Ericsson
Annual Report 2009

Plain-text annual report

S M A R T I I T H N K N G S M A R T L I V N G I I E R C S S O N a n n u a l r e p o r t 2 0 0 9 Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm, Sweden Telephone +46 10 719 0000 www.ericsson.com Printed on Maxi Offset and TerraPrint Silk – chlorine free paper that meets international environmental standards EN/LZT 138 0301 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2010 SMART THINKING SMART LIVING ERICSSON ANNUAL REPORT 2009 SMART THINKING Imagination is a gift that needs to be nurtured and developed. At Ericsson this is of the essence. We have a rich heritage of innovation from creative employees. It is the creativity of our employees that gives us the edge in a highly competitive marketplace. The world is changing all the time and we strive to be one step ahead, creating the patents, the standards, the technology and the solutions which empower people, business and society. SMART LIVING Technology is our business and it has the power to change lives and to make the world a better place. Environmentally-friendly communications solutions improve people’s lives all around the world. They make sustainable economic growth a reality. People everywhere, in mature or growing markets, urban or rural areas, can use new and exciting services which make daily tasks easier, improve safety or simply make life more fun. CONTENTS Annual Report 2009 2 4 6 2009 Snapshot 2009 Milestones Letter from the CEO 8 Five-Year Summary 9 Letter from the Chairman 10 Board of Directors’ Report* 34 Consolidated Financial Statements* 39 Notes to the Consolidated Financial Statements* 92 Parent Company Financial Statements* 97 Notes to the Parent Company Financial Statements* 113 Risk Factors* 117 Auditors’ Report 118 Forward-Looking Statements 119 Share Information 123 Market Trends 129 Information on the Company 138 Remuneration Report 143 Shareholder Information 144 Corporate Governance Report 2009 167 Glossary, Financial Terminology and Exchange Rates * Chapters covered by the Auditors’ Report, constituting the legal annual report. Annual publications The Ericsson Annual Report describes Ericsson’s financial and operational performance during 2009. This publication includes a Corporate Governance Report. Ericsson issues a separate Corporate Responsibility Report. THE ERICSSON VISION 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 access and share ideas and information whenever and wherever they want. As the leading supplier of communication networks and services, Ericsson plays a vital role in making such a world a reality. Ericsson Annual Report 2009 | CONTENTS 1 2009 SNAPSHOT THIS IS ERICSSON Founded in 1876, Ericsson is a leading provider of communications networks, related services and multimedia solutions. Through our joint ventures ST-Ericsson and Sony Ericsson, we are also a major provider of handsets. Our experience building networks in more than 175 countries gives us unique customer and consumer insights, and our extensive portfolio of telecommunications solutions and intellectual property (patents) offer a true business advantage. We are committed to working with our customers and partners to expand the borders of telecommunications for the benefit of people everywhere. Our operations have been divided into segments that create competitive advantage and best meet the needs of our global customer base. > Networks Technology leadership, a broad product portfolio and scale enable Ericsson to excel in meeting the coverage, capacity and network evolution needs of fixed and mobile operators. We provide products for all major standards as well as all essential elements of a network on an end-to-end solutions basis. > Services Expertise in network design, rollout, integration, operation and customer support, combined with a global structure and robust local capabilities, enables us to understand and respond to the unique challenges of each customer. As a result we are able to capitalize on the trend for operators to outsource a broader range of activities. > Multimedia Innovative application platforms, service delivery and revenue management solutions, combined with leading content developer and application provider relationships, enable Ericsson to help customers create exciting and differentiating multimedia services. > SONY ERICSSON The complementary strength of Sony Ericsson further enhances our consumer perspective for superior end-to-end offerings. Sony Ericsson offers exciting consumer experience through phones, accessories, content and applications. > ST-ERICSSON ST-Ericsson represents the link between infrastructure and handsets in Ericsson’s offering. They provide a market-leading portfolio of wireless platforms and semiconductors. NET SALES (SEK billion) SALES BY REGION 2009 Ericsson net sales (SEK billion) and change year-over-year OUR LARGEST MARKETS Percent of total sales 208.9 206.5 179.8 187.8 153.2 25.4 41% 20.1 –14% –13% 2009 44.6 10% 7% 9% 7% 4% 65.8 –4% 50.7 Western Europe Central and Eastern Europe, Middle East and Africa Asia Pacific Latin America North America 4% 4% 4% 3% 3% 3% C hina India U nited States Ind onesia Italy U nited King d o m Brazil Japan S pain 2005 2006 2007 2008 2009 2 2009 SNApShOT | Ericsson Annual Report 2009 performance In a progressively more challenging environment during the year, Ericsson’s market shares were well maintained, adjusted operating margin was slightly improved, and cash conversion was well above target. Grow faster than the market In the economic slowdown, the market for GSM/WCDMA network equipment and related services is estimated to have declined by more than 10%. Ericsson’s sales for comparable units were down 9%, adjusted for currency and hedging effects. A decline in Networks in line with the market was partly offset by an increase in Professional Services, driven by strong growth in managed services. Reported Multimedia sales increased by 5% for comparable units. The Multimedia market is still too fragmented to make relevant overall market growth estimates. Best-in-class operating margins Operating margin, excluding JV results and restructuring, improved slightly to 12% (11%) despite lower volumes and remained the highest among major listed competitors. Multimedia showed the greatest improvement, up significantly from breakeven levels in 2008. Cash conversion of more than 70% Cash conversion was well above the target at 117% (92%), reflecting management’s ongoing focus on improving working capital efficiency as well as a lower level of turnkey projects. CURIOUS MINDS Ericsson holds 25,000 patents worldwide. We are proud of our heritage of innovation and believe that our commitment to R&D is what keeps us among the top players in telecoms. Our people are the best in the business. Our ideas are setting the standard. Our innovation is born out of a desire to create solutions for a better world. KEY DEVELOPMENTS > Two billion subscribers supported by Ericsson 24 hours a day, 7 days a week. > Ericsson provides managed services to network operators which together serve 370 million subscribers. > North America set to become Ericsson’s largest and fastest growing market. > Ericsson’s presence in North America elevated – Chief Technology Officer relocated to Silicon Valley. > Ericsson is the only supplier selected to participate in all major 4G/LTE projects. > A new brand launched with the value proposition: “Innovating to Empower”. > Both joint ventures make progress on returning to report profits. FINANCIAL RESULTS IN SHORT NET SALES SEK 206.5 billion OpERATING INCOME* SEK 24.6 billion OpERATING MARGIN* 12 percent NET CASh SEK 36.1 billion (Dec. 31, 2009) EARNINGS pER ShARE SEK 1.14 * Excluding restructuring charges and share in earnings of JVs Ericsson Annual Report 2009 | 2009 SNApShOT 3 2009 MILESTONES JANUARY-MARCH APRIL-JUNE > > > > Verizon Wireless chose ericsson as one of two primary suppliers to build its LTe network infrastructure. Verizon Wireless will be the first operator to offer commercial LTe services in the United States. Later in the year, Metro-PCS chose ericsson as the sole supplier of its LTe network buildout. Both operators are new ericsson customers. China Unicom selected ericsson to supply 3G networks and services for 15 Chinese provinces and to upgrade its GSM networks to support 2G/3G interoperability in 10 provinces. The ST-ericsson joint venture was launched as a leading supplier of semiconductors and platforms for mobile devices to four of the top five handset manufacturers. With ericsson as its partner for mobile learning, the BBC World Service Trust uses the creative power of media to reduce poverty and promote human rights in Bangladesh. The Financial Times reported that more than 300,000 people had already signed up to learn english over their mobile phones. > > > In the first agreement of its kind in Africa, leading mobile operator Zain awarded ericsson the management responsibility for more than 4,000 sites across Nigeria, including network operations, field operations and business support systems. In support of the initiative Caring for Climate of the UN Global Compact, ericsson’s CeO Carl-Henric Svanberg addressed the UN Secretary General Ban-Ki Moon during the World Business Summit on Climate Change. The message was that a modernized telecommunications infrastructure can significantly contribute to the creation of a carbon-lean economy. The world’s largest upgrade of a live mobile network was accomplished at a record pace for Vodafone essar in India. ericsson replaced more than 10,500 of the operator’s GSM radio sites in just 13 months, reaching a peak rate of one site every minute and without disrupting service to more than 13 million subscribers. SETTING THE STANDARD Operators gain support in the evolution to LTe with an industry-leading evolved Packet Core portfolio, minimizing expenditure and ensuring a smooth transition process. The portfolio will be introduced through software upgrades for a simple step-by-step migration. 4 2009 MILESTONES | ericsson Annual Report 2009 JULY-SEPTEMBER OCTOBER-DECEMBER > > > > ericsson’s first major services contract in North America is also the world’s largest, valued at USD 4.5–5 billion over seven years. Operator Sprint and its 50 million customers benefit from ericsson’s leadership and best-in-class economies of scale in network services. ericsson signed framework agreements worth USD 1.7 billion for 2G/3G mobile communication equipment and related services for 2009 with two major Chinese telecom operators: China Mobile and China Unicom. All three telecom operators in China selected ericsson to provide fixed broadband access to millions of consumers in nine provinces. ericsson was selected by AT&T as one of two domain suppliers of wireline access products and services. This breakthrough win for ericsson in North America significantly accelerates AT&T’s ability to bring new broadband services to the market. > > > > With the acquisition of Nortel’s CDMA and LTe business, ericsson became the largest supplier of infrastructure and services in North America, based on ericsson reported sales and publicly reported sales and estimated sales for ericsson’s main competitors. Shipments of ericsson’s mobile broadband modules almost reached 1.5 million units. Asus, the inventor of the netbook, started to use ericsson’s embedded modules and ericsson is now a supplier to 3 of the top 5 PC manufacturers. ericsson announced low-cost mobile broadband for the world’s three billion GSM subscribers through a software upgrade. The eDGe evolution upgrade lets people enjoy the benefits of 3G performance – a great opportunity in countries where the mobile phone is the most affordable way to access the internet. Swedish TV network TV4 outsourced the operation of its nationwide playout services. Addressing the broadcasting industry substantially expands ericsson’s opportunities – not only for managed services, but also for the multimedia product portfolio. WELCOME TO TOMORROW China’s three operators invest in future- proof infrastructure and bring HDTV, high speed broadband and quality voice services to millions of people in China. Users will be able to enjoy IPTV, high- speed internet and VoIP for the first time. ericsson Annual Report 2009 | 2009 MILESTONES 5 LETTER from the CEO LOOKING BACK Dear fellow shareholders, While the current economic environment affects all parts of society the longer-term fundamentals for our industry remain solid. Over the past decade the number of mobile subscriptions in the world has grown from some 700 million to over 4.5 billion. Mobile telephony is reaching a penetration beyond all expectations. Ten years ago it was all 2G; today 3G is the prevailing technology, mobile broadband is a reality and telecom is literally changing the world. ericsson has played a vital role in bringing the benefits of mobile broadband to the majority of the world’s population. What we do greatly improves people’s lives and society at large – in short, what we do shapes people’s lives and the world around us. One of my strongest memories is from the day we launched the network in Dertu, one of the Millennium Villages. Their chief, one of the camel drivers, came up to me and said, “Today our village is reborn”. People are now able to share ideas and in- formation and accomplish things that were not possible before. In the past ten years the telecom industry and ericsson have transformed; from focus on voice to focus on internet, from hardware to software and from providing network equipment to providing solutions including services. During the same period, many of our competitors have been forced to leave the arena and new ones have entered. We work harder than ever to outperform them and match our customers’ needs. We have extended our leadership in mobile communications by building a highly successful services business which today accounts for almost 40 percent of our total Group sales. With less hardware, increased network complexity, and the move to all-IP, today is very much about making it work and supporting our customers in running and maintaining networks and realizing business models and rollout plans. During 2009 we captured additional strategic contracts in the services area and we now manage networks with 370 million subscribers. The acquisition of Nortel’s CDMA business during 2009, on the heels of important breakthrough contract wins in North America, positioned ericsson as the leading provider of telecoms technology and services in the United States and Canada. We have also firmly established ourselves in Silicon Valley where much of the internet development takes place. We also gained strategic contracts for the radio standard LTe (Long-Term evolution) which offers even greater network speeds and in December 2009 we passed another significant milestone with the worlds’ first commercial launch of an LTe network in Sweden. 6 LETTER FROM THE CEO | ericsson Annual Report 2009 “IN THE PAST TEN YEARS THE TELECOM INDUSTRY AND ERICSSON HAVE TRANSFORMED.” The industry has changed and our ability to change with it, and indeed to lead the change, is perhaps our most important asset. New and compelling challenges lie ahead and as a company ericsson must continue to drive the transformation of our industry. My years as President and CeO of ericsson have been the best of my professional career. Telecom is one of the most exciting industries to work in – so dynamic, challenging and competitive. I truly believe that telecom and the entire Information and Communication Technology (ICT) sector, particularly broadband networks, will form the backbone of the digital 21st century infrastructure, helping industries with the necessary reductions in their carbon footprint. In closing, I will continue to follow and be involved in ericsson’s development in my role as a Board member. I am proud and grateful to have had the opportunity to be at the helm of this great company and I will remember all the extraordinary people I have had the honor to work with, customers, partners and colleagues alike. Carl-Henric Svanberg Former President and CeO “IN THIS SEA OF CONNECTIVITY WE TAKE THE ROLE OF NAVIGATOR.” LOOKING FORWARD Dear shareholders, 2009 was a year of mixed trends and with varied operator investment behavior. Some markets were impacted by the financial climate while others continued to show growth. Our Group sales for the full year, however, were flat and the operating margin increased slightly. Despite the challenging economic environment we maintained market shares, cash flow was good and our financial position remained strong. During the year we undertook significant cost reduction activities. These, in combination with large losses in our joint ventures, affected our earnings negatively. However, cost reductions will result in reduced cost base going forward and our joint ventures remain on track to return to profit. It is now 2010 and we have a new decade ahead of us. A decade of new opportunities and new challenges. Telecoms is no longer about voice only. We do not just connect places and people. We also connect machines and devices. We connect the developing world to the developed world, rural areas to urban areas. Telecoms is the nervous system of the world. In ericsson we have a vision for this new decade – that there will be 50 billion connected devices. We will connect people with for example heart problems to remote monitoring systems so they can stay in the comfort of their homes, and we will connect our cars and trucks to smart road systems for safer driving and better fuel economy. Broadband networks will be the backbone of our smart cities, where houses will be connected so we can monitor and manage power consumption. In this world the challenge will lie in dealing with the complexity of connecting all these devices. And we cannot fail. Patients must be able to rely on their health monitoring services. Transport companies must be sure that they can minimize gas consumption by smart routing and up-to-date traffic information. In this sea of connectivity we take the role of navigator. We must support our customers and show them the way. This will require us to always put our customers first. Always have the best competence and drive innovation throughout the customer relationship. Our business is about both technology and services. We have to be consultants; we have to be able to develop complex network management systems, we have to be able to integrate systems and solutions from many different suppliers and vendors. In addition, we should be able to deliver the best revenue management solutions and multimedia applications the consumers have ever seen. everything must be based on IP software. This new decade requires a lot from us. We will have to change our ways of working. Our success will be determined by our ability to see beyond technology, stay ahead of our customers and solve problems before they even arise. In preparing ourselves to be successful in this new decade, we will need to continuously adjust to changing economic and competitive conditions while staying the course to our longer- term objectives. We will continue to proactively take actions to safeguard our financial position, leading technology and customer relationships. In order to drive shareholder value we focus on four financial targets; we want to grow the Company faster than the market, maintain best-in-class operating margins, have a healthy cash generation and grow earnings in the JVs. We have exciting developments ahead. The future will require us to be agile, brave and focused on performance in all we do. I am proud and honored to lead ericsson into a new decade where we will undoubtedly break new ground. even more people and devices will share information across the world. Hans Vestberg President and CeO ericsson Annual Report 2009 | LETTER FROM THE CEO 7 Five-Year Summary For definitions of the financial terms used, see Glossary, Financial Terminology and exchange Rates. 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) – end of period, basic – average, basic – average, diluted Additions to property, plant and equipment Depreciation and write-downs/impairments of property, plant and equipment Acquisitions/capitalization of intangible assets Amortization and write-downs/impairments of intangible assets Research and development expenses – as percentage of net sales Ratios Operating margin excluding joint ventures Operating margin eBITDA margin Cash conversion Return on equity Return on capital employed equity ratio Capital turnover Inventory turnover days 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 2009, as proposed by the Board of Directors. 8 FIVE-YEAR SUMMARY | ericsson Annual Report 2009 2009 Change 2008 2007 2006 2005 206,477 5,918 325 4,127 269,809 99,079 181,680 36,071 9,606 139,870 1,157 –1% –64% –67% –65% –6% –1% – 4% –4% –1% –8% 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 40,653 – 40,354 33,404 21,552 30,860 1.15 1.14 2.00 1) 43.79 3,194 3,190 3,212 4,006 3,502 11,413 8,621 33,055 16.0% 6.5% 2.9% 8.7% 117% 2.6% 4.3% 52.3% 1.1 68 2.9 88,960 43.1% 82,493 18,217 94,829 –68% –68% 8% –1% – – – –3% 13% – 55% –2% – – – – – – – – – – – 5% – 3.54 3.52 1.85 44.21 3,185 3,183 3,202 4,133 3,105 1,287 5,568 33,584 16.1% 8.0% 7.8% 11.9% 92% 8.2% 11.3% 49.7% 1.2 68 3.1 84,917 40.6% 6.87 6.84 2.50 42.17 3,180 3,178 3,193 4,319 2,914 29,838 5,459 28,842 15.4% 12.5% 16.3% 20.8% 66% 17.2% 20.9% 55.1% 1.2 70 3.4 64,678 34.4% 8.27 8.23 2.50 37.82 3,176 3,174 3,189 3,827 3,038 18,319 4,479 27,533 15.3% 16.7% 19.9% 24.1% 57% 23.7% 27.4% 56.2% 1.3 71 3.9 67,454 37.5% 5% –10% –13% 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 2,438 2,250 3,364 24,059 15.7% 20.1% 21.6% 25.4% 47% 26.7% 28.7% 49.0% 1.2 74 4.1 78,647 51.3% 56,055 21,178 93,879 Letter from the Chairman Dear sharehoLDer, As we head into 2010 and a new decade, we should consider the phenomenal transformation of the telecoms industry over the past decade, including the convergence of the telecom, IT and media industries. Through this and the explosive development in fixed and mobile internet usage, mobile communications has had a remarkable growth, with the number of subscribers increasing from 700 million in 2000 to more than 4.5 billion in 2009. Significant consolidation has occurred among operators as well as equipment suppliers. I would like to express my sincere thanks to Carl-Henric Svanberg for his outstanding helmsmanship during his time with the Company. Ericsson’s key to success during these years has been Carl-Henric Svanberg’s willingness to seek opportunity through change and proactively address challenges. The Board’s work in 2009 had a significant focus on strategic matters. Ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged. The key future opportunity for the industry and Ericsson will be the increased traffic generated by mobile broadband, driven by internet and social media, and a shift from connecting places and people to connecting devices and applications. Systems integration skills and application enablers will play an increasingly important role in this market development. The Company intends to build a strong position in these areas to complement the current leadership in network technologies and operations. sheet and a strong cash position. This enables the Company to pursue emerging opportunities created by the market situation. The debate around executive compensation has intensified. Benchmarking with global companies similar to Ericsson shows that we have a conservative but competitive compensation structure that rewards performance and effectively aligns employees’ longer-term interests with those of shareholders’. I am confident that these principles remain appropriate and Operator and consumer sensitivity to the macro-economy reasonable. is an important factor closely monitored by the Board. During 2009, Ericsson was affected in the second half by the economic downturn as many operators reduced their network investments. This was largely offset by good sales in the first half and by increasing sales of services and multimedia solutions. The Board also addressed the Company’s restructuring program, the Nortel acquisition, and the expanded presence in Silicon Valley to support acceleration of the move to all-IP technology. Through key contract wins and the acquisition of parts of Nortel, Ericsson became the largest supplier of network technology and services in North America. Ericsson’s joint ventures Sony Ericsson and ST-Ericsson were strongly affected by the market decline, and forceful actions have been taken to restore their profitability. That said, I believe Ericsson remains well positioned in relation to its peers, with sustained revenues and margins and in certain areas increased market shares, a healthy balance Looking to the future, I welcome Hans Vestberg as our new CEO and wish him all the best in his new role. The Board and I are convinced that Hans has the qualities it takes to lead Ericsson, and we give him and his new team our full support. Change and challenge seem to be the by-words for the world today. If embracing change and proactively addressing challenges brings rewards, then the coming years certainly look exciting for Ericsson. I sincerely appreciate your support during the year. Michael Treschow Chairman of the Board Ericsson Annual Report 2009 | LETTER FROM THE CHAIRMAN 9 BOARD OF DIRECTORS’ Report 2009 This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS as endorsed by the EU. The application of reasonable but subjective judgments, estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date as 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 Contents Business Drivers 2009 ...................................... 11 Operational Goals and Results ......................... 12 Vision and Strategy .......................................... 13 Financial Results of Operations........................ 14 Financial Position ............................................. 16 are designed to facilitate analysis by indicating Ericsson’s underlying Cash Flow ......................................................... 18 performance, however, these measures should not be viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non- IFRS measures with the IFRS results can be found on page 14. 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. 118) and “Risk Factors” (p. 113). 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. The terms “Ericsson”, “the Group”, and unless the context reasonably requires otherwise, also “the Company”, all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2008). Business Results .............................................. 20 Legal and Tax Proceedings .............................. 25 Material Contracts ............................................ 25 Corporate Governance ..................................... 26 Sustainability and Corporate Responsibility .... 28 Risk Management ............................................ 30 Parent Company .............................................. 32 Post-Closing events ......................................... 33 Board Assurance .............................................. 33 2009 IN SUMMARY Economic conditions impacted second half Maintained market shares well in all segments COST REDUCTIONS GIVING EFFECTS – STABLE MARGINS STRONG FINANCIAL POSITION Net sales SEK 206.5 billion Flat despite unfavorable economic conditions, driven by data traffic and services Operating margin 12% excl. JVs and restructuring charges Margin sustained due to cost saving activities Cash flow SEK 24 billion Lower income offset by strong working capital management. Net Cash remained strong. 10 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 BuSINESS DRIVERS 2009 Five major trends affected our markets and operations in 2009: > > > > > Accelerated mobile data growth Data traffic in developed markets is increasing dramatically, generating sales for additional network capacity. Network modernization and IP Many operators started migration to all-IP core networks. Technology shift – 2G/3G/4G In 2009, ericsson’s 3G sales surpassed 2G, however not yet offsetting the decline in GSM. The first commercial LTe (Long-Term evolution) network was launched. Impact from economic conditions Demand for telecom infrastructure started to decline mid- 2009, affecting sales in Networks – particularly in some developing markets, where the general economic downturn was exacerbated by weak currencies. Operator focus on efficiency Sales of services increased, not only managed services but also consulting and systems integration, driven by higher network complexity and operator focus on cost reductions. North America During 2009, ericsson significantly strengthened its position in North America. A number of key contracts were won: LTe with Verizon and Metro PCS, the largest managed services contract ever with Sprint and a domain supplier agreement with AT&T for wireline access products. The Company also acquired Nortel’s CDMA and LTe businesses in North America. Tough times for the JVs Both Sony ericsson and ST-ericsson were impacted by the decline in handset demand in 2009. Sony ericsson’s situation was worsened by an aging product portfolio. Both JVs reported losses and initiated aggressive cost restructuring programs and are on track to return to report profits. New CeOs and chairmen of the Boards were appointed in both JVs. ICT and the climate In 2009, climate change was on the agenda for governments. During the year, Carl-Henric Svanberg addressed the UN, promoting that a focused utilization of ICT solutions could reduce CO2 emissions by 15-20 percent. The ICT industry in itself contributes less than 2 percent to the emissions. Telecom is a long-term growth industry The Company is convinced that the factors driving industry growth are robust and should result in continued increased demand. The growth will be driven by the combined effects of the following: > > > > > Subscriber growth in emerging markets, supported by cheaper handsets. Increased coverage and use. ever faster mobile broadband communications, improving user efficiency and experiences. Data traffic driven by IP-based mobile broadband; in developed markets driven by the convenience of mobility, and in emerging markets by the lack of fixed broadband access. New multimedia applications and communication between various new devices. Competition Competition remained intense. After the consolidation in recent years, there are fewer vendors – all with comprehensive product portfolios. ericsson has maintained or increased its market shares during the year. EVERYWHERE CARE Telecom infrastructure and mobile applications provide the foundation for life-saving digital health solutions. As part of the Millennium Villages Project, m-health is improving care for people in the most remote areas. As well as dramatically improving standards in healthcare provision, the project also stimulates communication, development and commerce. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 11 OpERATIONAl GOAlS AND RESulTS ericsson aims to be the preferred business partner to its customers with an ultimate goal of sustainable long-term value creation. Faster than market sales growth, a best-in-class operating margin and a healthy cash conversion are key to the fulfillment of this goal. As a market leader, ericsson combines leading technology and services skills to develop superior solutions that deliver competitive advantage. ericsson believes that highly satisfied customers and empowered and motivated employees are key to success. Several annual key performance indicators are used regarding shareholder value creation, customer satisfaction and employee engagement. Shareholder value creation Although margins in 2009 remained below historic levels, the Company strengthened its market position in strategically important areas, such as: LTe/4G technology and commercial contracts, market share in the US and managed services. This combined with a strong balance sheet, efficient and leaner processes after ambitious restructuring, and continued strong customer relations provided the means for value creation also in the macro-economic headwind. The share price increased during the year and a dividend was paid for a total shareholder return of 15 percent in 2009. > Management uses several metrics to monitor performance: Faster than market sales growth Ericsson’s sales for comparable units decreased by 9 percent, adjusted for currency and hedging effects. Due to the effects of the economic slowdown and to weaker demand for GSM equipment, the market for GSM/WCDMA equipment and related services is estimated to have declined by more than 10 percent in USD terms. Segment Networks’ sales for comparable units in constant currencies declined in line with the market. Based on external analyses and reported results by ericsson and its main competitors, the Company believes its market shares were well maintained. A number of breakthrough contracts were signed which should enable the Company to grow faster than the market. Sales in Professional Services grew by 8 percent in local currencies. Sales for comparable parts of Multimedia grew by 5 percent. The overall market growth for Multimedia is difficult to assess, as the segment is very fragmented. Best-in-class operating margin Based on reported results for 2009, the operating margin for the Group, excluding joint ventures and restructuring charges, was 12 (11) percent and remains the highest among the Company’s main competitors that are publicly listed. Cash conversion of over 70 percent The cash conversion rate for 2009 was 117 (92) percent, reflecting a strong focus on cash flow with a significant reduction in operating assets. > > Customer satisfaction and employee engagement In the annual independent customer satisfaction survey, approximately 9,700 employees from 380 operators around the world were polled to assess their satisfaction with ericsson compared to its main peers. In 2009, ericsson maintained a level of excellence. An employee survey is also independently conducted every year. In 2009, 91 percent of employees participated in the survey. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, remained at a high level. VALUE CREATION CUSTOMER SATISFACTION AND EMPLOYEE ENGAGEMENT Growth Grow faster than the market Margin Best-in-class margins Cash Flow Cash conversion >70% 2008 2009 SEK 208.9 billion SEK 206.5 billion Operating margin 11%* Operating margin 12%* *excluding JVs and restructuring charges Cash conversion 92% Cash conversion 117% 80 70 60 50 40 Excellence Strength Potential Improvements needed 2005 2006 2007 2008 2009 Customer satisfaction Employee engagement 12 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 VISION AND STRATEGY ericsson’s vision of an all-communicating world is rapidly becoming a reality as the convergence of the telecom, internet and media sectors gains momentum. ericsson envisions continued evolution, from having connected some 1.5 billion places to connecting more than 5 billion people and 50 billion devices. The Company envisions that anything that can benefit from being connected will be connected, mainly via IP-based wireless communications. Mobile broadband at the forefront Following the unprecedented growth of mobile telephony is a rapidly expanding range of mobility-based devices and applications. The accelerating penetration of smartphones and mobile broadband usage are early signs of this development. extending network coverage and increasing data speeds, combined with devices that have large screens, intuitive user interfaces and multimedia capabilities, enhances the user experience and stimulates demand for mobile-broadband services. Once areas have ubiquitous coverage, machine-to- machine communication enables a large variety of existing services to be enhanced, such as media, governmental, utilities, industry automation, banking and transport. Spurring socio-economic development ericsson’s mission is to empower people, business and society through innovation, industry leadership and a long- term commitment to the vision of an all-communicating world. In the course of making people’s lives easier and more productive, ericsson is spurring socio-economic development and a better environment which brings the Company’s vision ever closer to reality. Leveraging the competitive dynamics The Company’s strategy is driven by the competitive dynamics of the telecom market and ericsson’s position, the combination of which gives rise to three strategic imperatives: > > > economies of scale and scope are prerequisites for sustainable value creation. Industry standards govern product design and functionality, making it challenging for equipment suppliers to differentiate on product capabilities alone. Therefore, the Company strives to combine technology leadership with leadership in services. The bargaining power of equipment suppliers depends primarily on their installed base. Operators not only look for the best products but also for long-term business partnerships that they can rely on to deliver end-to-end solutions for lower total cost of ownership, the ability to minimize time-to-market, strong professional services capabilities, and access to world-class subject matter experts. Primary end-to-end suppliers with well-entrenched local presence, backed up by global resources and a proven track record, have a competitive advantage. The Company seeks to be a full systems solutions house with a broad but integrated product portfolio combined with superior technical competence, for example in systems integration. Guiding principles The guiding principles for attainment of the Company’s strategic imperatives include: > > > customer intimacy; highly qualified employees working closely with the customer to create effective solutions continuous process improvements and innovation scale in delivery and technical solutions. NuRTuRING NETWORKS Sustainable mobile network solutions simplify network management, lower costs and reduce power consumption. evo RAN is a future-proof solution which means operators can run GSM, WCDMA and LTe as a single network and enjoy the highest capacity at the lowest cost to the environment. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 13 FINANCIAL RESULTS OF OPERATIONS ABBREvIATED InCOmE STATEmEnT wITh RECOnCIlIATIOn IFRS – nOn-IFRS mEASURES SEK billion Net sales Cost of sales Gross income Gross margin % Operating expenses Operating expenses as % of sales Other operating income and expenses Operating income before share in earnings of JVs and associated companies Operating margin % before share in earnings of JVs and associated companies Share in earnings of JVs and associated companies Operating income Operating margin % Financial income and expense, net Taxes net income ePS diluted (SeK) non-IFRS measures 2009 non-IFRS measures 2008 Percent change Restructuring Restructuring charges 2009 charges 2008 –1% 0% –3% –6% 4% 5% 206.5 –132.1 74.4 36.0% –52.9 25.6% 3.1 208.9 –132.1 76.8 36.8% –56.4 27.0% 3.0 24.6 23.4 11.9% –6.1 18.5 9.0% 11.2% 0.4 23.9 11.4% –4.2 –4.2 –7.1 –2.5 –2.5 –4.2 IFRS 2009 206.5 –136.3 70.2 34.0% –60.0 29.0% 3.1 IFRS 2008 208.9 –134.6 74.3 35.5% –60.6 29.0% 3.0 –11.3 –6.7 13.3 16.7 –22% –1.3 –12.6 –0.9 –7.6 6.5% 8.0% –7.4 5.9 –0.4 16.3 2.9% 7.8% 0.3 –2.1 4.1 1.14 1.0 –5.6 11.7 3.52 Non-IFRS measures are used in the income statement as supplemental information to the IFRS results. Since there were significant restructuring costs during 2008 and 2009, but with relatively little benefit in 2008 and consequently significant impact on reported results and margins both years, 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. For more details on the restructuring activities and corresponding charges, please see Note C5 - “Expenses by Nature”. Sales sustained in weaker market Increased sales in the first half of 2009 were offset in the second half by impact from the economic slowdown. Overall, sales declined marginally from last year to SeK 206.5 billion. Sales for comparable units were stable year over year, i.e. excluding SeK 2.7 billion of sales from the acquired Nortel business in North America in the fourth quarter and SeK 5.2 billion in 2008 from the divested PBX and mobile platform operations. Adjusted also for effects of exchange rates and hedging, sales declined 9 percent. Lower sales in Networks were largely offset by higher sales in Professional Services and Multimedia. The economic downturn coupled with tighter credit supply impacted operator spending, in particular in certain emerging markets. SERvICES’ ShARE OF SAlES InCREASES OPERATInG InCOmE AnD OPERATInG mARGIn excluding share in earnings of JVs and restructuring charges 31% 33% 38% 69% 67% 62% 100% 80% 60% 40% 20% 0% n o i l l i b K E S 30 25 20 15 10 5 0 13% 23.4 11% 23.4 12% 24.6 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2007 2008 2009 Total Sales SEK 188 billion SEK 209 billion SEK 207 billion Services Products Operating income Operating margin 14 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 The demand varied considerably between markets. Among our largest markets, the US, China, UK and Turkey had good sales increases. Australia, India and Japan were stable, whereas sales in Brazil, Indonesia, Italy, Pakistan and Spain declined. Several important contracts were won in 2009: four LTe contracts, the appointment as fixed access domain supplier to AT&T and a services contract with Sprint in the US. Gross margin stable excluding restructuring charges Gross margin declined only slightly as effects of price pressure, increased share of services sales, and the initial transition costs for the Sprint contract were largely offset by cost cutting and restructuring efforts. Operating expenses excluding restructuring charges were reduced Operating expenses declined year-over-year as a result of restructuring activities and the spin-off of mobile platforms. The Company continues to focus on innovations and R&D. however, spending as a percentage of sales was 13 percent compared to 15 percent in 2008 due to cost reductions and efficiency gains. Operating margin excluding share in earnings of Jvs and restructuring charges increased slightly Restructuring and other cost reduction measures have lowered the breakeven point. The operating margin in Multimedia increased significantly, reflecting a more narrow business focus. Share in earnings of Jvs and associated companies declined SEK 6.5 billion year-over-year Both Sony ericsson and ST-ericsson were adversely affected by the lower handset sales during the economic downturn. Both companies have undertaken ambitious restructuring activities, and Sony ericsson is improving its product portfolio focusing on mid- to high-end phones. Under new management, both JVs are well on track to return to report profits. Restructuring increased and will continue into 2010 In the beginning of the year, a program to reduce annual run rate of costs by SeK 10 billion was launched, following the 2008 program aiming at SeK 6–7 billion. In the third quarter, additional SeK 5–6 billion of savings were targeted with anticipated costs of the same magnitude. Full effects are expected to be achieved in the second half of 2010, assuming current level of operations. This year’s restructuring charges were SeK 11.3 (6.8) billion, relating to activities to reduce production costs, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. This resulted in fewer platforms and solutions and was coupled with write-downs of capitalized development costs and acquired IPR assets for affected products. Earnings per share (EPS) diluted down 68 percent ePS diluted declined from SeK 3.52 last year to SeK 1.14 this year, largely driven by the losses in our JVs and the restructuring program. Employees increased by net 3,750 in 2009 Headcount increased to 82,500 (78,750), largely as a result of new managed services contracts. About 2,500 employees from the acquired Nortel CDMA and LTe operations will be included from 2010. The additions were partly offset by reductions due to restructuring and the transfer of mobile platforms to ST-ericsson. The competence and capabilities of the workforce is increasingly service and software oriented. RESEARCh AnD DEvElOPmEnT PROGRAm EmPlOYEES BY CATEGORY expenses (SeK billion) 1) As percent of Net sales employees within R&D as at December 31 2) Patents 2) 2009 2008 2007 27.0 13.1% 30.9 14.8% 28.8 15.4% 18,300 25,000 19,800 24,000 19,300 23,000 1) excluding restructuring charges. 2) The number of employees and patents are approximate. 13% 22% 8% 9% 2009 48% R&D Services Supply Sales Other ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 15 FINANCIAL POSITION COnSOlIDATED BAlAnCE ShEET (ABBREvIATED) December 31, SEK billion 2009 2008 ASSETS Non-current assets, total – of which intangible assets – of which property, plant and equipment – of which financial assets – of which deferred tax assets Current assets, total – of which inventory – of which trade receivables – of which other receivables/financing – of which short-term investments, cash and cash equivalents Total assets 87.4 48.2 9.6 15.3 14.3 182.4 22.7 66.4 16.6 76.7 269.8 87.2 48.2 10.0 14.1 14.9 198.5 27.8 75.9 19.8 75.0 285.7 EQUITY AnD lIABIlITIES equity Non-current liabilities – of which post-employment benefits – of which borrowings – of which other non-current liabilities Current liabilities – of which provisions – of which current borrowings – of which trade payables – of which other current liabilities 2009 2008 141.0 43.3 8.5 30.0 4.8 85.5 12.0 2.1 18.9 52.5 142.1 39.5 9.9 24.9 4.7 104.1 14.0 5.5 23.5 61.0 Total equity and liabilities 1) 269.8 285.7 1) Of which interest-bearing liabilities and post-employment benefits SeK 40.7 billion (SeK 40.4 billion in 2008). In 2009, despite the strategic investments in ST-ericsson and the Nortel operations and a difficult macro-economic business environment, a healthy capital structure and equity ratio were maintained and the debt maturity profile was significantly improved. Intangible assets flat with acquisitions offset by amortizations and write-downs Added intangible assets from the Nortel acquisition of SeK 8.8 billion were offset by amortizations and impairment losses. Impairment losses on acquired intangibles were SeK 4.3 (0) billion in 2009, attributable to restructuring. Financial assets up slightly Financial assets increased slightly, with the investment in ST-ericsson partially offset by the reduced value of investments in JVs, attributable to their reported losses. Customer financing did not increase and deferred tax assets were slightly reduced with utilization of tax loss carryforwards. Strong reductions in receivables and inventory Considerable progress was made in the second half to achieve stable days sales outstanding (DSO) at 106 and inventory days at 68. However, targeted levels have not yet been reached and the improvement efforts will be continued. Property, plant and equipment slightly down The Company’s assets are largely related to test equipment for in-house manufacturing, R&D and services, including our network operations centers. A large share of manufacturing and IT operations are outsourced and most properties are leased. Cash remained strong at SEK 77 (75) billion Due to a strong cash flow, a good level of cash and short-term investments was maintained. A strong liquidity is deemed important to keep flexibility for volatility in sales and cash flows and to be able to take advantage of opportunities in the market. KEY RATIOS 120 100 80 60 40 20 0 102 70 57 106 106 35.5% 35.5% 68 55 68 57 85 71 54 81 74 52 16.3% 7.8% 7.8% 2005 2006 2007 2008 2009 Days sales outstanding Target is less than 90 days Inventory turnover days Target is less than 65 days Payable days Target is more than 60 days 16 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 Equity down SEK 1.1 billion Stockholders’ equity decreased by SeK 1.1 billion. The net income of SeK 4.1 billion and a capital increase of SeK 0.7 billion, attributable to the employee stock purchase plan, were more than offset by the dividend of SeK 6.3 billion. However, the equity ratio was maintained at a healthy level of 52 (50) percent. Return on equity 2.6 (8.2) percent The decline in return on equity (ROe) was primarily a consequence of JV losses and the restructuring charges. Return on capital employed 4.3 (11.3) percent The return on capital employed (ROCe) declined to 4.3 percent. excluding restructuring charges, ROCe would have been 11.2 (15.5) percent . Pension liabilities down SEK 1.4 billion after employer contributions Post-employment benefits related to defined benefit plans declined to SeK 8.5 (9.9) billion in 2009. A liability increase of SeK 1.2 billion, due to lower interest rates, was more than offset by higher values of plan assets of SeK 1.2 billion and employer contributions of SeK 2.1 billion to trust funds. The funded ratio (plan assets as percentage of defined benefit obligations) increased to 76 (68) percent. Provisions declined due to larger cash outlays The total amount for provisions declined to SeK 12.4 (14.4) billion, largely attributable to SeK 4.7 billion of larger cash outlays than last year, of which SeK 2.5 billion related to restructuring. Trade payables declined by SEK 4.6 billion The number of payable days improved some from 55 to 57 days, close to the target of 60 days or more, despite the macroeconomic conditions, where some suppliers have had to be supported with shorter payment terms in a tight credit market. Debt maturity profile improved During the year, the Company increased borrowings by SeK 1.7 billion and considerably improved the maturity profile. Debt maturing in 2009 of USD 0.5 billion and in 2010 of eUR 0.5 billion were replaced with a 7-year loan of USD 0.6 billion and a 4-year loan of eUR 0.6 billion. In addition to borrowings, the Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014. Credit Ratings Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+. Sony Ericsson borrowings guaranteed ericsson and SONY have on a 50/50 basis guaranteed eUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering ericsson’s financial position. Off-balance sheet arrangements There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources. DEBT mATURITY PROFIlE n o i l l i b K E S 7 6 5 4 3 2 1 0 2010 2011 2012 2013 2014 2015 2016 2017 Notes and bonds Loan from the European Investment Bank Other financial liabilities Loan from the Swedish Export Credit Corporation ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 17 CASH FLOW CASh FlOw (ABBREvIATED) JAnUARY–DECEmBER SEK billion Net income Income reconciled to cash Changes in operating net assets Cash flow from operating activities Cash flow from investing activities – of which capital expenditures, sales of PP&E, product development – of which acquisitions/divestments, net – of which short-term investments for cash management purposes and other investing activities Cash flow before financing activities Cash flow from financing activities Cash conversion (Cash flow from operating activities divided by income reconciled to cash) Gross cash (Cash, cash equivalents and short-term investments) Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits) 2009 4.1 21.0 3.5 24.5 –37.5 –4.9 –18.1 –14.5 –13.0 –1.7 117% 76.7 36.1 2008 11.7 26.0 –2.0 24.0 –8.5 –4.1 1.8 –6.2 15.5 –7.2 92% 75.0 34.7 Cash flow from operations stable at SEK 24.5 billion A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008. Cash flow from financing activities SEK –1.7 billion Dividends paid of SeK –6.3 billion were partly offset by increased borrowings of SeK 4.3 billion and other financing activities of SeK 0.2 billion. Strong cash conversion at 117 (92) percent The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash. Cash out from investing activities SEK –37.5 billion Cash outlays for recurring investing activities increased slightly to SeK –4.9 billion. Acquisitions/divestments during the year were net SeK –18.1 billion, with the major items being the formation of the ST-ericsson joint venture, the minority stake in LHS and Nortel’s CDMA and LTe businesses. Cash outflow for short-term investments for cash management purposes and other investing activities was net SeK –14.5 billion, largely attributable to SeK –17.1 billion of short-term investments driven by the strong cash flow from operations. ChAnGE In GROSS CASh 2009 Operating cash flow 24.5 b Investing activities –20.4 b excl. short-term investments Financing activities –1.7 b n o i l l i b K E S 100 90 80 70 60 50 40 Change in gross cash SEK 1.7 bILLION Gross cash opening balance Net Income Adj. reconcile to cash Working capital Capex Acquisitions/ divestments Dividend Other financing activities Gross cash closing balance 18 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 Restricted cash Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SeK 8.9 (8.2) billion. Capital expenditures Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations. The Board reviews the Company’s investment plans and proposals. CAPITAl EXPEnDITURES 2005–2009 SeK billion Capital expenditures – of which in Sweden as percent of net sales 2009 4.0 1.3 1.9% 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% Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings. We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness. HOME FROM HOME Connected Home Gateway software gives users the freedom to access and interact with their home multimedia devices, services and media, wherever they are. Consumers can use their mobile devices to communicate directly with their home computer, TV or media player and access their personal media library on the move. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 19 Business Results Operator investments are increasing in mobile broadband, driven by a strong ramp up of data traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency. Regional overview SALES PER REGION AND SEGMENT 2009 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 23.8 32.7 50.5 13.0 17.1 137.1 18.3 12.9 12.2 5.9 6.7 56.1 66.4% –3% 27.2% 15% 2.4 5.1 3.1 1.1 1.6 13.3 6.4% 5% 44.6 50.7 65.8 20.1 25.4 206.5 100% –1% –14% –4% 4% –13% 41% –1% 1) Central and eastern europe, Middle east and Africa. Sales in Western Europe decreased by –6 (–2) percent for comparable units with growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to be largely unaffected and mobile broadband traffic continued to show strong growth. In Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent, despite continued network buildouts in a number of markets, as the region has been more affected than most by the macro- economic development. Many countries within the CeMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to invest at healthy levels. A similar situation is seen in other emerging markets such as Latin America and Asia Pacific. Asia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent, fuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh. Latin American sales decreased by –13 (+25) percent, reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications. North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTe, fixed access and services and the acquisition of Nortel’s CDMA and LTe businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network operators in the region. Market shares were well maintained and the Company retains its ambition to grow faster than the market. GROWinG tHe nORtH AMeRiCAn FOOtPRint ericsson becomes the primary vendor in the North American market, securing its future in the region. ericsson strengthened its position in North America with the acquisition of Nortel’s CDMA and LTe businesses and groundbreaking deals with Verizon, Sprint, Metro-PCS and AT&T. 20 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 SALES BY REGION 2009 ericsson net sales (SeK billion) and change (percent) year-over-year 25.4 41% 44.6 20.1 –14% –13% 2009 4% 65.8 –4% 50.7 Western Europe Central and Eastern Europe, Middle East and Africa Asia Pacific Latin America North America Networks Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a total of almost 4.6 billion and data traffic accelerated. Network sales were down by –3 (+10) percent to SeK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SeK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the market. Lower GSM sales, particularly in high-growth markets such as China, contributed to the decline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband. GSM shipments reached their all-time-high volume in 2008. This year, ericsson’s WCDMA sales surpassed that of GSM for the first time. WCDMA growth did not offset the GSM decline. Mobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades. The global network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010. For the next generation wireless technology, 4G/LTe, ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTe is very strong and this technology is expected to play an important role in many markets with suitable spectrum. ericsson is leading the transformation and convergence of the core network with the largest installed base of all-IP networks based on Softswitch and IP Multimedia System (IMS) technology. The LTe core network is all-IP. To meet the demand for this new all-IP core, ericsson has introduced the industry’s most comprehensive evolved Packet Core portfolio which will support LTe network introduction. The portfolio is built on ericsson’s existing packet core products and new functionality will be introduced through software upgrades. The increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. ericsson offers a wide range of solutions to remove bottlenecks in the transport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission solutions to fixed as well as mobile operators developed in line with the market. In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China. Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for ericsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission. With the acquisition of the Nortel assets for CDMA and LTe, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTe technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTe. Going forward, R&D expenses are expected to be relatively low in CDMA compared with other technologies. networks sales seK 137.1 billion – of which SEK 23.1 billion network rollout NETWORKS SALES OF TOTAL NETWORKS SALES BY REGION (SeK billion and percent) SEK 137.1 billion SEK 137.1 billion 17.1 17.1 23.8 23.8 9% 9% 66% 66% 13 12% 13 12% 17% 17% 9% 9% > Stable margins despite drop in sales > Data growth drives backhaul and IP router sales 2009 2009 2009 2009 24% 24% 32.7 32.7 11% operating margin excl. restructuring charges –3% sales growth 37% 37% 50.5 50.5 Networks Networks Western Europe Western Europe Professional Services Professional Services Multimedia Multimedia Central and Eastern Europe, Middle East and Africa Central and Eastern Europe, Middle East and Africa Asia Pacific Asia Pacific Latin America Latin America North America North America ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 21 Consulting and systems integration also had encouraging developments during the year, particularly in revenue assurance and support systems transformation, exemplified by a multi-country contract for revenue assurance with Mobilkom Group of Austria and a service assurance contract with Wataniya in Algeria. Operational consulting is also an area of growth, exemplified by a contract with Claro in Guatemala (fixed and wireless). 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. Services expertise and experience, in combination with technology leadership and business understanding, enable the Company to take on a prime integrator role in complex deployment and transformation projects. Professional Services Professional Services sales continued to show good growth, increasing by 15 (14) percent to SeK 56.1 (49.0) billion. Growth measured in local currencies amounted to 8 (13) percent. However, sales were negatively affected by the reduced scope of a managed services agreement and somewhat lower sales of project-related services, reflecting the slowdown in network sales. Managed services was one of the main drivers for the sales increase, growing by 22 (17) percent to SeK 17.4 (14.3) billion, significantly outpacing the market. More than 60 percent of revenues in Professional Services are now of a recurring nature. As the professional services market develops, there are many opportunities for project business, but operators are also seeking longer-term partnerships for a competitive edge. Combined with an expanding managed services market, this should help sustain a healthy level of recurring business for ericsson. ericsson is the clear leader in managed services and at year end 2009 ericsson-managed network operations served over 370 (250) million users. Despite a higher proportion of managed services sales from new contracts with associated start-up costs, Professional Services’ operating margin remained in the mid-teens at 15 (16) percent. This is due to increased efficiency in the delivery organization. ericsson won several milestone contracts for managed services during the year. These include Sprint and Zain, the first full-scope managed services contracts in North America and Africa – not only firsts for ericsson but also for the industry. The acquisition of Nortel’s CDMA and LTe businesses creates opportunities for synergies in the services operations in North America. PROFessiOnAl seRViCes sales seK 56.1 billion > Continued good growth > Several strategic services contracts incl. Sprint 15% operating margin excl. restructuring and adjusted for sales of TEMS in 2009 15% sales growth PROFESSIONAL SERVICES SALES OF TOTAL PROFESSIONAL SERVICES SALES BY REGION (SeK billion and percent) SEK 56.1 billion SEK 56.1 billion 27% 23% 27% 23% 6.7 6.7 5.9 12% 5.9 12% 18.3 18.3 11% 11% 33% 33% 2009 2009 2009 2009 22% 22% 12.2 12.2 23% 23% 12.9 12.9 Networks Networks Western Europe Western Europe Professional Services Professional Services Multimedia Multimedia Central and Eastern Europe, Middle East and Africa Central and Eastern Europe, Middle East and Africa Asia Pacific Asia Pacific Latin America Latin America North America North America 22 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 Multimedia Multimedia sales increased 5 percent for comparable units with revenue management negatively affected during the second half of the year by lower network deployments. The segment continues to have attractive prospects for sales growth to network operators and service providers and the Company is well positioned to benefit from a market rebound. Operating margin improved to 8 (0) percent while eBITDA margin doubled to 16 percent with stringent cost control and the operational benefits of a more concentrated business, i.e. excluding PBX systems and mobile platforms, focusing on TV solutions, business support systems and revenue management. Solution area TV performed well during 2009 in what proved to be a challenging market environment. The Company strengthened its position in the IPTV market with a number of wins for its industry-leading IMS-enabled middleware, where full systems integration and solutions delivery is also provided. The product range in the Video on Demand and Content Management area was extended and a new generation of encoding platforms was introduced, redefining the achievable limits of compression performance. Industry recognition of market leadership was reinforced by three prestigious awards at IBC: Best IPTV solution, Best Content Management solution and Best Compression solution. As operators modernize and transform their networks to all-IP, with more and more services added, the importance of business support systems increases. ericsson’s business support systems enable management of subscribers, provisioning of services and subscriptions, collection of usage data, charging and invoicing for services used and settlements with business partners in the service value chain. Business support systems presence was increased by leveraging the strong market position in Networks and Professional Services, especially systems integration, with a broad solutions portfolio in revenue management, provisioning and service delivery. More than 800 million subscriptions have been activated through ericsson’s provisioning and service delivery platforms and 1 billion subscribers are now charged and billed through ericsson’s Revenue Management solutions. A Dynamic Discount Solution (DDS), the first telecom yield management system, was launched and deployed in a number of high- growth markets. ericsson advanced its leadership in mobile payment solutions and is first with a global solution to power application stores with mobile web payment capabilities. An Online Payment service was launched with great success through 60 operators in 15 markets. ericsson was awarded the Best Transactions Provider Award – Mobile entertainment 2009 and received a high ranking in the Forrester Messaging Wave Report. There are opportunities for network operators and service providers to increase the value of their offerings toward consumers by taking advantage of the transformation to all-IP. ericsson’s introduction of the two IP-based applications Rich Communication Suite and Business Communication Suite has attracted significant market interest. They enable ericsson’s customers to provide services regardless of handset model or operating system. ericsson also reinforced its leading position in Location Based Services with a number of new contracts. In addition, a Real Time Traffic Information service was launched in europe and Asia. The Company is making good progress in building a strong portfolio of applications enabling network operators and service providers to grow revenues and expand into new value chains beyond traditional telecom services. ericsson continues to invest in new multimedia opportunities which may affect profitability on occasion. Most earlier investments are starting to pay off. MultiMeDiA sales seK 13.3 billion Good development in TV and Multimedia Brokering > Business Support Systems gaining operator interest 8% operating margin excl. restructuring charges 5% sales growth for comparable units MULTIMEDIA SALES OF TOTAL MULTIMEDIA SALES BY REGION (SeK billion and percent) SEK 13.3 billion SEK 13.3 billion 1.6 1.6 2.4 2.4 6% 9% 6% 9% 1.1 12% 1.1 12% 18% 18% 23% 23% 8% 8% 2009 2009 2009 2009 23% 23% 3.1 3.1 38% 38% 5.1 5.1 Networks Networks Western Europe Western Europe Professional Services Professional Services Multimedia Multimedia Central and Eastern Europe, Middle East and Africa Central and Eastern Europe, Middle East and Africa Asia Pacific Asia Pacific Latin America Latin America North America North America ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 23 Joint Ventures Sony Ericsson The global handset market is believed to have declined by 10 percent in unit shipments, mainly due to weakening demand for mid- to high-end feature phones – an important segment for Sony ericsson with its higher than average market share exposure. As a consequence, Sony ericsson’s market share decreased from ~7 percent to less than 5 percent. Units shipped declined by 41 percent to 57.1 (96.6) million while the average selling price increased by 3 percent to eUR 119 (116). Sales decreased by 40 percent from eUR 11.2 billion to 6.8 billion. Gross margin declined significantly year-on-year but improved during the year as benefits of cost reductions and new products started to materialize. Income before taxes, excluding restructuring charges, was a loss of eUR 878 million. The income gradually improved during the year from an improved gross margin and reduced operating expenses. ericsson’s share in Sony ericsson’s income before taxes was SeK –5.7 billion. In the second half of the year, borrowing facilities of eUR 455 million were secured to improve liquidity. The parent companies guaranteed eUR 350 million of these facilities on a 50/50 basis without joint responsibility. eUR 255 million were utilized and eUR 200 million remain available as a backup facility. The net cash position was eUR 620 million at year end. Programs initiated 2008 to lower annual operating expenses by eUR 880 million will continue, with full benefits expected in the second half of 2010. Restructuring charges are estimated to be well within the previously announced eUR 500 million. Sir Howard Stringer, Chairman, CeO and President of SONY Corporation succeeded Carl-Henric Svanberg as Chairman of the Board and Bert Nordberg, executive Vice President and Head of ericsson Silicon Valley, succeeded Dick Komiyama as President and CeO. ST-Ericsson Proforma sales declined 25 percent from USD 3.6 billion to 2.7 billion. Sales grew progressively during the year, mainly due to good performance in Asia. The joint venture remains a key supplier to four of the five largest mobile phone manufacturers in the world. Adjusted operating losses for the full year amounted to USD 440 million but results improved progressively during the year. The first quarter saw a proforma loss of USD 149 million. This was followed by losses of USD 165 million in the second quarter, USD 77 million in the third quarter and USD 50 million in the fourth quarter. The improvements reflect a tight control of product costs and operating expenses as well as the positive effects of cost reduction activities. ST-ericsson is reporting in US-GAAP. ericsson’s share in ST-ericsson’s income before tax, adjusted to IFRS, was SeK –1.8 billion. Adjustments for IFRS-compliance mainly consist of capitalization of R&D expenses for hardware development. The cost reduction programs are on schedule and target USD 595 million savings per year, of which USD 250 million were achieved by end of 2009. The full effects of the cost- reduction activities are expected in the second half of 2010. A new product roadmap for market leadership has been established by combining the strengths of parent companies STMicroelectronics and ericsson. ST-ericsson’s market position was further enhanced by securing leadership in the fast growing TD-SCDMA technology for the Chinese market and the announcement of a close cooperation with Nokia to deliver platforms for new smartphones. Wireless microelectronics industry veteran Gilles Delfassy succeeded Alain Dutheil as President and CeO after the successful integration of the JV operations. Hans Vestberg succeeded Carl-Henric Svanberg as Chairman of the Board. SONY ERICSSON NET SALES AND ADJUSTED INCOME BEFORE TAXES ST-ERICSSON NET SALES AND ADJUSTED OPERATING INCOME 12,916 10,959 11,244 n o i l l i m o r u E 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 –2,000 7,269 6,788 n o i l l i m D S U 800 700 600 500 400 300 200 100 0 –100 –200 –300 666 562 728 740 2005 2006 2007 2008 2009 Q1 Proforma Q2 Q3 Q4 Net sales Income before taxes excl. restructuring charges Net sales Operating income adjusted for restructuring and amortization of acquisition-related intangibles All figures in accordance with reported adjusted US GAAP figures 24 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 leGAl AnD tAx PROCeeDinGs In the fall of 2007, ericsson was named a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints alleged violations of US securities laws in connection with ericsson’s October 2007 profit warning. In February 2008, the court consolidated the three class actions into one. In June 2008, ericsson filed a motion to dismiss the complaint. In December, the court granted the motion and dismissed the case. In early January 2009, the plaintiffs appealed the decision to dismiss the case. On October 8, 2009, the Second Circuit affirmed the district court and dismissed the case. Consequently, there are no pending legal actions that relate to ericsson’s October 2007 profit warning. 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. In November 2009, the complaints were withdrawn and the investigation closed. Together with most of the mobile communications industry, ericsson has been named a defendant in two class action lawsuits in the US, where plaintiffs allege that adverse health effects could be associated with mobile phone usage. The cases are currently pending in the federal court in Pennsylvania and the Superior Court of the District of Columbia. 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 an appeal in a related case. In April 2007, an Australian company, QPSX Developments Pty Ltd., filed a patent infringement lawsuit against ericsson and other defendants in the US, alleging that ericsson infringed a patent related to asynchronous transfer mode (ATM) technology. Currently, all of the asserted patent claims have been rejected as invalid by an examiner in the US Patent and Trademark Office in connection with a reexamination proceeding. QPSX is appealing that decision. On August 27, 2009, the court granted ericsson’s motion to stay pending the outcome of the reexamination proceeding. Swedish fiscal authorities have disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. Most of the taxes have already been paid. The decision covering the fiscal year 1999 was appealed. In December 2006, the County Administrative Court in Stockholm rendered a judgment in favor of the fiscal authorities. The Administrative Court of Appeal in Stockholm affirmed the County Administrative Court’s judgment. The judgment has been appealed to the Administrative Supreme Court. For more information on risks related to litigations, see chapter Risk Factors. MAteRiAl COntRACts Material contractual obligations are outlined in Note C33 “Contractual obligations”. These are primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing. ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. However, none of the agreements currently in effect would entail any material consequence to ericsson due to a change in control of the Company. BRiGHt iDeAs BRiGHt PROsPeCts ericsson’s solutions can make a significant contribution to the creation of a carbon-lean economy. Low carbon communication solutions will support new ways of living and working, allowing us all to contribute to a brighter future. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 25 CORPORAte GOVeRnAnCe In accordance with the Swedish Code of Corporate Governance (the Code), a separate Corporate Governance Report including an Internal Control section has been prepared. The Company is committed to complying with best-practice corporate governance standards on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code. An ethical business ericsson’s Code of Business ethics summarizes the Group’s fundamental policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to achieve and maintain its high standards. There have been no amendments or waivers to ericsson’s Code of Business ethics for any Director, member of management or other employee. Board of Directors 2009/2010 The Annual General Meeting on April 22, 2009, re-elected Michael Treschow as Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Börje ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, and Marcus Wallenberg as Directors of the Board. Anna Guldstrand, Jan Hedlund and Karin Åberg were appointed as union representatives with Monica Bergström, Pehr Claesson and Kristina Davidsson as deputies. Management In 2009, Hans Vestberg was appointed new President and CeO, succeeding Carl-Henric Svanberg as of January 1, 2010. The President and CeO is supported by the Group Management Team which, in addition to the President and CeO, consists of heads of Group Functions and heads of business units. A management system is implemented to ensure that the business is well managed and able to fulfill the objectives of major stakeholders within established risk limits. The system also monitors internal control and compliance with applicable laws, listing requirements and governance codes. Remuneration Fees to the members of the Board of Directors and the remuneration of management as well as the 2009 guidelines for remuneration to senior management are reported in Notes to the Consolidated Financial Statements – Note C29, “Information Regarding Members of the Board of Directors, the Management and employees”. As of December 31, 2009, there were no loans outstanding from and no guarantees issued to or assumed by ericsson for the benefit of any member of the Board of Directors or senior management. All relevant information regarding remuneration can be found in chapter Remuneration Report. The Board of Directors’ proposal for guidelines for remuneration to senior management The Board of Directors proposes the following guidelines for remuneration and other employment terms for the senior management for the period up to the 2011 Annual General Meeting. Compared to the guidelines resolved by the 2009 Annual General Meeting, these guidelines have been restructured and rephrased to better demonstrate the basic principles for remuneration within the ericsson Group. Details of how we deliver on our principles and policy, including information on previously decided long-term variable remuneration that has not yet become due for payment, can be found in the Remuneration Report and in Note C29, “Information regarding Members of the Board of Directors, the Management and employees” in the Annual Report 2009. sOMetHinG OlD sOMetHinG neW ericsson’s VDSL2-based broadband technology means operators can maximize the reuse of existing infrastructure and enhance fiber access deployments with copper lines in the last mile. As a result more consumers will be able to enjoy true broadband services such as HDTV and video-on-demand in their homes. 26 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009  > > > > > Variable remuneration is through cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either corporate or unit level, operational targets, employee motivation targets and customer satisfaction targets. With the current composition of Group Management, the Company’s cost during 2010 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 140 percent of the aggregate fixed salary cost, all excluding social security costs. All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. The retirement age is normally 60 to 65 years of age. By way of exception, additional arrangements can be made when deemed required. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made. The mutual notice period may be no more than 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 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. 2010 Remuneration Policy Remuneration at ericsson is based on the principles of performance, competitiveness and fairness. These principles and good practice in Sweden guide our policy to: > > > > > > > > Attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the ericsson strategy. encourage behavior consistent with ericsson’s culture and core values of professionalism, respect and perseverance. ensure fairness in reward by delivering total remuneration that is appropriate but not excessive. ensure a total compensation mix of fixed and variable remuneration and benefits that reflects the Company´s principles and is competitive where ericsson competes for talent. encourage variable remuneration which, first, aligns employees with clear and relevant targets, second, reinforces performance and, third, enables flexible remuneration costs. ensure that all variable remuneration plans have maximum award and vesting limits. encourage employees to deliver sustained performance and build up a personal shareholding in ericsson, aligning the interests of shareholders and employees. Communicate clearly to both employees and shareholders how ericsson translates remuneration principles and policy into practice. Group Management For senior management consisting of the executive Leadership Team, including the President and CeO, in the following referred to as the “Group Management”, total remuneration consists of fixed salary, short- and long-term variable remuneration, pension and other benefits. Furthermore, the following guidelines apply for Group Management: CitY netWORKs CitY PROGRess Operator-neutral city networks bring the highest level of services to residents and promise sustainable growth. With ericsson’s solution, residents are able to select individual high-speed broadband services such as HD IPTV and video-on-demand from a provider of their choice. The city gains high quality infrastructure that will help keep corporations and businesses in the region. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 27 SuStainability and Corporate reSponSibility The Company has implemented strong social, environmental and ethical standards supporting risk management and value creation. This commitment generates positive business impacts that benefit society. ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations and in its relationships with stakeholders. The Board of Directors considers these aspects in governance decision- making. Group level policies and directives ensure consistency across global operations. ericsson publishes an annual Sustainability and CR Report which provides additional information. Minimizing risk Responsible business practices ericsson supports the UN Global Compact and endorses its ten principles regarding human and labor rights, anti-corruption and environmental protection. The ericsson Group Management System includes policies and directives that cover responsible business practices, such as the Code of Business ethics, Code of Conduct (CoC), anti-corruption and environmental management. It is reinforced by training, workshops and monitoring, including a global assessment program run by an external assurance provider in which CR criteria represent approximately 20 percent of the total areas assessed. Supply chain Suppliers must comply with ericsson’s CoC and environmental Requirements. The Company performs regular audits and works with suppliers to ensure measurable and continuous improvements. Priorities from a risk model include network roll- out, tower manufacturing and logistics. Findings are followed up to ensure that lasting improvements are made. One common finding is suppliers’ insufficient routines for ensuring compliance to the CoC requirements in their supply chain. Design for Environment Controls are in place to ensure compliance with environmental regulations, e.g. the eU regulation for Registration, evaluation, Authorization and restriction of Chemicals (ReACH). ericsson’s List of Banned and Restricted Substances was updated in 2009. The Company has to date produced more than 10 million lead-free soldered printed board assemblies with reliability equal to lead-soldered boards. Take-back ericsson ecology Management and Product Take-back is a global initiative to take responsibility of products at the end of their life. Close to 100 percent of decommissioned equipment is recycled, exceeding the Waste from electronic and electrical equipment Directive (Weee) stipulation of 75 percent. During 2009 more than 5,300 tons were collected. Radio waves and health ericsson provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. ericsson currently co-sponsors about 40 ongoing research projects related to electromagnetic fields, radio waves and health; over 90 studies have been supported since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations. FailSaFe ForeCaStinG Mobile transmission of weather information has the potential to save lives in Africa. The ‘Weather Info for All’ initiative plans to deploy 5,000 automatic weather stations in mobile network sites across Africa. The initiative, set up by the Global Humanitarian Forum, the World Meteorological Organization, ericsson and Zain, will enable those on the front line of climate change to access accurate weather information. 28 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 Creating value The environmental opportunity Information and Communication Technology (ICT) represents about two percent of global CO2 emissions, but can potentially offset a significant portion of the remaining 98 percent from other sectors. ericsson takes active measures to ensure that its own carbon footprint will be reduced. A carbon footprint reduction target was set in 2008 to reduce emissions relative to products sold by 40 percent over five years, from in-house activities and the life-cycle impacts of products. In 2009, ericsson exceeded the annual 10 percent reduction target by: A 20 percent reduction in direct emissions from ericsson activities, through reducing product weight, increasing the share of surface mode transports to 60 percent, and by reducing business travel by approximately 10 percent globally. This led to a 200,000 ton CO2 reduction. A 15 percent reduction in indirect emissions from products in operation was achieved. Reducing the energy consumption of products sold will lead to a 3.5 million ton CO2 reduction over the product lifetime. > > In addition, part of ericsson’s sustainability strategy is to focus on the role that broadband can play in helping to offset global CO2 emissions. In 2009, ericsson focused on sustainable city solutions, and partnered with WWF Sweden to assess the positive impact that ICT has in the creation of low-carbon economies, co-publishing recommendations for policy makers. Sony ericsson launched its Greenheart phone, with an in- phone manual, recycled plastics, energy efficient display and waterbased paints decreasing the overall CO2 emissions of the phone by 15 percent. Meeting the Millennium Development Goals Mobile connectivity fuels economic growth, which is particularly vital for the billions of people living at the base of the economic pyramid – the markets of the future. ericsson is committed to using its technology and competence to help achieve the UN Millennium Development Goals (MDGs), and customer engagement is part of its strategy to meet this aim. In 2009, a monitoring and evaluation study, conducted in cooperation with Columbia University, revealed that access to mobile communications in the Millennium Villages has concretely contributed to the achievement of the MDGs. It also showed that mobile applications are especially well suited for collecting information and monitoring critical areas such as health, education, security and small business development. Ericsson Response ericsson Response is a global employee volunteer initiative to rapidly roll out communication solutions and provide telecoms experts to assist disaster relief operations. ericsson Response cooperates with the UN Office for the Coordination of Humanitarian Affairs, the UN World Food Programme and the International Federation of Red Cross and Red Crescent Societies (IFRC). In 2009, support was provided to relief workers in saving children in Southern Sudan and after heavy flooding in Panama. Continued support was given to the UN in establishing operations in the Central African Republic and in the Democratic Republic of Congo. In recognition of performance The Millennium Villages Project received a Global Telecoms Business Innovation Award. ericsson China was named the “China Green Benchmark Company” for the second year in a row. ericsson was also recognized as the “Green Pioneer” at the 2009 “Korea-eU Industrial Cooperation Day”. In the UK Brand emissions Leaders survey, ericsson was named one of the brand leaders in reducing its carbon emissions. ERICSSON LIFE-CYCLE ASSESSMENT CARBON FOOTPRINT 2009 CARBON INTENSITY 2009 2 O C s n o T M 25 20 15 10 5 0 –5 ~19 ~3 ~3 0.6 ~–0.3 5 4 3 2 1 0 ~ –15% ~ –20% Supply chain Ericsson activities Operator activities Products operation End-of-life treatment Activities in 2009 Future (lifetime) operation of products delivered in 2009 Ericsson’s direct emissions (own activities) ~ = Approximately Indirect emissions (all other life-cycle related emissions) 2005 2006 2007 2008 2009 Product operation kg CO2 / Capacity [subscriber/line/port] and year Ericsson activities kg CO2 / Capacity [subscriber/line/port] Ericsson activities ton CO2 / Net sales [MSEK] Goal 2009 for product operation and Ericsson activities: –10% (actual achievements are stated in the 2009 columns) ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 29 riSk ManaGeMent ericsson’s Board of Directors is actively engaged in the Company’s risk management. Risks related to set long-term objectives are discussed and strategies formally approved by the Board as part of the annual strategy process. Risks related to annual targets for the Company are also reviewed by the Board and then monitored continuously during the year. Operational risk management is integrated within the ericsson Group Management System to ensure effectiveness, efficiency, business continuity and compliance with corporate governance, legal and other requirements. Certain transactional risks require specific Board approval, e.g. material acquisitions, management remuneration, borrowing or customer finance in excess of pre-defined limits. For more information on risks related to ericsson’s business, see chapter Risk Factors. Strategic and tactical risks In the annual strategy and target setting process, objectives are set for the next five years, risks and opportunities are assessed and strategies are developed to achieve the objectives. To ensure that actions are taken to realize the strategies, focus areas are identified in target setting and planning for the coming year. In 2009, the general economic downturn in 2008–2009 and the consequences for the business were assessed in relation to both strategy and target setting. For the setting of long-term objectives, important industry and market fundamentals were analyzed and risks and opportunities evaluated. Near-term, a continued focus on cost management and a strong liquidity were emphasized due to the increased difficulties of forecasting customer demand. Risks and opportunities were identified and analyzed in the following balanced scorecard perspectives: STRATEGY, TARGET SETTING AND RISK MANAGEMENT CYCLE Financial perspective > > > > Top line growth: the decline caused by reduction in 2G spend has yet to be offset by growth in 3G and LTe driven by data traffic in mobile broadband networks. ericsson will focus on converged solutions, IMS, multi-standard radios and services plus opportunities in transmission and evolved eDGe. Margin improvement: addressed by platform consolidation, software reuse, reduced number of sites and rapid transformation of transferred managed services operations and integration of acquired Nortel units. Cash flow: continued focus on working capital improvements. A strong cash position is deemed important for flexibility to execute on potential market opportunities. JVs: continued cooperation with JVs and co-owners needed to make them profitable again as soon as possible. Customer perspective > > > > Convergence of the telecom, datacom and media industries results in new forms of competition and customers. ericsson will focus on competitive offerings for mobile broadband, converged core solutions, network management systems and systems integration. The competitive landscape is constantly changing, as consolidation continues among customers and vendors. Continued investments in R&D for premium, cost-effective and future-proof solutions are essential. Customer intimacy for network planning and migration is key for forging customer partnerships. ericsson’s installed base is an important asset for sales of upgrades, network convergence and systems integration. Now also Nortel’s US customer base is added, providing additional opportunities in CDMA and LTe. Continuous follow-up of quality of delivered products and services to be maintained to ensure customer satisfaction. Board Target Approval Review of one-year risks Group Management Strategy directives Quantitative and qualitative situation analysis Target Setting (12 month horizon) Related risk identification and mitigation Q4 Nov Oct Sep Dec Jan Q1 Group Strategy Development (five year perspective) Feb Mar Apr New Business Development Market Unit & Account Planning Board Strategy Approval Review of long-term risks Q3 Aug May Q2 Jul Jun Business Unit & Group Function Strategy planning Strategic risk identification and mitigation Quarterly risk monitoring Global Management Conference on Strategy 30 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 Market position perspective > > > > > > Continued strong competition in the market is addressed through cost reductions and premium end-to-end solutions, based on continued leadership in R&D and services. Market leadership is being safeguarded through rapid technological development and establishment of a key player position in network transformation – IP, mobile broadband, multimedia and consulting. Backhaul demand is growing, driven by strong data traffic. ericsson will seize this opportunity by harvesting its leading microwave position. The Company will also leverage the broader product portfolio created through acquisitions, promote OneVoice and IMS for LTe networks, and continue its strong Design for environment program to lower operators’ cost of ownership and drive a positive environmental impact. The Company will capitalize on the dramatic improvement of its US footprint and its Silicon Valley presence. The joint ventures will need to execute their restructuring programs and also address multiple operating systems and new market players, e.g. Google/Android. Sony ericsson will focus its product portfolio more on high-end handsets. Operations and people perspectives > > > > > Restructuring and other activities have been defined for margin protection, including industrialization of managed services. Continued focus in R&D on shortened lead times for product/solution development. Increased flexibility and responsiveness will be achieved through efforts to shorten lead times also for delivery of hardware and software. The Company must ensure it has top competence in key technology areas and systems integration. empowerment and remuneration are important aspects to continue to be a competitive and attractive employer. Operational and financial risks Operational risks are owned and managed by operational units. Risk management is embedded in various process controls, such as decision tollgates and approvals. Certain cross-process risks, such as information security/IT, corporate responsibility and business continuity as well as insurable risks are centrally coordinated. Financial risk management is governed by a Group policy and carried out by the Treasury and Customer Finance functions, both supervised by the Finance Committee of the Board of Directors. The policy governs risk exposures related to foreign exchange, liquidity/ financing, interest rates, credit risk and market price risk in equity instruments. For further information on financial risk management, see Notes to the Consolidated Financial Statements – Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”. Compliance risks ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business ethics. Risk management is integrated in the Company’s business processes. Policies and controls are implemented to ensure compliance with financial reporting standards and stock market regulations, e.g. the US Sarbanes-Oxley Act. Monitoring and audits Company management monitors the compliance with policies, directives and processes through internal self-assessment within all units. This is complemented by internal and external audits. external financial audits are performed by PricewaterhouseCoopers, and ISO/management system audits by Det Norske Veritas, DNV. liVe liFe Interactive TV platform supports advanced services such as video-on-demand and music-on-demand. Users can schedule their entertainment around their lives and catch up with their favorite TV at any time. ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 31 parent CoMpany The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities as well as customer credit management, performed on a commission basis by ericsson Credit AB. The Parent Company is the owner of a substantial part of ericsson’s intellectual property rights. It manages the patent portfolio, including patent applications, licensing and cross- licensing of patents and defending of patents in litigations. The Parent Company has 6 (7) branch offices. In total, the Group has 65 (62) branch and representative offices. Financial information Net sales for the year amounted to SeK 0.3 (5.1) billion and income after financial items was SeK 8.1 (19.4) billion. effective January 1, 2009, the right to all license revenues from third parties related to patent licenses was transferred to ericsson AB, a wholly owned subsidiary, and consequently net sales in 2009 were insignificant compared to 2008. TeMS SWeDeN AB was sold during the year. exports accounted for 100 (70) percent of net sales. The Parent Company had no sales in 2009 or 2008 to subsidiaries, while 45 (46) percent of total purchases of goods and services were from such companies. Major changes in the Parent Company’s financial position for the year include: > > > > > Investments in the joint venture ST-ericsson of SeK 8.6 billion. Decreased current and non-current receivables from subsidiaries of SeK 10.1 billion. Decreased other current receivables of SeK 2.0 billion. Increased cash, cash equivalents and short-term investments of SeK 3.2 billion. Increased current and non-current liabilities to subsidiaries of SeK 5.0 billion. > Decreased other current liabilities of SeK 7.4 billion. At year end, cash, cash equivalents and short-term investments amounted to SeK 62.4 (59.2) billion. Share information In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SeK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SeK 135.1 million. As per December 31, 2009, the total number of shares was 3,273,351,735, of which 261,755,983 Class A shares, each carrying one vote, and 3,011,595,752 Class B shares, each carrying one-tenth of one vote. The two largest shareholders at year end were Investor and Industrivärden holding 19.33 and 13.62 percent respectively of the voting rights in the Parent Company. In accordance with the conditions of the Long-Term Variable Remuneration Program (LTV) for ericsson employees, 9,087,564 treasury shares were sold or distributed to employees in 2009. The quotient value of these shares was SeK 45.4 million, representing less than 1 percent of capital stock, and compensation received amounted to SeK 213.2 million. The holding of treasury stock at December 31, 2009, was 78,978,533 Class B shares. The quotient value of these shares is SeK 394.9 million, representing 2 percent of capital stock, and the related acquisition cost amounts to SeK 672.4 million. Proposed disposition of earnings The Board of Directors proposes that a dividend of SeK 2.00 (1.85 in 2008) per share be paid to shareholders duly registered on the record date April 16, 2010, and that the Parent Company one For all MBNL, the 50/50 joint venture formed by 3 and T-Mobile in the UK, accelerates its consolidation program to improve coverage while reducing its number of sites. The program will result in the creation of an integrated network providing close to complete population coverage for 3G services in the UK. 32 BOARD OF DIRECTORS’ REPORT | ericsson Annual Report 2009 shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive a dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows: Amount to be paid to the shareholders Amount to be retained by the Parent Company SEK 6,546,703,470 SEK 35,406,164,930 Total non-restricted equity of the Parent Company SEK 41,952,868,400 As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 52 (50) percent and a net cash amount of SeK 36.1 (34.7) billion. The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries. The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is our assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group. poSt-CloSinG eVentS In an auction on November 25, 2009, ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions. On January 12, 2010, ericsson announced an agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees. On January 18, 2010, the Company appointed Rima Qureshi and Magnus Mandersson as heads of business unit CDMA and Global Services respectively. Both are members of the executive Leadership Team. In January 2010, as per the trust’s funding requirements, the Company made an employer contribution payment of SeK 730 million to the Swedish pension trust fund. On February 8, 2010, the Company announced the appointment of Mats H. Olsson and Angel Ruiz as members of the executive Leadership Team as well as a reorganization of its 23 market units into ten regions. board aSSuranCe The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as adopted by the eU, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations. The Board of Directors’ Report for the ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group. Stockholm February 26, 2010 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 Carl-Henric Svanberg Member of the Board Sverker Martin-Löf Deputy Chairman Nancy McKinstry Member of the Board Börje Ekholm Member of the Board Hans Vestberg President and CeO Marcus Wallenberg Deputy Chairman Anders Nyrén Member of the Board Roxanne S. Austin Member of the Board Jan Hedlund Member of the Board Karin Åberg Member of the Board Anna Guldstrand Member of the Board ericsson Annual Report 2009 | BOARD OF DIRECTORS’ REPORT 33 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 operating income before shares in earnings of joint ventures and associated companies Operating margin before shares in earnings of joint ventures and associated companies (%) Share in earnings of joint ventures and associated companies operating income Financial income Financial expenses income after financial items Taxes net income Net income attributable to: Stockholders of the Parent Company Minority interest other information Average number of shares, basic (million) 1) earnings per share attributable to stockholders of the Parent Company, basic (SeK) 1) 2) earnings per share attributable to stockholders of the Parent Company, diluted (SeK) 1) 2) 1) A reverse split 1:5 was made in June 2008. Comparative figures are restated accordingly. 2) Based on Net income attributable to stockholders of the Parent Company. notes C3, C4 2009 2008 2007 206,477 –136,278 70,199 34.0% –33,055 –26,908 –59,963 208,930 –134,661 74,269 35.5% –33,584 –26,974 –60,558 187,780 –114,059 73,721 39.3% –28,842 –23,199 –52,041 C6 3,082 2,977 1,734 13,318 16,688 23,414 6.5% 8.0% 12.5% C12 C7 C7 C8 C9 C9 C9 –7,400 5,918 1,874 –1,549 6,243 –2,116 4,127 3,672 455 3,190 1.15 1.14 –436 16,252 3,458 –2,484 17,226 –5,559 11,667 7,232 30,646 1,778 –1,695 30,729 –8,594 22,135 11,273 394 21,836 299 3,183 3.54 3.52 3,178 6.87 6.84 34 consolidated financial statements | ericsson Annual Report 2009 Consolidated Statement of comprehensive income Years ended december 31, seK million net income other comprehensive income Actuarial gains and losses, and the effect of the asset ceiling, related to pensions Revaluation of other investments in shares and participations Fair value remeasurement Cash Flow hedges Gains/losses arising during the period Reclassification adjustments for gains/losses included in profit or loss Adjustments for amounts transferred to initial carrying amount of hedged items Changes in cumulative translation adjustments Tax on items relating to components of OCI total other comprehensive income total comprehensive income Total Comprehensive Income attributable to: Stockholders of the Parent Company Minority interest notes 2009 4,127 2008 11,667 2007 22,135 C16 C16 C16 C16 C16 C16 C16 –605 –4,015 1,208 –2 –7 2 672 3,850 –1,029 –1,361 –1,040 485 4,612 –5,080 1,192 – 8,528 2,330 2,948 14,615 584 –1,390 – –797 –73 –466 21,669 4,211 401 13,988 627 21,371 298 ericsson Annual Report 2009 | consolidated financial statements 35 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 2009 2008 C10 2,079 27,375 18,739 2,782 24,877 20,587 Property, plant and equipment C11, C26, C27 9,606 9,995 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 C14 C15 C20 C25 C16 C16 C17 C18 C8 C19, C20 C18 C19, C20 C22 C21 11,578 256 830 2,577 14,327 87,367 7,988 309 846 4,917 14,858 87,159 22,718 27,836 66,410 1,444 15,146 53,926 22,798 75,891 1,975 17,818 37,192 37,813 182,442 198,525 269,809 285,684 139,870 1,157 141,027 8,533 461 2,270 29,996 2,035 43,295 11,970 2,124 18,864 52,529 85,487 140,823 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 total equity and liabilities 1) 269,809 285,684 1) Of which interest-bearing liabilities and post-employment benefits SeK 40,653 million (SeK 40,354 million in 2008). 36 consolidated financial statements | ericsson Annual Report 2009 Consolidated Statement of Cash Flows January–december, seK million 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 Trade payables Provisions and post-employment benefits Other operating assets and liabilities, net notes 2009 2008 2007 C25 4,127 16,856 20,983 5,207 598 7,668 –3,522 –2,950 –3,508 3,493 11,667 14,318 25,985 –3,927 549 –11,434 4,794 3,830 4,203 –1,985 22,135 7,172 29,307 –445 365 –7,467 –1,558 –4,401 3,409 –10,097 cash flow from operating activities 24,476 24,000 19,210 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 cash flow from investing activities C11 C25, C26 C25, C26 C10 –4,006 534 –19,321 1,239 –1,443 2,606 –17,071 –37,462 –4,133 1,373 –74 1,910 –1,409 944 –7,155 –8,544 –4,319 152 –26,292 84 –1,053 396 3,499 –27,533 cash flow before financing activities –12,986 15,456 –8,323 financing activities Proceeds from issuance of borrowings Repayment of borrowings Sale of own stock and options exercised Dividends paid Other financing activities cash flow from financing activities 14,153 –9,804 69 –6,318 199 –1,701 5,245 –4,216 3 –8,240 – –7,208 15,587 –1,291 94 –8,132 – 6,258 effect of exchange rate changes on cash –328 1,255 406 net change in cash –15,015 9,503 –1,659 cash and cash equivalents, beginning of period 37,813 28,310 29,969 cash and cash equivalents, end of period C25 22,798 37,813 28,310 ericsson Annual Report 2009 | consolidated financial statements 37 Consolidated Statement of Changes in Equity Revalua- tion of other invest- ments in shares and partici- pations addi- tional paid in capital capital stock cumula- tive transla- tion cash flow hedges adjust- Retained earnings ments holders’ minority interests equity total equity stock- January 1, 2009 16,232 24,731 Total comprehensive income transactions with owners Stock issue Sale of own shares Repurchase of own shares Stock Purchase and Stock Option Plans Dividends paid Business combinations – 135 – – – – – – – – – – – – december 31, 2009 16,367 24,731 January 1, 2008 16,132 24,731 Total comprehensive income transactions with owners Stock issue Sale of own shares Repurchase of own shares Stock Purchase and Stock Option Plans Dividends paid Business combinations – 100 – – – – – – – – – – – – –1 –3 – – – – – – –4 5 –6 – – – – – – –2,356 2,124 100,093 140,823 1,261 142,084 2,434 –1,461 3,241 4,211 401 4,612 – – – – – – – – – – – – – 75 –135 658 –5,897 – 135 75 –135 658 –5,897 – – – – – –421 –84 135 75 –135 658 –6,318 –84 78 663 98,035 139,870 1,157 141,027 307 –6,345 99,282 134,112 –2,663 8,469 8,188 13,988 940 627 135,052 14,615 – – – – – – – – – – – – – 88 –100 589 –7,954 – 100 88 –100 589 –7,954 – – – – – –286 –20 100 88 –100 589 –8,240 –20 december 31, 2008 16,232 24,731 –1 –2,356 2,124 100,093 140,823 1,261 142,084 January 1, 2007 16,132 24,731 Total comprehensive income transactions with owners Sale of own shares Stock Purchase and Stock Option Plans Dividends paid Business combinations – – – – – – – – – – december 31, 2007 16,132 24,731 3 2 – – – – 5 877 –5,569 83,939 120,113 –570 –776 22,715 21,371 782 298 120,895 21,669 – – – – – – – – 62 509 –7,943 – 62 509 –7,943 – – – –189 49 62 509 –8,132 49 307 –6,345 99,282 134,112 940 135,052 38 consolidated financial statements | ericsson Annual Report 2009 notes to the Consolidated Financial statements Contents C1 Significant Accounting Policies ..................................................................................................................................................................................................................................... 40 C2 Critical Accounting estimates and Judgments ................................................................................................................................................................................................ 47 C3 Segment Information ............................................................................................................................................................................................................................................................... 50 C4 Net Sales ............................................................................................................................................................................................................................................................................................. 54 C5 expenses by Nature ................................................................................................................................................................................................................................................................. 54 C6 Other Operating Income and expenses ................................................................................................................................................................................................................ 54 C7 Financial Income and expenses ................................................................................................................................................................................................................................... 55 C8 Taxes ....................................................................................................................................................................................................................................................................................................... 55 C9 earnings per Share ..................................................................................................................................................................................................................................................................... 57 C10 Intangible Assets .......................................................................................................................................................................................................................................................................... 57 C11 Property, Plant and equipment ...................................................................................................................................................................................................................................... 59 C12 Financial Assets, Non-Current ....................................................................................................................................................................................................................................... 60 C13 Inventories .......................................................................................................................................................................................................................................................................................... 61 C14 Trade Receivables and Customer Finance ......................................................................................................................................................................................................... 62 C15 Other Current Receivables ................................................................................................................................................................................................................................................. 64 C16 equity and Other Comprehensive Income .......................................................................................................................................................................................................... 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 ........................................................................................................................................................................................................................................................ 79 C22 Trade Payables .............................................................................................................................................................................................................................................................................. 79 C23 Assets Pledged as Collateral ........................................................................................................................................................................................................................................... 79 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 Members of the Board of Directors, Management and employees ................................................................................ 84 C30 Related Party Transactions ............................................................................................................................................................................................................................................... 90 C31 Fees to Auditors ............................................................................................................................................................................................................................................................................ 91 C32 events after the Balance Sheet Date ......................................................................................................................................................................................................................... 91 C33 Contractual Obligations ......................................................................................................................................................................................................................................................... 91 ericsson Annual Report 2009 | notes to the consolidated financial statements 39 NOTe C1 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 joint ventures and associated companies. The Parent Company is domiciled in Sweden at Torshamnsgatan 23, Se-164 83 Stockholm. The consolidated financial statements for the year ended December 31, 2009, have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the eU and RFR 1.2 “Additional rules for Group Accounting”, related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering), and the Swedish Annual Accounts Act. For the financial reporting of 2009, the Company has applied IFRS as issued by the IASB (IFRS effective as per December 31, 2009) and without any early application. There is no difference between IFRS effective as per December 31, 2009, and IFRS as endorsed by the eU, nor is RFR 1.2 or the Swedish Annual Accounts Act in conflict with IFRS. The financial statements were approved by the Board of Directors on February 26, 2010. 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, 2009, changing presentation or disclosure: > > > IAS 1 (Revised), “Presentation of Financial Statements”. The revised standard requires all non-owner changes in equity to be shown in a performance statement. The Company therefore presents two statements, the Income Statement and a Statement of Comprehensive Income. Also, to improve the understanding of the Company’s financial performance, a new subtotal line has been added in the Income Statement, “Operating income before share in earnings of joint ventures and associated companies”. This is to distinguish between operating income from operations consolidated and from shares in earnings of joint ventures and associated companies accounted for using the equity method. IFRS 7 “Financial instruments – Disclosures” (amendment). The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosure, there is no impact on earning per share. IFRS 8 “Operating Segments”. This standard replaces IAS 14 “Segment Reporting” and requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting to the Chief Operating Decision Maker (CODM). In ericsson, the Group Management Team is defined as the CODM function. The new standard has not resulted in any changes of the reportable segments, except for changes in the content of disclosures in note C3 Segment Information. New standards, amendments of standards and interpretations, effective as from January 1, 2009, changing financial result and position and disclosures: > IFRS 2 (amendment), “Share-based payment” 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. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. The amendment has not had a material impact on the Company’s financial statements. > Revised IAS 23, “Borrowing Costs” and “Improvements to IFRSs”, (May 2008). In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after January 1, 2009, the Company capitalizes borrowing costs directly attributable to the acquisition, design, construction or production of a qualifying asset as part of the cost of that asset. Previously the Company immediately recognized all borrowing costs as an expense. The change in IAS 23 has not had a material impact on the Company’s financial statements. Any capitalization of borrowing costs would normally relate to internally generated intangible assets (see note C10). The following amendments and IFRIC:s have not had any material impact on the Company’s financial statements: > > > > > > > > > > IAS 32 and IAS 1 (Amendments) “Puttable Financial Instruments” and “Obligations Arising on Liquidation”. IAS 39 (Amendment) “Financial instruments: Recognition and Measurement – eligible hedged Items.” Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. Amendments to IFRIC Interpretation 9 and IAS 39. Reassessment of embedded Derivatives. IFRIC 13 “Customer Loyalty Programmes” addresses the accounting by companies that operate, or otherwise participate in, customer loyalty programmes for their customers. IFRIC 15 “Agreements for Construction of Real estate”. In note C4 Net Sales the Company discloses the split between revenue related to IAS 11 and IAS 18. IFRIC 16 “Hedges of a Net Investment in a Foreign Operation”. IFRIC 18 ”Transfers of Assets from Customers”. Improvements to IFRSs, published in May 2008 and effective from January 1, 2009 Improvements to IFRSs, published in April 2009 and effective from January 1, 2010. For information on “New standards and interpretations not yet adopted” please see page 46. changes in financial reporting structure The joint venture ST-ericsson was formed on February 3, 2009. By merging STMicroelectronics’ wireless business and ericsson Mobile Platforms, a large company in the semiconductor industry was created. ST-ericsson is reported as a separate operating segment, accounted for using the equity method. definition of other comprehensive income (oci) OCI comprises items of income and expense (including reclassification adjustments) that are not recognized in the income statement as required or permitted by IFRS. See also comments under IAS 1 above. Basis of presentation The financial statements are presented in millions of Swedish Krona (SeK). They are prepared on a historical cost basis, except for certain financial assets and liabilities that are stated at fair value: derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale and plan assets related to defined benefit pension plans. Basis of consolidation The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiaries, joint ventures and associated companies earned only after their acquisition. Subsidiaries are all companies in which ericsson has an ownership interest, directly or indirectly, including effective potential voting rights, has the power to govern the financial and operating policies generally 40 notes to the consolidated financial statements | ericsson Annual Report 2009 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. 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. Final amounts must be established within one year after the transaction date at the latest. minority interest The Company treats transactions with minority interests as transactions with external parties. Disposals of minority interests are recognized as gains and losses in the income statement. Purchases from minority interests result in goodwill if there is a difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. Joint ventures and associated companies Investments in joint ventures and 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 joint ventures and associated companies 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. Shares in earnings of joint ventures and associated companies included in consolidated equity which are undistributed are reported in Retained earnings in the balance sheet. Impairment testing as well as recognition or reversal of impairment of investments in each joint venture is performed in the same manner as for intangible assets other than goodwill. The entire carrying amount of each investment, including goodwill, is tested as a single asset. See also description under “Intangible assets other than goodwill” below. foreign currency remeasurement and translation Items included in the financial statements of each entity of the Company 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. NOTe C1 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 OCI 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 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 OCI. 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 OCI. 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 OCI. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in OCI 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 statement of cash flow 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. license 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, ericsson Annual Report 2009 | notes to the consolidated financial statements 41 NOTe C1 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. Sales are recorded net of value added taxes, goods returned, trade discounts and rebates. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when the revenue amount is fixed or determinable, and when collection is reasonably assured. Specific contractual performance and acceptance criteria may impact the timing and amounts of revenue recognized. The profitability of individual contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable. For sales between consolidated companies, associated companies, joint ventures and segments, the Company applies arm’s length pricing. definitions of contract types and related more specific 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 are accounted for in accordance with IAS 18 are: Delivery-type contracts, i.e. 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 with multiple elements, revenue is allocated to each element based on relative fair values. If there are undelivered elements essential to the functionality of delivered elements, the Company defers recognition of revenue until all elements essential to the functionality have been delivered. Contracts for services include various types of 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 license fees from third parties for the use of the Company’s technology or intellectual property rights. Revenue is normally recognized based on sales of products sold to the customer/ licensee. The contract type that is accounted for in accordance with 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. earnings per share 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, other operating income, financial income or financial expense, depending on the intent with the transaction. 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 as well as amounts where risk and rewards have been transferred to the customer but the invoice has not yet been issued. Collectibility of the receivables is assessed for purposes of initial revenue recognition. available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other 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. 42 notes to the consolidated financial statements | ericsson Annual Report 2009 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 OCI. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in OCI. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments previously recognized in OCI 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 OCI 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 recoveries of amounts previously written off are credited to selling expenses in the income statement. financial liabilities Financial liabilities are recognized when the Company becomes bound to the contractual obligations 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. Borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Company 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 NOTe C1 are recognized immediately in the income statement either as cost of sales, other operating income, 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) fair value hedge: a hedge of the fair value of recognized liabilities; b) cash flow hedge: a hedge of a particular risk associated with a highly probable forecast transaction; or c) net investment hedge: a hedge of a net investment in a foreign operation. At the inception of the hedge, 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 OCI are shown in Note C16, “equity and OCI”. The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities. 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 remaining period to maturity. 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 OCI. The gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or expense. Amounts deferred in OCI 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 OCI are transferred from OCI 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 OCI is recognized ericsson Annual Report 2009 | notes to the consolidated financial statements 43 NOTe C1 in the income statement when the forecast transaction is ultimately recognized. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately transferred to the income statement within financial income or expense. 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 OCI. 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 OCI 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 intangible assets other than goodwill Intangible assets other than goodwill comprise capitalized development expenses and acquired intangible assets, such as patents, customer relations, trademarks 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 any 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. 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 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. 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. ericsson’s five operating segments have been identified as CGUs. Goodwill is assigned to three of them, Networks, Professional Services and Multimedia. 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. Additional disclosure is required in relation to goodwill impairment testing, see 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 any 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 equipment on lease. 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 cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement. Amortization of acquired intangible assets, such as patents, customer leasing relations, brands and software, is made according to the straight-line method over their estimated useful lives, 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 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 44 notes to the consolidated financial statements | ericsson Annual Report 2009 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 the equipment Is recorded as property, plant and equipment 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 or OCI. For those items, the related income tax is also reported directly in equity or OCI. 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 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 when It Is probable that the temporary difference will 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 or OCI, in which case the adjustment is also recognized in equity or OCI. 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, customer 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 NOTe C1 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 unresolved income tax issues, 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. In the ordinary course of business, the Company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. These matters are often resolved over 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. 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, see Note 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. 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 results will differ from the estimated results or that the actuarial assumptions will change from one period to another. These differences are reported as actuarial gains and ericsson Annual Report 2009 | notes to the consolidated financial statements 45 NOTe C1 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 OCI 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. Payroll taxes related to actuarial gains and losses are included in determining actuarial gains and losses. 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 based on a measure of the value to the company of services received under the plans. 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 and other features that are non-vesting conditions. The employee pays 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. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. When calculating the compensation costs for shares under performance-based matching programs, the Parent Company at each reporting date assesses the probability that the performance targets are met. 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. compensation to the Board of directors During 2008, the Parent 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 Parent Company at the time of payment, as further disclosed in Note C29, “Information Regarding Members of the Board of Directors, Management and employees”. The cost for cash settlements is measured and recognized 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 An operating segment is a component of a company whose operating results are regularly reviewed by the Company’s chief operating decision maker, (CODM), to make decisions about resources to be allocated to the segment and assess its performance. Within the Company, the Group Management Team is defined as the CODM function. The segment presentation, as per each segment is based on the accounting policies as disclosed in this note. The arm’s length principle is applied in transactions between the segments. The Company’s segment disclosure about geographical areas is based on in which country transfer of risks and rewards occur. Borrowing costs The Company capitalizes borrowing costs in relation to qualifying assets, for the Company normally being internally generated intangible assets as capitalized development expenses. All other borrowing costs are expensed as incurred. 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. 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, 2009, and have not been applied in preparing these consolidated financial statements: > > IAS 27 (revised), ‘Consolidated and separate financial statements’, (effective from July 1, 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in OCI if there is no change in control and these transactions will no longer result in goodwill or gains or losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re- measured to fair value, and a gain or loss is recognized in profit or loss. The Company will apply IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010. IFRS 3 (revised), ‘Business combinations’ (effective from July 1, 2009). The revised standard continues to apply the acquisition method to 46 notes to the consolidated financial statements | ericsson Annual Report 2009 business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non- controlling interest in the acquiree either at fair value or at the non- controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed as incurred. The Company will apply IFRS 3 (revised) prospectively from January 1, 2010. Acquisition-related costs incurred prior to the adoption of IFRS 3 (R) have been treated as a part of the purchase price, as required by IFRS 3. These costs amount to SeK 53 million as per December 31, 2009. IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’ (effective from January 1, 2010). In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by the interpretation. The new guidance is not expected to have a material impact on the Group’s financial statements. The eU has not yet endorsed. Improvements to IFRSs, published in April 2009 and effective from January 1, 2010. None of these improvements are expected to have a material impact on the Company’s financial statements. The eU has not yet endorsed. Amendment to IAS 32 Classification of Rights Issues (published in October 2009 and effective for periods beginning after February 1, 2010). This amendment prescribes the accounting treatment of a contract that will or may be settled in the Company’s own equity instruments. The amendment is not expected to have a significant impact on the Company’s financial statements and is planned to be applied as from January 1, 2011. IFRIC 17,”Distributions of Non-cash Assets to Owners”. This interpretation is not expected to have a material impact on the Company’s financial statements. Amendments to IFRIC 14, ‘Prepayment of a minimum funding requirement’ (effective from January 1, 2011). These new amendments are not expected to have a material impact on the group’s financial statements. The eU has not yet endorsed. IFRIC19, ‘extinguishing financial liabilities with equity instruments’ (effective for periods beginning after July 1, 2010). This new IFRIC is not expected to have a material impact on the group’s financial statements. The eU has not yet endorsed. IAS 24 (revised) ‘Related party disclosures’ (effective from January 1, 2011). This amendment only impact disclosures. The eU has not yet endorsed. IFRS 9 ‘Financial Instruments’ (effective from January 1, 2013). The objective of this IFRS is to establish principles for the financial reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity’s future cash flows. The Company has not yet evaluated the impact of this new standard. The eU has not yet endorsed. > > > > > > > > NOTe C1– 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, 2009, were SeK 1.7 (1.8) billion or 2.4 (2.2) 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. inventory valuation 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, 2009, amounted to SeK 3.0 (3.5) billion or 12 (11) percent of gross inventory. investments in joint ventures and associated companies Key sources of estimation uncertainty Impairment testing is performed after initial recognition whenever there is an indication of impairment. At December 31, 2009, the amount of joint ventures and associated companies amounted to SeK 11.6 (8.0) billion. ericsson Annual Report 2009 | notes to the consolidated financial statements 47 NOTe C2 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, 2009, the value of deferred tax assets amounted to SeK 14.3 (14.9) 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 testing amounts are based on estimates of future cash flows for the respective products. At December 31, 2009, the capitalized development expenses amounted to SeK 2.1 (2.8) billion. An impairment charge of SeK 0.2 (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. Judgments made in relation to accounting policies applied 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 the Company’s 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 and the evaluation of impairment indicators also require 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 estimated, to ensure that the initial carrying values do not exceed the expected discounted cash flows for the items of this type of assets. After initial recognition impairment testing is performed 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 2009 well exceeded the value of the Company’s net assets. 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, 2009, the amount of acquired intellectual property rights and other intangible assets amounted to SeK 46.1 (45.5) billion, including goodwill of SeK 274 (24.9) billion. An impairment charge of SeK 4.3 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. Judgments made in relation to accounting policies applied At initial recognition and subsequent remeasurement, 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 these 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. Provisions 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, 2009, amounted to SeK 2.5 (1.9) billion. 48 notes to the consolidated financial statements | ericsson Annual Report 2009 NOTe C2 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, 2009, provisions other than warranty commitments amounted to SeK 9.9 (12.4) 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. 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, employee 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, 2009, defined benefit obligations for pensions and other post-employment benefits amounted to SeK 30.7 (28.0) billion and fair value of plan assets to SeK 23.2 (19.0) billion. For more information on estimates and assumptions, see Note C17, “Post-employment Benefits”. financial instruments, 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. Forecasts are based on estimations of future transactions, a forecast is therefore per definition uncertain to some degree. Judgments made in relation to accounting policies applied establishing highly probable sales volumes involves gathering and evaluating sales and purchases estimates for future periods as well as analyzing actual outcome versus 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”. ericsson Annual Report 2009 | notes to the consolidated financial statements 49 NOTE C3 C3 Segment InformatIon operating segments The Company has the following five operating 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. Fixed access solutions; increase the customers’ ability to modernize fixed networks to enable new IP-based services with higher bandwidth. Ericsson’s core network solutions include industry leading softswitches, IP infrastructure for EDGE- and core routing, IP Multimedia Subsystem (IMS) and media gateways. Transmission/backhaul; micro-wave and optical transmission solutions for mobile and fixed networks. Related network rollout services. Network management tools; supporting operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services. GSM and WCDMA share a common core network, preserving investments. IMS is a platform that enables converged services to be transparently provided independent 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 provides enablers and applications enabling operators to deliver a rich user experience seamlessly on any device, any time and anywhere. The offering includes: > > > > 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 delivery and provisioning platforms enabling operators and service providers to create, sell and manage multimedia offerings and multi-play offerings. sony ericsson, consisting of the joint venture Sony Ericsson Mobile Communications. Sony Ericsson delivers innovative and feature-rich mobile phones and accessories. st-ericsson, consisting of the joint venture ST-Ericsson. ST-Ericsson is an industry leader in design, development, and creation of cutting-edge mobile platforms and wireless semiconductors. ST-Ericsson was formed on February 2, 2009, by merging ST-NXP Wireless and Ericsson Mobile Platforms. Unallocated Some revenues, costs, assets and liabilities are not identified as part of any operating segment and are therefore not allocated. Examples of such items are costs for corporate staff, IT costs and general marketing costs. Geographical areas The Company operates world-wide and reports its operations divided in five geographical areas: (1) Western Europe, (2) Central and Eastern Europe, Middle East and Africa, (3) Asia Pacific, (4) North America and (5) Latin America. major customers The Company does not have any customer for which revenues from transactions have exceeded 10 percent of the Company’s total revenues for the years 2009, 2008 or 2007. 50 notes to the consolidated financial statements | Ericsson Annual Report 2009 oPeR atinG seGments 2009 Segment sales Inter–segment sales net sales operating income Operating margin (%) Financial income Financial expenses income after financial items Taxes net income other segment items Share in earnings of joint ventures and associated companies Amortization Depreciation Impairment losses Reversals of impairment losses Restructuring expenses Gains/losses from divestments sony total ericsson ericsson segments st- NOTE C3 Unallo- cated elimi- nations 3) Group Professional multi- services media networks 136,312 770 137,082 56,065 58 12,996 276 56,123 13,272 71,984 164 72,148 13,535 5,731 290,892 6,999 – – –85,519 205,373 1,104 –5,895 19,266 297,891 – –91,414 206,477 6,879 2) 5% 6,990 1) 12% 655 5% –10,820 –2,615 1,089 –855 5,684 5,918 –15% –14% 0% – – 3% 1,874 –1,549 6,243 –2,116 4,127 37 –2,673 –2,768 –4,333 2) 38 –8,748 2) 10 33 –574 –627 – 9 –2,044 777 1) –1 –910 –155 –80 2 –385 41 –5,693 –165 –1,124 – – –1,754 – –1,762 –828 –997 –46 – –890 47 –7,386 –5,150 –5,671 –4,459 49 –13,821 875 –14 – – – – –82 –32 – 941 2,121 46 – 1,322 – –7,400 –4,209 –3,550 –4,413 49 –12,581 843 total assets 116,226 33,515 17,650 33,586 22,187 223,164 92,101 –45,456 269,809 1) In Q2 2009, the TEMS business was divested, resulting in a capital gain of SEK 0.8 billion. 2) Including impairment losses related to restructuring activities of SEK 4.3 billion. 3) Sony Ericsson and ST-Ericsson are accounted for in accordance with the equity method. The difference between what is reported to the CODM and externally is eliminated. GeoGRaPhical aReas 2009 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 non-current net sales assets 1) 44,579 4,096 50,725 65,770 18,455 15,252 25,350 21,538 20,053 206,477 49,313 56,118 43,574 1,202 1,630 903 225 8,359 8,100 2,066 69,375 49,158 1) Total non-current assets excluding financial instruments, deferred tax assets, and post-employement benefit assets. For employee information, see Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. Ericsson Annual Report 2009 | notes to the consolidated financial statements 51 NOTE C3 oPeR atinG seGments 2008 Segment sales Inter-segment sales net sales operating income Operating margin (%) Financial income Financial expenses income after financial items Taxes net income other segment items Share in earnings of joint ventures and associated companies Amortization Depreciation Impairment losses Reversals of impairment losses Restructuring expenses Gains/losses from divestments networks 142,031 19 142,050 Professional multi- sony services media 1) ericsson segments total Unallo- cated elimi- nations 2) 48,940 38 12,614 5,288 108,492 261 312,077 5,606 – –108,492 –261 – Group 203,585 5,345 48,978 17,902 108,753 317,683 – -108,753 208,930 11,145 8% 6,346 13% –118 –1% –1,094 16,279 –618 0% 5% – 591 – –25 –3,210 –2,347 –547 6 –5,131 9 91 –368 –532 – 1 –1,272 –16 1 –1,429 –228 –19 – –337 992 -503 –53 –1,138 – – –1,692 – –436 –5,060 –4,245 –566 7 –8,432 985 – 1 –1 – – –20 113 – 53 1,138 – – 846 – 16,252 8% 3,458 –2,484 17,226 –5,559 11,667 -436 –5,006 –3,108 –566 7 –7,606 1,098 total assets 131,127 3) 32,099 3) 20,891 48,837 232,954 94,873 –42,143 285,684 1) Multimedia figures include the Mobile Platforms business which from 2009 is part of ST-Ericsson. 2) Sony Ericsson is accounted for in accordance with the equity method. The difference between what is reported to the CODM and externally is eliminated. 3) Amounts for 2007 and 2008 have been restated to be consistent with asset allocation method applied as from 2009. GeoGRaPhical aReas 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 non-current net sales assets 1) 51,570 8,876 53,080 63,307 15,068 15,176 17,925 14,132 23,048 208,930 57,601 53,019 46,458 1,178 1,436 688 156 8,917 8,829 1,676 66,226 52,945 1) Total non-current assets excluding financial instruments, deferred tax assets, and post-employement benefit assets. For employee information, see Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. 52 notes to the consolidated financial statements | Ericsson Annual Report 2009 oPeR atinG seGments 2007 Segment sales Inter-segment sales net sales operating income Operating margin (%) Financial income Financial expenses income after financial items Taxes net income other segment items Share in earnings of joint ventures and associated companies Amortization Depreciation Impairment losses Reversals of impairment losses Gains/losses from divestments networks 128,985 32 129,017 Professional multi- sony services media 1,2) ericsson segments total Unallo- cated elimi- nations 3) 42,892 10 11,997 3,908 119,068 333 302,942 4,283 – –119,068 –377 – 42,902 15,905 119,401 307,225 – –119,445 187,780 NOTE C3 Group 183,874 3,906 17,398 13% 6,394 15% –135 –1% 14,270 37,927 –119 -7,162 12% 12% – – 61 –4,630 –2,601 –105 297 – 66 –237 –367 –1 – – –3 –566 –152 – – – 7,108 – –1,052 – – – 7232 –5,433 –4,172 –106 297 – – – –1 – – 280 – – 1,052 – – – 30,646 16% 1,778 –1,695 30,729 –8,594 22,135 7,232 –5,433 –3,121 –106 297 280 total assets 117,863 4) 28,078 4) 18,945 50,832 215,718 70,682 –41,283 245,117 1) Multimedia figures include the Enterprise PBX business which was divested in 2008. 2) Multimedia figures include the Mobile Platforms business which from 2009 is part of ST-Ericsson 3) Sony Ericsson is accounted for in accordance with the equity method. The difference between what is reported to the CODM and externally is eliminated. 4) Amounts for 2007 and 2008 have been restated to be consistent with asset allocation method applied as from 2009. GeoGRaPhical aReas 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 non-current net sales assets 1) 52,685 8,395 48,661 54,629 13,598 10,517 13,422 10,529 18,383 187,780 58,978 57,537 49,283 1,158 1,313 618 124 8,794 8,668 1,846 70,648 57,148 1) Total non-current assets excluding financial instruments, deferred tax assets, and post-employement benefit assets. For employee information, see Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. Ericsson Annual Report 2009 | notes to the consolidated financial statements 53 NOTE C4–C6 C4 Net SaleS Sales of products and network rollout services Of which: – Delivery-type contracts – Construction-type contracts Professional Services sales License revenues 1) C6 Other OperatiNg iNCOme aNd expeNSeS 2009 2008 2007 2009 2008 2007 145,873 150,846 138,011 144,908 148,358 130,890 7,121 42,892 6,877 2,488 48,978 9,106 965 56,123 4,481 Gains on sales of intangible assets and PP&e Losses on sales of intangible assets and PP&e Gains on sales of investments and operations Losses on sales of investments and operations Capital gains/losses, net Other operating revenues total other operating income and expenses 193 302 78 –126 –190 –104 962 1,236 –119 910 2,172 –138 1,210 1,767 296 –16 254 1,480 3,082 2,977 1,734 net sales export sales from Sweden 206,477 208,930 187,780 94,829 109,254 102,486 1) The ST-ericsson joint venture was formed in February 2009, figures for 2007 and 2008 include licenses revenues from Mobile Platforms. C5 expeNSeS by Nature Goods and services Amortization and depreciation Impairments and obsolescence allowances, net of reversals employee remunerations Interest expenses Taxes expenses incurred Less: Inventory changes 1) Additions to Capitalized development expenses charged to the income statement 2009 2008 2007 124,627 138,298 8,114 7,759 113,195 8,554 5,637 54,877 1,549 2,116 2,680 51,297 2,484 5,559 1,435 44,771 1,695 8,594 196,565 208,432 178,244 –4,784 1,443 3,761 1,409 802 1,053 199,906 203,262 176,389 1) The inventory changes are based on changes of gross inventory values prior to obsolescence allowances. The increase in impairments and obsolescence allowances, net of reversals, is mainly due to restructuring-related impairments of intangible assets, somewhat offset by decreased obsolescence allowances for inventories as well as decreased impairments of trade receivables and capitalized development expenses. In January, 2009, cost reduction activities were initiated targeting annual savings of SeK 10 billion with full effect to be achieved in the second half of 2010, assuming current level of operations. In the third quarter an increase of the target with an additional SeK 5–6 billion of savings was set with anticipated costs of the same magnitude. The restructuring charges relate to activities to reduce production cost, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. In the product portfolio reviews, opportunities to reduce the number of platforms and solutions were identified, resulting in write-downs of capitalized development costs and acquired IPR assets for the affected products. For 2009, restructuring charges amounted to SeK 11.3 billion. Restructuring charges are included in the expenses presented above. Restructuring charges by function 2009 2008 2007 Cost of sales R&D expenses Selling and administrative expenses total restructuring charges 4,180 6,045 1,034 11,259 2,540 2,648 1,572 6,760 – – – – 54 notes to the consolidated financial statements | ericsson Annual Report 2009 NOTe C7– C8 C7 FinanCial inCome and expenses 2009 2008 financial income financial expenses financial income financial expenses 2007 financial income financial expenses Contractual interest on financial assets Of which on financial assets at fair value through profit or loss Contractual interest on financial liabilities Of which on 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 1,287 814 635 – –53 5 2,938 2,282 –1,616 –2,023 – 155 155 – –2 –86 – 280 –32 – – –656 –85 322 – – 191 – 7 total 1,874 –1,549 3,458 –2,484 2,293 1,094 –181 – – –342 – 8 1,778 –1,543 – –60 –7 – – 11 –103 –1,695 1) excluding net gain from operating assets and liabilities, SeK 2,247 million (net loss of SeK 4,234 million in 2008, net loss of SeK 762 million in 2007), reported as Cost of Sales. C8 Taxes The Company’s expense for the year was SeK 2,116 (5,559) million or 33.9 (32.3) percent of the income after financial items, mainly due to a lower tax rate from the loss making joint venture companies. The tax rate excluding joint ventures and associated companies was 25.7 percent. 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 previous years Deferred tax income/expense (–) Sub total Share of taxes in joint ventures and associated companies Taxes 2009 2008 2007 –4,605 –5,574 –4,115 441 661 167 –297 –294 –2,227 –3,503 –5,704 –6,636 1,387 145 –1,958 –2,116 –5,559 –8,594 A reconciliation between actual tax expense for the year and the theoretical tax expense that would arise when applying statutory tax rate in Sweden, 26.3 percent, on income before taxes is shown in the table below. Reconciliation of swedish income tax to the actual income tax Tax rate in Sweden (26.3 %) effect of foreign tax rates Of which joint ventures and associated companies Current income taxes related to previous years Recognition/remeasurement of tax losses related to previous years Recognition/remeasurement of deductible temporary differences related to previous years Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of changes in tax rates taxes 2009 2008 2007 –1,643 –812 –4,823 22 –8,604 62 –550 1 63 441 167 –294 8 –169 –204 267 –1,155 630 148 62 –986 327 –159 472 –810 853 –69 –2,116 –5,559 –8,594 ericsson Annual Report 2009 | notes to the consolidated financial statements 55 NOTe C8 deferred tax balances Tax effects of temporary differences and tax loss carryforwards are attributable as shown in the table below: tax effects of temPoRaRY diffeRences and tax loss caRRYfoRwaRds deferred tax deferred tax liabilities assets net balance deferred tax deferred tax liabilities assets net balance 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 359 2,481 852 2,240 1,901 4,343 3,961 16,137 –1,810 14,327 2,264 53 472 – – 1,291 1) – 4,080 –1,810 2,270 313 2,056 1,054 2,473 2,941 3,743 4,736 17,316 –2,458 4,081 80 138 – – 897 1) – 5,196 –2,458 12,057 14,858 2,738 12,120 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. Tax loss carryforwards for Sony ericsson and ST-ericsson are not included, as they are accounted for in accordance with the equity method. At December 31, 2009, the available tax loss carryforwards amounted to SeK 14,493 (16,327) 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 2010 2011 2012 2013 2014 2015 or later total 28 41 101 256 379 13,688 14,493 tax effect 7 8 20 55 96 3,775 3,961 1) Referring mainly to R&D credits and intellectual property rights. changes in defeRRed taxes opening balance, net Recognized in income statement Recognized in OCI Acquisitions/disposals of subsidiaries Translation differences closing balance, net 2009 2008 12,120 661 –1,040 186 130 8,891 –296 2,330 861 334 12,057 12,120 Tax effects reported directly in Other Comprehensive Income amount to SeK –1,040 (2,330) million, of which actuarial gains and losses related to pensions SeK 173 (931) million, cash flow hedges SeK –1,059 (1,225) million and changes in cumulative translations adjustments SeK –154 (174) 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. 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 3,961 million, SeK 2,420 million relate to Sweden with indefinite time of utilization. Due to the Company’s strong current financial position and taxable income during 2009, ericsson has been able to utilize part of its tax loss carryforwards during the year. The assessment is that ericsson will be able to generate sufficient income in the coming years to also utilize the 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. 56 notes to the consolidated financial statements | ericsson Annual Report 2009 NOTe C9 – C10 C9 earnings per share Basic Net income attributable to stockholders of the Parent Company (SeK million) Average number of shares outstanding, basic (millions) earnings per share, basic (seK) diluted 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) 2009 2008 2007 1) 3,672 11,273 21,836 3,190 1.15 3,183 3.54 3,178 6.87 3,672 11,273 21,836 3,190 – 22 3,183 1 18 3,212 1.14 3,202 3.52 3,178 2 13 3,193 6.84 1) A reverse split 1:5 was made in June 2008. Comparative figures are restated accordingly. C10 inTangible asseTs 2009 accumulated acquisition costs Opening balance Acquisitions/capitalization Balances regarding divested/ acquired businesses 1) Sales/disposals Contribution to joint ventures Translation difference closing balance accumulated amortization Opening balance Amortization Sales/disposals Translation difference closing balance accumulated impairment losses Opening balance Impairment losses 2) closing balance net carrying value capitalized development expenses goodwill for internal use to be marketed acquired costs internal costs total intellectual property rights (iPR), trade- marks and other intangible assets trademarks and similar rights Patents and acquired R&d total 5,518 1,045 – – –1,342 – 5,221 –1,570 –534 – – –2,104 –1,508 –157 –1,665 1,452 1,821 239 1,217 159 8,556 1,443 24,877 – – – – – – – – – – – –1,342 – 3,534 –21 – –1,015 9,429 602 811 –142 – –76 20,450 2 29,879 604 5,021 – – –575 5,832 –142 – –651 2,060 1,376 8,657 27,375 10,624 24,898 35,522 –1,562 –68 – – –1,630 –55 – –55 375 –1,042 –45 – – –1,087 –37 – –37 252 –4,174 –647 – – –4,821 –1,600 –157 –1,757 – – – – – – – – –2,425 –360 131 15 –2,639 –6,853 –3,202 – 180 –9,278 –3,562 131 195 –9,875 –12,514 – – – –14 –4,255 –14 –4,255 –4,269 –4,269 2,079 27,375 7,985 10,754 18,739 1) During 2009, ericsson acquired Nortel SeK 8.7 billion. 2) The write-down (impairment charge) of SeK 4.255 billion is a consequence of the restructuring program decision to phase out certain products. The goodwill is allocated to the operating segments Networks SeK 16.5 (15.3) billion, Professional Services SeK 3.7 (2.8) billion and Multimedia SeK 7.2 (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 regarding revenue growth, approved by group management and each operating segment’s management, are based on industry sources and projections made within the Company for the development 2010–2014 for key industry parameters: > the number of global mobile subscriptions is estimated to grow from 4.5 billion by the end of 2009 to approximately 7.1 billion. Of these, some hundred millions will have mobile PC connections, while more than 2 billion will have a mobile broadband connection. ericsson Annual Report 2009 | notes to the consolidated financial statements 57 NOTe C10 Mobile PC includes USB dongles and embedded modules for CDMA2000 eV-DO, HSPA, LTe, Mobile WiMax and TDSCDMA and can also be used for fixed applications. Mobile Broadband includes CDMA2000 eV-DO, HSPA, LTe, Mobile WiMax and TDSCDMA. It includes handsets, USB dongles and embedded modules. The vast majority is handsets. Fixed broadband subscriptions will grow from slightly above 400 million to almost 600 million in the same time perspective. Mobile traffic volume is estimated to increase more than 10 times, while the fixed Internet traffic and fixed IPTV traffic is estimated to increase around 7–8 times, however from a much larger base. > > The demand for multimedia solutions is driven by the opportunities for new types of service offerings enabled by IP technology and high-speed broadband. 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 (3) percent per year thereafter. The impairment tests 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 2009, the market capitalization of the Company well exceeded the value of the Company’s net assets. An after-tax discount rate of 12 (12) percent has for all cash generating units been applied for the discounting of projected after-tax cash flows. 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 intellectual property rights (iPR), trade- marks and other intangible assets 2008 accumulated acquisition costs Opening balance Acquisitions/capitalization Balances regarding divested/ acquired businesses Sales/disposals Reclassification 2) Translation difference closing balance accumulated amortization Opening balance Amortization Sales/disposals Translation difference closing balance accumulated impairment losses Opening balance Impairment losses closing balance net carrying value for internal use to be marketed acquired costs internal costs total trademarks and similar rights Patents and acquired R&d total 30,130 20 –172 –1,243 –209 1,353 12,478 1,107 – –8,067 – – 5,518 –7,911 –1,726 8,067 – –1,570 –974 –534 3) –1,508 2,440 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 1,821 1,217 8,556 24,877 9,429 20,450 29,879 –1,562 – – – –1,562 –38 –17 –55 204 –1,042 – – – –1,042 –26 –11 –37 138 –10,515 –1,726 8,067 – –4,174 –1,038 –562 –1,600 – – – – – – – – –2,072 –674 496 –175 –2,425 – – – –4,086 –2,606 8 –169 –6,158 –3,280 504 –344 –6,853 –9,278 –14 – –14 –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. 58 notes to the consolidated financial statements | ericsson Annual Report 2009 C11 ProPerty, Plant and equiPment 2009 Real estate machinery and other technical assets other equipment, tools and installations construction in process and advance payments 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 Opening balance Impairment losses Reversals of impairment losses Sales/disposals Translation difference closing balance net carrying value 4,054 362 – –282 240 –157 4,217 –1,545 –303 – 174 –75 57 –1,692 –47 – – – 2 –45 2,480 6,131 657 –183 –1,241 151 –217 5,298 –4,211 –735 112 1,188 –51 140 –3,557 –125 – 33 – 1 –91 1,650 18,058 1,699 –95 –2,184 947 –338 18,087 –12,967 –2,512 191 1,873 126 231 –13,058 –148 –1 16 – 2 –131 4,898 795 1,288 –1 –148 –1,338 –18 578 – – – – – – – – – – – – – 578 Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2009, amounted to SeK 236 (229) million. The reversal of impairment losses have been reported under Cost of sales. 2008 Real estate machinery and other technical assets other equipment, tools and installations construction in process and advance payments 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 Opening balance Impairment losses Reversals of impairment losses Sales/disposals Translation difference closing balance net carrying value 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 NOTE C11 total 29,038 4,006 –279 –3,855 – –730 28,180 –18,723 –3,550 303 3,235 – 428 –18,307 –320 –1 49 – 5 –267 9,606 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 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. ericsson Annual Report 2009 | notes to the consolidated financial statements 59 NOTE C12 C12 FinanCial assets, non-Current equity in joint ventures and associated companies Opening balance Share in earnings Taxes Translation difference Change in hedge reserve Pensions Dividends Contributions to joint ventures and associated companies Reclassification Disposals joint ventures 2009 2008 6,694 –7,455 1,388 –277 6 21 – 9,941 1) –1 – 9,549 –503 151 1,084 36 4 –3,627 – – – associated companies total 2009 1,294 55 –1 –17 – – –70 2 –2 – 2008 1,354 67 –6 130 – – –236 46 –1 –60 2009 2008 7,988 –7,400 1,387 –294 6 21 4 –70 9,943 –3 – 11,578 10,903 –436 145 1,214 36 –3,863 46 –1 –60 7,988 closing balance 10,317 2) 6,694 1,261 3) 1,294 1) Including contribution of SeK 5.0 billion paid to STMicroelectronics. 2) Including goodwill for ST-ericsson of SeK 1,341 million 3) Goodwill, net, amounts to SeK 16 million (SeK 16 million in 2008). ericsson’s share of assets, liabilities and income in joint venture sony ericsson mobile communications ericsson’s share of assets, liabilities and income in joint venture st-ericsson Non-current assets Current assets Non-current liabilities Current liabilities net assets net sales Income after financial items Income taxes 2009 2008 2007 4,003 12,790 130 14,675 1,988 36,074 –5,540 1,252 3,228 21,190 157 17,593 6,668 54,377 –400 151 2,701 22,714 121 15,745 9,549 59,700 7,276 –1,957 net income –4,288 –249 5,319 Net income attributable to: Stockholders of the Parent Company Minority interest Assets pledged as collateral Contingent liabilities –4,441 153 182 17 –353 104 – 20 5,151 168 – 12 ericsson’s share of assets, liabilities and income in associated company ericsson nikola tesla d.d. 1) 2009 2008 2007 Non-current assets Current assets Non-current liabilities Current liabilities net assets net sales Income after financial items Income taxes net income Net income attributable to: Stockholders of the Parent Company Minority interest Assets pledged as collateral Contingent liabilities 1) ericsson’s share is 49.07 percent. 311 754 3 240 822 994 90 1 91 91 – 5 151 394 695 6 253 830 1,182 139 –5 134 134 – 5 172 363 728 1 263 827 1,100 124 –1 123 123 – 5 64 All three companies apply IFRS in the reporting to ericsson. Non-current assets Current assets Non-current liabilities Current liabilities net assets net sales Income after financial items Income taxes net income Net income attributable to: Stockholders of the Parent Company Minority interest Assets pledged as collateral Contingent liabilities 2009 7,238 3,856 129 2,691 8,274 9,633 –1,762 136 –1,626 –1,626 – – 6 st-ericsson: On February 2, 2009, the 50/50 joint venture consisting of ST- NXP wireless business and ericsson Mobile Platforms was established. ST-ericsson is an industry leader in design, development, and the creation of new generations of mobile platforms and wireless semiconductors. ST-ericsson is a key supplier to four of the industry’s top five handset manufacturers, who together represent about 80 percent of global handset shipments, as well as to other leading companies in the industry. ericsson contributed with net cash and net assets, of which SeK 5.0 billion was paid to STMicroelectronics. The joint venture is headquartered in Geneva, Switzerland, and employs approximately 8,000 persons. 60 notes to the consolidated financial statements | ericsson Annual Report 2009 NOTE C12– C13 other financial assets, non–current accumulated acquisition costs Opening balance Additions Business combinations Disposals/repayments/deductions Change in value in funded pension plans 1) Reclassifications Revaluation Translation difference other investments in shares and participations 2008 2009 customer finance, non-current 2008 2009 derivatives, non-current 2008 2009 other financial assets, non-current 2008 2009 1,783 1 – –36 – –1 – –87 2,019 4 – –462 2) – – – 222 1,082 408 – –258 – – – – 1,221 623 – –761 – – – –1 2,814 – – – – – –1,971 – 96 – – – – – 2,718 – 3,557 389 – – –244 –521 – – – 16 4,092 292 –713 –307 – 193 closing balance 1,660 1,783 2) 1,232 1,082 843 2,814 3,197 3,557 accumulated impairment losses/allowances Opening balance Impairment losses/allowance Business combinations Disposals/repayments/deductions Translation difference closing balance net carrying value –1,474 –3 – – 73 –1,281 – – –7 –186 –1,404 –1,474 256 309 –236 –222 – 56 – –402 830 –209 –48 – 21 – –236 846 – – – – – – – – – – – – –1,454 –74 – – – – 65 –1,270 –14 –170 –1,463 –1,454 843 2,814 1,734 2,103 1) For further information, see Note C17, “Post-employment benefits”. 2) In 2008, the divestment of shares in Symbian, with a cash flow effect of SeK 1,256 million, is included in divestments of subsidiaries and other operations. C13 inventories Raw materials, components, consumables and manufacturing work in progress Finished products and goods for resale Contract work in progress inventories, net 2009 2008 6,190 6,621 9,907 7,413 7,616 12,807 22,718 27,836 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 2,961 (3,493) million. movements in obsolescence allowances opening balance Additions, net Utilization Translation difference Balances regarding acquired/divested businesses closing balance 2009 2008 2007 3,493 562 –1,297 2 2,752 1,553 –1,039 250 2,578 1,276 –1,114 17 201 –23 –5 2,961 3,493 2,752 The amount of inventories recognized as expense and included in Cost of sales was SeK 52,255 (58,155) million. ericsson Annual Report 2009 | notes to the consolidated financial statements 61 NOTE C14 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 2009 2008 67,133 –924 76,827 –1,471 66,209 75,356 201 535 66,410 75,891 3,046 –772 2,274 1,444 3,147 –326 2,821 1,975 Credit commitments for customer finance 3,027 3,811 Days Sales Outstanding were 106 (106) in December, 2009. 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, 2009 trade receivables 2008 2009 2007 customer finance 2008 2009 2007 1,471 388 –583 –312 10 –43 –7 924 1,351 651 –492 –81 –69 115 –4 1,471 1,372 564 –554 –137 56 50 – 1,351 326 595 –67 –37 – –45 – 772 275 90 –3 –74 – 38 – 326 418 49 –43 –141 – –8 – 275 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 less than or more 90 days Trade receivables excluding associated companies and joint ventures Allowances for impairment of receivables Customer finance Allowances for impairment of customer finance 67,133 –924 3,046 –772 58,727 – 1,292 – 43 –8 1,314 –342 2,962 – 9 – 2,081 – 1 – 774 –180 145 –145 2,546 –736 285 –285 aging analysis as PeR decembeR 31, 2008 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 less than or more 90 days Trade receivables excluding associated companies and joint ventures Allowances for impairment of receivables Customer finance Allowances for impairment of customer finance 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 62 notes to the consolidated financial statements | ericsson Annual Report 2009 NOTE C14 commercial, e.g. a borrower’s deteriorated creditworthiness. As of December 31, 2009, ericsson’s total outstanding exposure related to customer finance was SeK 3,046 (3,147) million. As of December 31, 2009, ericsson also had unutilized customer finance commitments of SeK 3,027 (3,811) million. During 2009 ericsson transferred certain customer finance assets to third parties, and continues to recognize a part of such assets corresponding to the extent of its continuing involvement. The total carrying amount of the original assets transferred is SeK 560 million, the amount of the assets that ericsson continues to recognize is SeK 28 million, and the carrying amount of the associated liabilities is SeK 28 million. Customer finance is arranged for infrastructure projects in different geographic markets and for a large number of customers. As of December 31, 2009, there were a total of 68 (69) customer finance arrangements originated by or guaranteed by ericsson. The five largest facilities represented 43 (44) percent of the total credit exposure. Of ericsson’s total outstanding customer finance exposure as of December 31, 2009, 57 (58) percent was related to Central and eastern europe, Middle east and Africa, 15 (22) percent to America, 14 (18) percent to Western europe, and 14 (2) percent to Asia Pacific. The effect of risk provisions and reversals for customer finance affecting the income statement amounted to a net negative impact of SeK 480 (16) million in 2009. Credit losses incurred were SeK 67 (3) million. Security arrangements for customer finance facilities normally include pledges of equipment, pledges of certain assets belonging to the borrower 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 is as a rule 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. A credit risk transfer under a sub participation arrangement with a bank can also be arranged. In this case the entire credit risk and the funding is taken care of by the bank for the part that they cover. A credit risk cover from a third party may also be issued by an insurance company. During 2009, ericsson has not taken possession of any collateral it holds as security or called on any other credit enhancement. Information about guarantees related to customer finance is included in note C24. The table below summarizes ericsson’s outstanding customer finance as of December 31, 2009 and 2008. oUtstanding cUstomeR finance Total customer finance Accrued interest Less third-party risk coverage ericsson’s risk exposure 2009 3,046 57 –382 2008 3,147 81 –162 2,721 3,066 credit risk Credit risk is divided into three categories: credit risk in trade receivables, customer finance risk and financial credit risk (see C20, Financial Risk Management and Financial Instruments). 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 Company 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. This is based on the credit risk set on the customer. Credit blocks appear if the credit limit set on customer is exceeded or if past due receivables are higher than permitted levels. Release of a 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 67,133 (76,827) million as of December 31, 2009. Provisions for expected losses are regularly assessed and amounted to SeK 924 (1,471) million as of December 31, 2009. ericsson’s nominal credit losses have, however, historically been low. The amounts of trade receivables closely follow the distribution of ericsson’s sales and do not include any major concentrations of credit risk by customer or by geography. The five largest customers represent 26 percent of the total trade receivables. customer finance credit risk All major commitments to finance customers are made only after the approval by the Finance Committee of the Board of Directors according to the established credit approval process. 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 of each transaction (for political and commercial risk). The credit risk analysis is made by using an assessment 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 credit risk exposure. The output from the assessment tool for the credit rating also include an internal pricing of the risk. This is expressed as a risk margin per annum over funding cost. The reference pricing for political 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. Risk provisions related to customer finance risk exposures are only made upon events which occur after the financing arrangement has become effective and 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 ericsson Annual Report 2009 | notes to the consolidated financial statements 63 dividend proposal The Board of Directors will propose to the Annual General Meeting 2010 a dividend of SeK 2.00 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. cash flow hedges The cash flow hedge 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 cumulative translation adjustments 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. Actuarial gains and losses related to pensions are included in retained earnings. NOTe C15 – C16 C15 Other Current reCeivables Prepaid expenses Accrued revenues Advance payments to suppliers Derivatives with a positive value 1) Taxes Other total 2009 2008 2,403 1,538 776 1,760 4,830 3,839 3,134 1,885 1,278 2,796 4,130 4,595 15,146 17,818 1) Also see Note C20 “Financial Risk Management and Financial Instruments” C16 equity and Other COmprehensive inCOme capital stock 2009 Capital stock at December 31, 2009, consisted of the following: Parent company Class A shares Class B shares total number capital stock of shares 261,755,983 3,011,595,752 1,309 15,058 3,273,351,735 16,367 The capital stock of the Parent 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. 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, 2009, the total number of treasury shares was 78,978,533 (61,066,097 in 2008 and 46,398,309 1) in 2007) Class B shares. ericsson repurchased 27,000,000 shares in 2009, in relation to the Stock Purchase Plans and the Stock Option Plans. 1) A reverse split 1:5 was made in June 2008. Comparative figures are restated accordingly. Reconciliation of numbeR of shaRes Number of shares Jan 1, 2009 Number of shares Dec 31, 2009 number of shares capital stock 3,246,351,735 3,273,351,735 16,232 16,367 For further information about number of shares, see chapter Share information. 64 notes to the consolidated financial statements | ericsson Annual Report 2009  Revalua- tion of other invest- ments in shares and partici- pations addi- tional paid in capital capital stock cumula- tive transla- tion cash flow hedges NOTe C16 stock- 2009 January 1, 2009 net income Group Joint ventures and associated companies other comprehensive income Actuarial gains and losses, and the effect of the asset ceiling, related to pensions Group Joint ventures and associated companies Revaluation of other investments in shares and participations Fair value remeasurement Group Joint ventures and associated companies Cash flow hedges Gains/losses arising during the year Group Joint ventures and associated companies Reclassification adjustments for gains/losses included in profit or loss Adjustments for amounts transferred to initial carrying amount of hedged items Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items relating to components of OCI 3) total other comprehensive income total comprehensive income transactions with owners Stock issue Sale of own shares Repurchase of own shares Stock Purchase and Stock Option Plans Group Joint ventures and associated companies Dividends paid Business combinations december 31, 2009 adjust- Retained holders’ minority interests ments earnings equity total equity 16,232 24,731 –1 –2,356 2,124 100,093 140,823 1,261 142,084 – – – – – – – – – – – – – – – 135 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –2 – – – – – – – –1 –3 –3 – – – – – – – – – – – – – 665 7 3,850 1) –1,029 – – –1,059 – – – – – – – – – – –1,013 2) –294 –154 4) 2,434 –1,461 2,434 –1,461 – – – – – – – – – – – – – – 9,685 –6,013 9,685 –6,013 455 – 10,140 –6,013 –633 28 –633 28 – – – – – – – – 174 –431 3,241 – 75 –135 –2 – 665 7 3,850 –1,029 –1,013 –294 –1,040 539 4,211 135 75 –135 658 – –5,897 – 658 – –5,897 – – – – – – – – – –54 – – –54 401 – – – – – –421 –84 –633 28 –2 – 665 7 3,850 –1,029 –1,067 –294 –1,040 485 4,612 135 75 –135 658 – –6,318 –84 16,367 24,731 –4 78 663 98,035 139,870 1,157 141,027 1) SeK 3,720 million is recognized in Net Sales, SeK 698 million is recognized in Cost of Sales and SeK –568 million is recognized in R&D. 2) Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SeK -1,015 million (SeK 2,993 million in 2008, SeK –914 million in 2007), gain/loss from hedging activities of foreign entities, SeK 586 million (SeK –660 in 2008, SeK –52 million in 2007) and SeK 10 million (SeK 13 million in 2008, SeK –70 million in 2007) of realized gain/losses net from sold/liquidated companies. 3) For further disclosures, see note C8 “Taxes”. 4) Deferred tax on gains/losses on hedges on investments in foreign entities. ericsson Annual Report 2009 | notes to the consolidated financial statements 65 NOTe C16 2008 January 1, 2008 net income Group Joint ventures and associated companies other comprehensive income Actuarial gains and losses related to pensions Group Joint ventures and associated companies Revaluation of other investments in shares and participations Fair value remeasurement Group Joint ventures and associated companies Cash flow hedges Gains/losses arising during the year Group Joint ventures and associated companies Reclassification adjustments for gains/losses included in profit or loss Adjustments for amounts transferred to initial carrying amount of hedged items Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items relating to components of OCI total other comprehensive income total comprehensive income transactions with owners Stock issue Sale of own shares Repurchase of own shares Stock Purchase and Stock Option Plans Group Joint ventures and associated companies Dividends paid Business combinations december 31, 2008 Revalua- tion of other invest- ments in shares and partici- pations addi- tional paid in capital capital stock 16,132 24,731 – – – – – – – – – – – – – – – 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5 – – – – –6 –1 – – – – – – 1 –6 –6 – – – – – – – cumula- tive transla- tion cash flow hedges stock- adjust- Retained holders’ minority interests ments earnings equity total equity 307 –6,345 99,282 134,112 940 135,052 11,564 –291 11,564 –291 394 – 11,958 –291 – – – – – – –5,116 36 1,192 – – – 1,225 – – – – – – – – – – –4,019 4 –4,019 4 – – – – – – –6 –1 –5,116 36 1,192 – 7,081 1,214 2,330 2,715 7,081 1,214 174 – – 930 –2,663 8,469 –3,085 –2,663 8,469 8,188 13,988 – – – – – – – – – – – – – – – 88 –100 589 – –7,954 – 100 88 –100 589 – –7,954 – – – – – – – – 233 – – 233 627 – – – – – – –286 –20 –4,019 4 –6 –1 –5,116 36 1,192 – 7,314 1,214 2,330 2,948 14,615 100 88 –100 589 –8,240 –20 16,232 24,731 –1 –2,356 2,124 100,093 140,823 1,261 142,084 66 notes to the consolidated financial statements | ericsson Annual Report 2009 2007 January 1, 2007 net income Group Joint ventures and associated companies other comprehensive income Actuarial gains and losses related to pensions Group Joint ventures and associated companies Revaluation of other investments in shares and participations Fair value remeasurement Group Joint ventures and associated companies Cash flow hedges Gains/losses arising during the year Group Joint ventures and associated companies Reclassification adjustments for gains/losses included in profit or loss Adjustments for amounts transferred to initial carrying amount of hedged items Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items relating to components of OCI total other comprehensive income total comprehensive income transactions with owners Sale of own shares Stock Purchase and Stock Option Plans Group Joint ventures and associated companies Dividends paid Business combinations december 31, 2007 NOTe C16 stock- Revalua- tion of other invest- ments in shares and partici- pations addi- tional paid in capital capital stock cumula- tive transla- tion cash flow hedges adjust- Retained holders’ minority interests ments earnings equity total equity 16,132 24,731 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,132 24,731 3 – – – 2 – – – – – – – – – 2 2 – – – – – 5 877 –5,569 83,939 120,113 782 120,895 – – – – – – 580 4 –1,390 – – – 236 –570 –570 – – – – – – – – – – – – – – – –1,155 359 20 –776 –776 – – – – – 16,562 5,274 16,562 5,274 299 – 16,861 5,274 1,210 –2 1,210 –2 – – – – – – – – – –329 879 2 – – 580 4 –1,390 – –1,155 359 –73 –465 – – – – – – – – –1 – – –1 1,210 –2 2 – – 580 4 –1,390 – –1,156 359 –73 –466 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 ericsson Annual Report 2009 | notes to the consolidated financial statements 67 NOTE C17 C17 Post-EmPloymEnt BEnEfits Ericsson sponsors a number of post-employment benefit plans throughout the Company, which are in line with market practice in each country. The year 2009 was characterised by a positive return of plan assets and significant employer contributions. 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 OCI 6. Actuarial Assumptions 7. Summary Information on Pension Plans per Geographical Zone section one: amount Recognized in the consolidated Balance sheet 2009 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) 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) sweden UK euro zone Us other total 16,150 10,927 5,223 – 5,223 – 5,223 14,866 8,181 6,685 – 6,685 – 6,685 5,688 5,336 352 – 352 190 542 4,867 4,407 460 – 460 35 495 3,840 2,406 1,434 –14 1,420 29 1,449 3,557 2,330 1,227 1 1,228 304 1,532 2,781 1,974 807 – 807 – 807 2,258 2,563 –305 –79 –384 896 512 30,717 23,206 7,511 –93 7,418 1,115 8,533 2,789 2,289 1,931 1,830 28,010 19,037 500 – 500 171 671 101 –75 26 464 490 8,973 –74 8,899 974 9,873 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 notes to the consolidated financial statements | Ericsson Annual Report 2009 NOTE C17 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. 2009 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 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 1) See cost details in table below. sweden UK euro zone Us other total 1,686 674 2,360 1,607 625 2,232 1,166 471 1,637 73 66 139 40 156 196 265 279 544 385 202 587 345 179 524 370 128 498 124 49 173 114 35 149 105 42 147 185 144 329 72 33 105 148 100 248 2,453 1,135 3,588 8.7% 2,178 1,028 3,206 8.3% 2,054 1,020 3,074 9.0% cost details foR defined Benefit Plans Recognized in the income statement sweden UK euro zone Us other total 2009 Current service cost Interest cost Expected return on plan assets Past service cost Curtailments and settlements 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 594 590 –366 – –144 674 539 549 –431 – –32 625 473 435 –412 – –25 471 205 284 –270 – –153 66 186 299 –310 – –19 156 257 307 –285 – – 279 138 194 –125 5 –10 202 141 160 –143 11 10 179 186 135 –125 – –68 128 35 171 –156 – –1 49 29 142 –137 – 1 35 33 139 –135 3 2 42 131 155 –208 25 41 144 122 133 –201 8 –29 33 140 109 –163 8 6 100 1,103 1,394 –1,125 30 –267 1,135 1,017 1,283 –1,222 19 –69 1,028 1,089 1,125 –1,120 11 –85 1,020 Ericsson Annual Report 2009 | notes to the consolidated financial statements 69 NOTE C17 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. 2009 opening balance Current service cost Interest cost Employee contributions Pension payments Actuarial gain/loss (–/+) Settlements Curtailments Business combinations Other Translation difference closing balance Of which medical benefit schemes 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 1) Business combinations in 2008 are related to the divesture of the Enterprise Business. sweden UK euro zone Us other total 14,866 594 590 – –107 351 – –144 – – – 16,150 – 12,512 539 549 – –74 1,372 – –32 – – – 14,866 – 4,867 205 284 14 –108 543 – –153 – –13 49 5,688 – 5,606 186 299 43 –87 –436 – –19 – –7 –718 4,867 – 3,557 138 194 4 –90 204 – –14 – 74 –227 3,840 – 3,079 141 160 4 –133 –185 – 10 –14 7 488 3,557 – 2,789 35 171 – –172 143 – – – 26 –211 2,781 631 2,238 29 142 – –144 38 – 1 – 19 466 2,789 639 1,931 131 155 12 –142 –120 –1 – –13 40 265 2,258 – 1,791 122 133 12 –86 25 –16 –13 – –7 –30 28,010 1,103 1,394 30 –619 1,121 –1 –311 –13 127 –124 30,717 631 25,226 1,017 1,283 59 –524 814 –16 –53 –14 12 206 1,931 28,010 – 639 funded status The funded ratio, defined as total plan assets in relation to the total defined benefit obligation (DBO), was 75.5 percent in 2009, compared to 68.0 percent in 2008. The following table summarizes the value of the DBO per geographical area based on whether there are plan assets wholly or partially funding each pension plan. 2009 DBO, closing balance Of which partially or fully funded Of which unfunded 2008 DBO, closing balance Of which partially or fully funded Of which unfunded sweden UK euro zone Us other total 16,150 15,660 490 14,866 14,375 491 5,688 5,688 – 4,867 4,867 – 3,840 2,659 1,181 3,557 2,355 1,202 2,781 2,119 662 2,789 2,118 671 2,258 1,813 445 1,931 1,522 409 30,717 27,939 2,778 28,010 25,237 2,773 70 notes to the consolidated financial statements | Ericsson Annual Report 2009 NOTE C17 sweden UK euro zone Us other total 8,181 366 1,076 1,305 – – – – –1 – 4,407 270 342 387 14 –122 – – – 38 10,927 5,336 9,463 431 –1,713 – – – – – – – 8,181 4,854 310 –595 527 43 –95 – – – –637 4,407 2,330 125 –136 213 4 –75 – –1 90 –144 2,406 2,104 143 –343 132 4 –30 – –2 – 322 2,289 156 –253 49 – –115 – – – –152 1,974 1,779 137 19 61 – –88 – – – 381 2,330 2,289 1,830 208 162 122 12 –125 – –11 –2 367 19,037 1,125 1,191 2,076 30 –437 – –12 87 109 2,563 23,206 2,036 201 –320 85 12 –73 –16 – –5 –90 1,830 20,236 1,222 –2,952 805 59 –286 –16 –2 –5 –24 19,037 sweden UK euro zone 1,441 –1,283 612 –284 –10 –200 Us –97 156 other total 370 –119 2,316 –1,730 sweden UK euro zone Us other total 3,824 7,103 – 10,927 – 2,577 5,604 – 8,181 – 1,825 2,801 710 5,336 – 1,674 2,161 572 4,407 – 1,094 1,051 261 2,406 – 900 1,291 139 2,330 – 1,069 741 164 1,974 – 831 1,256 202 2,289 – 394 1,747 422 2,563 – 306 1,258 266 1,830 – 8,063 13,586 1,557 23,206 – 6,288 11,570 1,179 19,037 – 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. 2009 opening balance Expected return on plan assets Actuarial gain/loss (+/–) Employer contributions Employee contributions Pension payments Settlements Business combinations Other Translation difference closing balance 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 1) Business combinations in 2008 are related to the divesture of the Enterprise Business. Refunds from or reductions in future contributions to plan assets are recognized if they are available and firmly decided. actUal RetURn on Plan assets 2009 2008 asset allocation 2009 Equities Interest-bearing securities Other total Of which Ericsson securities 2008 Equities Interest-bearing securities Other total Of which Ericsson securities Equity instruments amount to 35 percent of the total assets, interest bearing instruments amount to 59 percent of the total assets, and other instruments amount to 6 percent of the total assets. The contributions to the defined benefit plans for the upcoming year will be based on the development of the financial markets as well as on the growth of the pension liability, and how these developments affect the target funding ratio of the Company. Ericsson Annual Report 2009 | notes to the consolidated financial statements 71 NOTE C17 section five: actuarial gains and losses Reported directly in oci 2009 2008 mUlti-yeaR sUmmaRy 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) The gain in 2008 is related to terminated pension plans. 5,402 1,806 –70 – –6 5,326 3,765 –7 –162 5,402 Since January 1, 2006, Ericsson applies immediate recognition of actuarial gains and losses directly in OCI, as disclosed in the statement of OCI. 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 2009 2008 2007 2006 2005 Plan assets DBO 23,206 30,717 19,037 28,010 20,236 25,226 18,395 24,612 16,784 22,314 Deficit/Surplus (–/+) Actuarial gains and losses (–/+) Experience-based adjustments of pension obligations Experience-based adjustments of plan assets –7,511 –8,973 –4,990 –6,217 –5,530 310 57 –76 232 –415 –1,191 2,952 59 –358 –706 2009 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 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 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. sweden UK euro zone 1) Us 1) other 1) 4.00% 4.55% 3.25% 2.00% n/a 21 24 4.00% 4.55% 3.25% 2.00% n/a 21 24 5.60% 6.00% 4.90% 3.60% n/a 21 24 5.50% 6.40% 4.30% 3.00% n/a 21 24 5.26% 6.31% 2.92% 2.17% n/a 22 25 5.86% 6.51% 3.00% 2.25% n/a 22 25 5.89% 7.00% 4.50% 2.50% 9.00% 18 20 6.25% 7.50% 4.50% 2.50% 9.00% 18 20 8.91% 9.34% 6.77% 3.80% n/a 18 22 8.53% 10.05% 6.81% 4.23% 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 4 –3 59 –50 72 notes to the consolidated financial statements | Ericsson Annual Report 2009 NOTE C17 section seven: summary information on Pension Plans per geographical zone Applicable to all countries: In 2009, the positive return of plan assets resulted in an actuarial gain and an increase in the total value of the plan assets. The actuarial gain on plan assets is the difference between the expected return on plan assets and the actual return on plan assets. Changes in discount rate resulted in an overall actuarial loss and an increase in the defined benefit obligation. The net actuarial gain amounted to SEK 70 million. sweden: In 2009, the Swedish discount rate is unchanged compared to 2008. The actuarial loss was purely due to experience-based adjustments on pension obligations and plan assets. Sweden was positively affected by the positive performance of the plan assets and the employer contribution to the Swedish Trust fund. 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. Alecta has a collective funding ratio which is a buffer for its insurance commitments to protect against fluctuations in investment return and insurance risks. Alecta’s target ratio is 140 percent and 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. UK: The increase in the discount rate was more than offset by the rise in inflation and future salary increases, which resulted in an overall actuarial loss. The restructuring of the UK operations resulted in a curtailment of approximately SEK 150 million. 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 decreased, resulting in an increase in the defined benefit obligation and an actuarial loss. Us: The discount rate decreased resulting in an increase in the defined benefit obligation and an actuarial loss. other: Brazil is the country included in Other with the most significant defined benefit pension plan. Ericsson Annual Report 2009 | notes to the consolidated financial statements 73 NOTE C18 C18 Provisions 2009 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 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 Warranty commitments Restruc- turing Project related other total 1,931 2,141 –171 –1,427 96 19 –56 2,533 1,814 1,568 –392 –1,150 –30 1 120 1,931 3,830 4,920 –210 –4,248 – 146 –139 4,299 1,051 4,328 –131 –1,756 –2 71 269 3,830 3,794 1,952 –451 –3,459 – –128 –14 1,694 2,619 3,960 –799 –2,164 –51 45 184 3,794 4,795 2,129 –915 –1,595 16 –595 70 3,905 4,242 2,105 –493 –970 –15 –173 99 4,795 14,350 11,142 –1,747 9,395 –10,729 112 –558 –139 12,431 9,726 11,961 –1,815 10,146 –6,040 –98 –56 672 14,350 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. 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. For 2009, new or additional provisions amounting to SeK 11.1 billion were made, and SeK 1.7 billion were reversed. The actual utilization for 2009 was SeK 10.7 billion compared with the estimated SeK 9 billion. The expected utilization in 2010 is approximately SeK 8 billion. Of the total provisions, SeK 461 (311) million are classified as non- current. 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 2009 was SeK 1.4 billion and in line with the expected SeK 1 billion. Provisions amounting to SeK 2.1 billion were made and due to more favorable outcomes in certain cases reversals of SeK 0.2 billion were made. The utilization of warranty provisions during year 2010 is estimated to approximately SeK 2 billion. Restructuring In January, 2009, cost reduction activities were initiated, targeting annual savings of SeK 10 billion from the second half of 2010 split equally between cost of sales and operating expenses. In the third quarter 2009, it was reported that the program was ahead of plan and that additional opportunities for efficiency improvements had evolved. This would lead to further restructuring charges during the last three quarters of the program with full cost savings to be achieved in second half of 2010, assuming current level of operations. As part of this cost reduction plan, SeK 4.9 billion in provision were made. The actual utilization was SeK 4.2 billion, where SeK 2.6 billion was related to restructuring programs initiated before 2009. The utilization for 2010 is estimated to approximately SeK 3 billion. Project related Project provisions relate to estimated losses on onerous contracts, including probable contractual penalties. The utilization of project related provisions were SeK 3.5 billion and in line with the estimated SeK 3 billion. Provisions amounting to SeK 2.0 billion were made and SeK 0.5 billion were reversed due to a more favorable outcome than expected. The utilization for 2010 is estimated to be approximately SeK 1 billion. other Other provisions include provisions for tax issues, litigations, supplier claims, and other. The utilization was SeK 1.6 billion in 2009 compared to the estimate of SeK 2 billion. During 2009, new provisions amounting to SeK 2.1 billion were made and SeK 0.9 billion were reversed during the year due to a more favorable outcome. For 2010, the estimated utilization is approximately SeK 2 billion. 74 notes to the consolidated financial statements | ericsson Annual Report 2009 C19 Interest-BearIng LIaBILItIes As of December 31, 2009, ericsson’s outstanding interest-bearing liabilities were SeK 32.1 (30.5) billion. inteRest-BeaRinG liaBilities Borrowings, current Current part of non-current borrowings 1) Other current borrowings Total current borrowings Borrowings, non-current Notes and bond loans Other borrowings, non-current Total non-current interest- bearing liabilities total interest-bearing liabilities 2009 2008 684 1,440 2,124 3,903 1,639 5,542 23,801 6,195 18,879 6,060 29,996 24,939 32,120 30,481 1) Including notes and bond loans of SeK 0 (3,794) million. All outstanding notes and bond loans are issued by the Parent Company under its euro Medium-Term Note (eMTN) program. Bonds issued at a fixed interest rate are swapped to a floating interest rate using interest rate swaps, NOTe C19 resulting in a weighted average interest rate of 2.88 percent at December 31, 2009. These bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. On May 20, 2009, the USD bond issued in 1999 of 483 million matured and was repaid. On June 22, 2009, a new eUR fixed rate bond was issued under the eMTN program. The nominal amount of the issue was 600 million eUR and the maturity date 24 June 2013. On June 23, 2009, ericsson signed a seven year floating rate loan of USD 625 million with Svensk exportkredit. This loan is issued under the eMTN program. On November 30, 2009, ericsson called the eUR bond issued in 2003 of eUR 471 million with maturity date 28 November 2010 at par. In 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 2004–2012 2007–2012 2007–2012 2007–2014 2007–2017 2009–2013 2009–2016 total nominal amount 450 1,000 2,000 375 500 600 625 coupon currency Book value (seK m.) maturity date (yy-mm-dd) Unrealized hedge gain/loss (incl. in book value) 1.275% 5.100% 0.730% 1.006% 5.380% 5.000% 3.29875% SeK SeK SeK eUR eUR eUR USD 450 1,058 1) 2,000 3,863 5,714 1) 6,229 1) 4,487 23,801 12-12-07 2) 12-06-29 12-06-29 3) 14-06-27 4) 17-06-27 13-06-24 16-06-23 5) –59 –591 –81 –731 1) Interest rate swaps are designated as fair value hedges. 2) Next contractual repricing date 2010-06-03 (semi annual). 3) Next contractual repricing date 2010-03-25 (quarterly). 4) Next contractual repricing date 2010-03-25 (quarterly). 5) Next contractual repricing date 2010-03-19 (quarterly). ericsson Annual Report 2009 | notes to the consolidated financial statements 75 NOTE C20 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 Company 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 related information Capital (SeK billion) equity ratio (percent) Cash conversion rate (percent) Positive net cash (SeK billion) credit rating Moody’s Standard & Poor’s 2009 2008 141 52 117 36.1 142 50 92 34.7 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 Company’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. 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 Company 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. Net sales and Operating Income are affected by changes in foreign exchange rates from two different kinds of exposures, translation exposure and transaction exposure. In the Operating Income we are primarily exposed to transaction exposure which is partially addressed by hedging. currency exposure net sales net cost of which translation exposure exposure of which translation exposure exposure 42% 22% 8% 5% 3% 3% 13% 16% 8% 7% 3% 3% 21% 25% 5% 3% 2% 3% 13% 19% 7% 7% 3% 4% USD eUR CNY INR JPY BRL translation exposure Translation exposure relates to Sales and Cost of sales in foreign entities when translated into SeK upon consolidation. These exposures can not be addressed by hedging, but as the Income Statement is translated using average rate, the impact of volatility in foreign currency rates is reduced. transaction exposure Transaction exposure relates to Sales and Cost of sales in non-reporting currencies in individual group companies. 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 subsidiaries’ balance sheets (i.e. trade receivables and payables and customer finance receivables) should be fully hedged, except for non-tradable currencies. Group Treasury has a mandate to leave selected transaction exposures in local companies’ balance sheets unhedged up to an aggregate Value at Risk (VaR) of SeK 20 million, given a confidence level of 99 percent and a 1-day horizon. Foreign exchange exposures in balance sheet items are hedged through offsetting balances or derivatives. As of December 31, 2009, outstanding foreign exchange derivatives hedging transaction exposures had a positive net market value of SeK 0.3 (negative 2.9) billion. The market value is partly deferred in the hedge reserve in OCI to offset the gains/losses on hedged future sales in foreign currency. 76 notes to the consolidated financial statements | ericsson Annual Report 2009 cash flow hedges The purpose of hedging future cash flows is to 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 can not 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 OCI during 2009 were negative, SeK 1.4 billion, including hedging gain of SeK 0.6 billion. interest rate risk ericsson is exposed to interest rate risk through market value fluctuations in certain balance sheet items and through changes in interest revenues and expenses. The net cash position was SeK 36.1 (34.7) billion at the end of 2009, consisting of cash, cash equivalents and short-term investments of SeK 76.7 (75.0) billion and interest-bearing liabilities and post-employment benefits of SeK 40.7 (40.4) 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, 2009, 88 (87) percent of ericsson’s interest-bearing liabilities and 61 (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. NOTE C20 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 2009 asset liability 2008 asset liability 580 500 2,671 2,489 910 90 84 3 423 44 – – 1,639 40 – – 1,666 1) 967 4,350 1) 4,022 589 – – 7,100 96 – – 28 49 175 685 937 1) – 62 – 3,503 8 179 – – 40 151 40 58 289 315 129 105 711 1,260 1) – 121 25 – 53 199 – 845 – 1,152 1) Of which 843 (2,814) million is reported as non-current assets. 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 2009 was for the interest rate mandate SeK 14.3 (20.5) million and for the transaction exposure mandate SeK 13.9 (14.4) million. No VaR-limits were exceeded during 2009. 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. ericsson mitigates these risks by investing cash primarily in well-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 2009, neither on external investments nor on derivative positions. At December 31, 2009, the credit risk in financial cash instruments was equal to the instruments’ carrying value. Credit exposure in derivative instruments was SeK 2.6 (5.6) billion. ericsson Annual Report 2009 | notes to the consolidated financial statements 77 NOTE C20 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 Note C33, “Contractual obligations”. The current cash position is deemed to satisfy all short-term liquidity requirements. During 2009, cash and bank and short-term investments increased by SeK 1.7 billion to SeK 76.7 billion. The increase was mainly due to positive operating cash flow. cash, cash equivalents and short-term investments (seK billion) 2009 2008 remaining time to maturity < 3 months 31.8 43.5 < 1 year 2.6 23.7 1–5 years 34.4 5.9 >5 years 7.9 1.9 total 76.7 75.0 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. Cash, Cash equivalents and short-term investments are mainly held in SeK unless off-set by eUR-funding. 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) 2010 2011 2012 2013 2014 2015 2016 2017 2018 total 0.5 – – – – – – – – 0.5 – – 3.5 6.2 3.9 – 4.5 5.2 – 23.3 – 0.6 – – 0.1 4.0 – 0.1 – 4.8 total 0.5 0.6 3.5 6.2 4.0 4.0 4.5 5.3 – 28.6 1) excluding finance leases reported in Note C27, “Leasing”. Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets. Bank financing is used for certain subsidiary funding and to obtain committed credit facilities. fundinG proGrams euro Medium-Term Note program (USD m.) euro Commercial Paper program (USD m.) Swedish Commercial Paper program (SeK m.) Long-term Committed Credit facility (USD m.) european Investment Bank (SeK m.) Indian Commercial Paper program (INR m.) amount utilized unutilized 5,000 3,158 1,842 1,500 5,000 2,000 – – – 1,500 5,000 2,000 4,000 4,000 – 5,000 4,000 1,000 At year-end, ericsson’s credit ratings 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 The fair value of the majority of the Company’s financial instruments are determined based on quoted market prices or rates. In the following tables, carrying amounts and fair values of financial instruments that are carried in the financial statements at other than fair values are presented. Assets valued at fair value through profit or loss showed a net gain of SeK 2.1 billion. For further information about valuation principles, please see Note C1, “Significant accounting policies”. financial instruments carried at other than fair value1) fair value carrying amount seK billion 2009 2008 2009 2008 Current maturities of non-current borrowings Notes and bonds Other borrowings non-current total 0.7 23.8 4.8 29.3 3.9 18.9 4.6 27.4 0.7 22.8 4.0 27.5 4.0 15.9 3.7 23.6 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. market price risk in own shares and other listed equity investments risk related to our own share price ericsson is exposed to the development of its own share price through stock option and stock purchase plans for employees and synthetic share-based compensations to the Board of Directors. The obligation to deliver shares, or pay compensation amounts, under these plans is covered by holding ericsson Class B shares as treasury stock and warrants for issuance of new ericsson Class B shares or provisions. 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. For further information about the stock option and stock purchase plans, please see note C29, “Information Regarding Members of the Board of Directors, the Management and employees”. 78 notes to the consolidated financial statements | ericsson Annual Report 2009 financial instruments, carryinG amounts seK billion customer finance c14 trade receiv- ables c14 short- term invest- ments cash borrow- ings c19 equiva- lents trade payables c22 other financial assets c12 other current receivables c15 other current liabilities c21 2.3 66.4 53.9 1.6 2.8 1.8 –1.3 2.2 Assets at fair value through profit or loss Loans and receivables Available for sale assets Financial liabilities at amortized cost total 2.3 66.4 53.9 4.4 2.2 1.8 –1.3 78.7 75.3 –32.1 –32.1 –18.9 –18.9 NOTE C20 –C23 2009 2008 56.0 73.7 – 41.6 87.4 0.3 –51.0 –54.0 C21 otheR CuRRent liabilities C22 tRade Payables Income tax liabilities Advances from customers Liabilities to associated companies and joint ventures Accrued interest Accrued expenses, of which employee related other 1) Deferred revenues Derivatives with a negative value 2) Other 3) 2009 1,890 4,903 152 378 29,957 10,137 19,820 8,267 1,255 5,727 2008 2,213 4,412 93 421 24,289 10,369 13,920 9,204 7,299 13,101 Payables to associated companies and joint ventures Other total 2009 2008 1,186 17,678 83 23,421 18,864 23,504 C23 assets Pledged as CollateRal total 52,529 61,032 1) Major balance relates to accrued expenses for customer projects. 2) See Note C20, “Financial Risk Management and Financial Instruments”. 3) Includes items such as VAT and withholding tax payables, social security payables and other payroll deductions, and liabilities for goods received where invoice is not yet received. Chattel mortgages Bank deposits total 2009 2008 167 383 550 149 267 416 ericsson Annual Report 2009 | notes to the consolidated financial statements 79 NOTE C24–C25 C24 Contingent LiabiLities Contingent liabilities total 2009 2008 1,245 1,080 1,245 1,080 Contingent liabilities assumed by ericsson include guarantees of loans to other companies of SeK 76 (72) million. ericsson has SeK 542 (568) 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. Financial guarantees for third party amounted to SeK 52 million as of December 31, 2009. Maturity date for major part of the issued guarantees occurs in 2018 at latest. In addition to the above, ericsson has issued guarantees for a long-term loan granted to Sony ericsson Mobile Communications AB (SeMC) with a maximum amount of SeK 3,606 million. The parent companies of ericsson and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. ericsson’s part thus amounted to SeK 1,803 million. As of December 31, 2009, ericsson’s part of the principal amount outstanding amounted to SeK 779 million inclusive of accrued interest SeK 6 million. Maturity date for the maximum amount of the issued guarantees occurs in 2011 (SeK 1,030 million) and 2010 (SeK 773 million). See also Note C30, “Related Party Transactions”. C25 statement of Cash fLows Interest paid in 2009 was SeK 772 million (SeK 1,689 million in 2008, SeK 1,513 million in 2007) and interest received was SeK 1,900 million (SeK 2,375 million in 2008, SeK 1,864 million in 2007). Taxes paid, including withholding tax, were SeK 4,427 million (SeK 4,274 million in 2008, SeK 5,116 million in 2007). Cash and cash equivalents includes cash of SeK 18,372 million (SeK 28,939 million in 2008) and temporary investments of SeK 4,426 million (SeK 8,874 million in 2008). 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 regulations or other legal restrictions in certain countries amounted to SeK 8,907 million (SeK 8,197 million in 2008, SeK 5,797 million in 2007). 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 and other intangible assets Total amortization Impairments Capitalized development expenses Intellectual Property Rights, brands and other intangible assets total total depreciation, amortization and impairment losses on property, plant and equipment and intangible assets Taxes Dividends from joint ventures/ associated companies 1) Undistributed earnings in joint ventures/associated companies 1) Gains/losses on sales of investments and operations, intangible assets and PP&e, net 2) Other non-cash items 2) 3) total adjustments to reconcile net income to cash 2009 2008 2007 3,550 3,108 3,121 –48 –3 –207 3,502 3,105 2,914 647 1,726 2,371 3,562 3,280 3,062 4,209 5,006 5,433 157 562 4,255 – 16 – 8,621 5,568 5,449 12,123 8,673 8,363 –1,011 1,032 1,119 70 3,863 4,223 6,013 291 –5,636 –910 –1,210 1,669 571 –254 –643 16,856 14,318 7,172 1) See also note C12, “Financial Assets, Non-Current”. 2) See also note C26, “Business Combinations”. 3) Refers mainly to unrealized foreign exchange, gains/losses on financial instruments. acqUisitions/divestments of sUbsidiaRies and otheR oPeR ations 2009 acquisitions divestments Cash flow from business combinations 1) Capital contribution to joint venture total 1) See also note C26, “Business Combinations”. –9,633 –9,688 –19,321 1,239 – 1,239 80 notes to the consolidated financial statements | ericsson Annual Report 2009 C26 Business ComBinations acquisitions and divestments acquisitions 2009 2008 2007 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 5,832 297 3,534 1,235 – –1,270 – 5 9,633 –209 – –882 887 – 278 – – 11,627 325 16,917 4,266 –127 –6,227 45 2,387 – – – – 2,387 534 74 29,213 > cash flow effect 9,633 74 26,292 In 2009, ericsson made acquisitions with a cash flow effect amounting to SeK 9,633 million (SeK 74 million in 2008), primarily: > On July 25, the Company announced that it had entered into an nortel: asset purchase agreement to acquire the parts of the Carrier networks division of Nortel relating to CDMA and LTe technology. The purchase is structured as an asset acquisition deal at a cash purchase price of USD 1.18 billion on cash and debt free basis. The acquisition strengthens ericsson’s ability to serve North America’s leading wireless operators in the evolution to LTe. Nortel employs approximately 2,500 persons. Net sales for acquired Nortel business amounted to approximately SeK 2,711 million for the period November 13 – December 31, 2009. The acquired Nortel business had a positive impact on the result. The main reasons for that part of the acquisition costs are recognized as goodwill, representing 30 percent of total assets acquired, are that future synergies are estimated and also the value of the acquired assembled work force. Transaction costs for the acquisition amounted to SeK 96 million. noRtel business net assets acquired intangible assets Intellectual property rights Customer relationships Goodwill other assets and liabilities Inventory Property, plant and equipment Other assets Other liabilities total purchase price Less: Cash and cash equivalents cash flow effect book value fair value adjustments fair value – – – 187 261 392 –1,242 4,979 811 2,957 4,979 811 2,957 187 – 261 – – 392 – –1,242 8,345 – – – 8,345 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 adjustments. > > NOTE C26 On May 28, the Company announced that it has acquired all bizitek: shares in Bizitek, a Turkish systems integrator of business support systems. With this acquisition ericsson will strengthen its local R&D force as well as its leadership in the field of systems integration. The acquisition gives ericsson an additional competence to provide end-to- end solutions in business support systems for charging, provisioning, billing and customer relations management. The purchase price was TTL 5,840 million. All 116 employees were transferred to ericsson. On June 17, the Company announced the purchase of elcoteq: elcoteq’s manufacturing operations in Tallinn, estonia, to secure manufacturing capacity. elcoteq Se is a leading electronics manufacturing Services Company in the communications technology field. The purchase price was eUR 30 million, mainly relating to inventory and some minor assets. The agreement includes transfer of about 1,200 employees. On July 3, the Company announced that it has acquired additional lhs: shares in LHS, thereby increasing its ownership in the German company to 99.83 percent. In addition goodwill increased by SeK 560 million. otheR net assets acquired intangible assets Customer relationships Goodwill other assets and liabilities Inventory Property, plant and equipment Other assets Cash and cash equivalents Other liabilities total purchase price Less: Cash and cash equivalents cash flow effect book value fair value adjust- ments fair value – – 298 36 358 5 –28 42 577 – – – – – 42 577 298 36 358 5 –28 1,288 – 1,288 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. In 2008 the preliminary purchase price allocations made in 2007 related to acquired businesses were finalized with the following effects: > > > An increase in deferred tax assets of SeK 593 million, Redback: goodwill decreased correspondingly. Decreased intangible assets by SeK 209 million, increased tandberg: goodwill by SeK 71 million and increased deferred tax assets by SeK 138 million. An increase in deferred tax assets of SeK 130 million, entrisphere: goodwill decrease correspondingly. In addition goodwill decreased by SeK 260 million, regarding entrisphere, since the additional consideration never was materialized. ericsson Annual Report 2009 | notes to the consolidated financial statements 81 NOTE C26 divestments net assets disposed of 2009 2008 2007 Property, plant and equipment Other assets Provisions, including post- employment benefits Other liabilities Net gains from divestments Less: Cash and cash equivalents cash flow effect 5 586 – –38 553 780 94 1,239 3 1,005 – –456 552 296 194 654 13 498 –19 –234 258 280 454 84 In 2009, the Company made divestments with a cash flow effect amounting to SeK 1,239 million (SeK 654 million in 2008), primarily: > On March 23, 2009, the Company announced an agreement tems: to divest its TeMS branded products business, consisting of tools for air interface monitoring and radio network planning, to Ascom. The purchase price was CHF 190 million, excluding net of assets and liabilities. The agreement involves transfer of approximately 300 employees. Sales in 2009 amounted to approximately SeK 256 million. acquisitions 2007–2009 company description tems business net assets disposed of Property, plant and equipment Other assets Other liabilities Net gains from divestments Less: Cash and cash equivalents cash flow effect 2009 5 276 –38 243 777 94 926 Divestments in 2008 refer mainly to enterprise PBX solutions business with a gain amounting to SeK 151 million and a Cash flow effect of SeK 637 million. date Nov 13, 2009 June 17, 2009 May 28, 2009 Mar 31, 2008 Dec 30, 2007 Oct 1, 2007 June 28, 2007 Feb 12, 2007 Jan 23, 2007 date Nortel elcoteq Bizitek Mobeon HyC LHS Drutt An asset purchase agreement of the Carrier networks division of Nortel relating to CDMA and LTe technology. estonian electronics manufacturing service company with around 1,200 employees. Turkish systems integrator of business support systems with around 116 employees. 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. 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. diVestments 2007–2009 company description TeMS enterprise Tools for air interface monitoring and radio network planning. Cash flow effect of SeK 0.9 billion. Mar 23, 2009 PBX solutions business. Cash flow effect SeK 0.6 billion. May 1, 2008 82 notes to the consolidated financial statements | ericsson Annual Report 2009 C27 Leasing leasing with the company as lessee Assets under finance leases, recorded as property, plant and equipment, consist of: leases with the company as lessor Leasing income mainly relates to subleasing of real estate. These leasing contracts vary in length from 1 to 11 years. At December 31, 2009, future minimum payment receivables were distributed as follows: NOTe C27– C28 2010 2011 2012 2013 2014 2015 and later total Unearned financial income Uncollectible lease payments net investments in financial leases finance operating leases leases – – – – – – – – – – 112 51 17 14 14 54 262 n/a n/a n/a Leasing income in 2009 was SeK 181 (205) million. C28 Tax assessmenT VaLues in sweden Land and land improvements Buildings total 2009 2008 58 265 323 58 265 323 finance leases acquisition costs Real estate Machinery accumulated depreciation Real estate Machinery accumulated impairment losses Real estate net carrying value 2009 2008 1,942 2,059 4 4 1,946 2,063 –662 –4 –666 –763 –4 –767 –49 –10 1,231 1,286 As of December 31, 2009, future minimum lease payment obligations for leases were distributed as follows: 2010 2011 2012 2013 2014 2015 and later total Future finance charges 1) finance operating leases leases 177 168 166 164 209 1186 3,185 2,611 2,102 1,270 935 2,371 2,070 12,474 –676 n/a Present value of finance lease liabilities 1,394 12,474 1) Average effective interest rate on lease payables is 5.63 percent. expenses in 2009 for leasing of assets were SeK 3,839 (4,708) million, of which variable expenses were SeK 0 (1) 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, they relate to charges for heating linked to the oil price index. Most of the leases of real estate contain terms of renewal, giving the company 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 2009 | notes to the consolidated financial statements 83 NOTE C29 C29 InformatIon regardIng members of the board of dIreCtors, the management and employees Remuneration to the Board of directors RemuneR ation to memBeRs of the BoaRd of diRectoRs Contents 1. Remuneration to the Board of Directors .............................. 84 2. Remuneration to the Group Management ............................ 85 Remuneration costs for the Group Management ................. 85 Remuneration Policy for Group Management ...................... 85 3. Long-Term Variable Remuneration ....................................... 86 Stock Purchase Plan ............................................................ 86 The Key Contributor Retention Plan ..................................... 86 The Executive Performance Stock Plan ............................... 86 Stock option plans ................................................................ 87 Shares for all plans ............................................................... 88 4. Employee numbers, wages and salaries .............................. 89 Employee numbers ............................................................... 89 Employee wages and salaries .............................................. 89 number of synthetic shares/ portion of Board fee Board fees 3,750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 – 18,000 21,000 19,500 19,500 21,000 21,000 40,747/75% 2,716/25% 0/0% 8,149/75% 2,716/25% 8,149/75% 8,149/75% 5,433/50% 0/0% – – – – – – – Board member Michael Treschow Marcus Wallenberg Sverker Martin–Löf Roxanne S. Austin Sir Peter L. Bonfield Börje Ekholm Ulf J. Johansson Nancy McKinstry Anders Nyrén Carl-Henric Svanberg Employee Representatives Jan Hedlund Anna Guldstrand Karin Åberg Monica Bergström Kristina Davidsson Pehr Claesson grant date previously Value at number of net change in value allocated of allocated synthetic shares of synthetic shares allocated 2009 synthetic committee fees shares 1) total fees paid in cash 2) total recognized costs 2009 c (a+B+c) a B 2,812,500 187,500 – 562,500 187,500 562,500 562,500 375,000 – – 38,323.80 2,554.80 – 7,664.60 2,554.80 7,664.60 7,664.60 7,664.60 – – +227,763 +15,153 – +45,524 +15,153 +45,524 +45,524 +53,904 – – – – – – – – – – – – – – 250,000 125,000 – 250,000 250,000 125,000 350,000 125,000 125,000 – – – – – – – 1,187,500 687,500 750,000 437,500 812,500 312,500 537,500 500,000 875,000 – 18,000 21,000 19,500 19,500 21,000 21,000 4,227,763 890,153 750,000 1,045,524 1,015,153 920,524 1,145,524 928,904 875,000 – 18,000 21,000 19,500 19,500 21,000 21,000 Total 9,870,000 76,059 5,250,000 74,091.80 +448,545 1,600,000 6,220,000 11,918,545 1) The difference in value as of December 31, 2009 compared to December 31, 2008 (with respect to synthetic shares allocated 2008) and compared to grant date 2009 (with respect to synthetic shares allocated 2009). The value of synthetic shares allocated 2008 includes SEK 1.85 per share in compensation for dividends resolved by the Annual General Meeting 2009. 2) Committee fee and cash portion of the Board fee. 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 non-employed 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 non-employed 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. None of the directors have entered into a service contract with the Parent Company or any of its subsidiaries, providing for termination benefits. 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 and their deputies. The Annual General Meeting 2009 resolved that non-employed Directors may choose to receive the Board fee, (i.e. exclusive of committee fee) as follows: i) 25 percent of the Board fee in cash and 75 percent in the form of synthetic shares, with a value corresponding to 75 percent of the Board fee at the time of allocation, ii) 50 percent 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 and receive 100 percent of the Board fee in cash. Committee fees are always paid in cash. 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 Ericsson’s interim report for the first quarter of 2009: SEK 69.0222. The number of synthetic shares is rounded down to the nearest whole number of shares. 84 notes to the consolidated financial statements | Ericsson Annual Report 2009 The synthetic shares are vested during the Directors’ term of office and the 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 synthetic share program, i.e. in 2014. 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. Synthetic shares were allocated to members of the Board for the first time 2008, on equal terms and conditions as resolved 2009. Payment based on synthetic shares may thus occur for the first time in 2013 with respect to the synthetic shares allocated 2008. The value of all outstanding synthetic shares fluctuates in line with the market value of Ericsson’s Class B share and may differ from year to year compared to the original value on their respective grant dates. The change in value of the outstanding synthetic shares is established each year and affects the total recognized costs that year. As per December 31, 2009 the total number of synthetic shares under the programs is 150,150.80 and the total accounted debt is SEK 10,039,515. Remuneration to the group management Remuneration costs for the group management The total remuneration to the President and CEO and to other members of the Group Management includes fixed salary, short-term and long-term variable remuneration, pension and other benefits. These remuneration elements are based on the guidelines for remuneration and other employment conditions for senior management as approved at AGM 2009, see the approved guidelines in “2009 Remuneration Policy for Group Management”. The Remuneration Policy and how it is implemented at Ericsson is outlined in “Remuneration Report”. RemuneRation costs incuRRed duRing 2009 foR the PResident and ceo and otheR memBeRs of gRouP management NOTE C29 > > > > compensation for outstanding vacation at the time of his resignation, i.e. earned but not used vacation days during his employment at Ericsson. “Long-term variable remuneration provisions” refers to the compensation costs during 2009 for all outstanding share based plans. For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies, Share based employee compensation”. For the President and CEO and other members of Group Management employed in Sweden a supplementary plan is applied in addition to the occupational pension plan for salaried staff on the Swedish labor market (ITP) with pension from 60 years. These pension plans are not conditional upon future employment at Ericsson. For the President and CEO, the contribution during 2009 for old age pension in the supplementary pension plan was SEK 7,489,825 and the fee in the ITP plan SEK 1,427,795. The pension cost for the President and CEO includes a pension supplement of SEK 10,000,000 paid to his existing pension insurance. Changes of commitments made to the President and CEO and other members of Group Management for benefit based temporary disability and survivor’s pension until retirement age are also included in the pension costs. Ericsson’s commitments for benefit based pensions per December 31, 2009, under IAS 19 amounted to SEK 3,025,527 for the President and CEO which refers to the ITP plan. For other members of Group Management the Company’s commitments amounted to SEK 47,969,448 of which SEK 36,890,051 refers to the ITP plan and the remaining SEK 11,079,397 to temporary disability and survivor’s pensions until retirement age. For previous Presidents, the Company has made provisions for defined benefit pension plans in connection with their active service periods within the Company. outstanding matching Rights as per december 31, 2009 number of class B shares the President other members of group management other members of group President management the Stock Purchase Plans 2006, 2007, 2008 and 2009 and Executive Performance Stock Plans 2007, 2008 and 2009 total 410,123 553,688 15,981,000 45,672,309 61,653,309 seK Salary Provisions for annual variable remuneration earned 2009 to be paid 2010 Long-term variable remuneration provision Pension costs Other benefits 6,226,920 15,137,637 21,364,557 1,261,476 18,917,620 59,664 1,910,875 28,656,277 2,363,773 3,172,351 47,573,897 2,423,437 total 42,446,680 93,740,871 136,187,551 comments to the table > > > > During 2009, there were three Executive Vice Presidents, appointed by the Board of Directors, of whom one has have left his position during the year. No one of these executives has acted as deputy to the President and CEO during the year. 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, Jan Frykhammar, Johan Wibergh, Carl Olof Blomqvist, Cesare Avenia (from November 9, 2009), Håkan Eriksson, Douglas Gilstrap (from September 7, 2009), Marita Hellberg, Magnus Mandersson (from November 13, 2009), Torbjörn Possne, Henry Sténson, and Jan Wäreby. Bert Nordberg left the Group Management Team as of September 1, 2009. Joakim Westh left the Group Management Team as of January 1, 2009, but is included up to June 30, 2009, as he was fulfilling his six-month notice period. The salary stated in the table includes vacation salary paid during 2009. During 2010, the President and CEO has received SEK 6,804,000 as comments to the tables > > > For the definition of matching rights, see description in “Long-term variable remuneration”. The number of matching rights is based on expected performance matching under Executive Performance Stock Plans 2007, 2008 and 2009 (there is no payout under the 2006 Executive Performance Stock Plan). During 2009, the President and CEO received 9,183 matching shares and other members of Group Managemement 10,857 matching shares. Remuneration Policy for group management The following guidelines for remuneration and other employment terms for Group Management were approved by the Annual General Meeting 2009. 2009 Remuneration Policy for group management This policy covers the remuneration and other terms of employment for the Group Management Team, including the President and CEO, in the following referred to as the “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 Ericsson Annual Report 2009 | notes to the consolidated financial statements 85 NOTE C29 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. 1. 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 practices together with the practice of the home country of each member of 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 remuneration - 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 to 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 remuneration of executives. All variable remuneration plans have maximum award and vesting limits. With the current composition of Group Management, the Company’s cost during 2009 for the short-term variable and the long-term variable remuneration of Group Management can, at a constant share price, amount to between 0 and 125 percent of the aggregate fixed salary cost, all excluding social security costs. 2. 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. Share based long-term variable remuneration plans are submitted each year for approval by the shareholders in General Meeting. The payout is determined by three specific variables, the individual’s own investment in shares, a long-term financial target at corporate level and the share price development. 3. Pension Pension benefits follow the competitive practice 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 of age but can vary in individual cases. 4. other benefits The basic principle is that other benefits, such as company car and medical schemes, shall be competitive in the local market. 5. 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 encourage individuals to 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 remuneration that the individual concerned would have received had no additional arrangement been made. 6. 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 86 notes to the consolidated financial statements | Ericsson Annual Report 2009 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 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. long-term Variable Remuneration the stock Purchase Plan The Stock Purchase Plan is 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. For the 2009 plan employees are able to 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 table below shows the contribution periods and participation details for ongoing plans. Plan Stock Purchase plan 2006 Stock Purchase plan 2007 Stock Purchase plan 2008 Stock Purchase plan 2009 contribution participants number of take-up rate – percent of at launch all employees period August 2006 – July 2007 August 2007 – July 2008 August 2008 – July 2009 August 2009 – July 2010 17,000 19,000 19,000 18,000 29% 26% 25% 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. the Key contributor Retention Plan The Key Contributor Retention Plan is part of Ericsson’s 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 (2009: 6,702 employees) are selected through a nomination 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 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 (2009: 218 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. The table below shows all Executive Performance Stock Plans to date. NOTE C29 executiVe PeRfoRmance stocK Plans 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) Percentage vesting 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% Performance Stock Plan 2009 2.90 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 0.67 to 4 1 to 6 1.33 to 8 100% 100% 0% 0% 0% 0% 0% 30% 45% 30% 45% 30% 45% 72% 30% 45% 72% 30% 45% 72% 30% 45% 72% 1) Sum of four quarters up to June 30 of plan year. 2) EPS range found from three-year average EPS of the twelve quarters to the end of the performance period and corresponding growth targets. 3) Corresponding to EPS range (no Performance Share Plan matching below this range). Matching shares per contribution share invested in addition to Stock Purchase Plan matching according to program of up to 4, 6 or 8 matching shares. 4) At full investment, full vesting and constant share price. Excludes Stock Purchase Plan matching. 5) The 2004 plan vested in full. 6) No vesting and therefore no Performance Share Plan matching for 2005 and 2006 plans stock option plans Originally, for the Stock Option Plan 2002, 10.8 million options were granted to 12,800 key employees. Of the originally issued employee options, there remained, as of December 31, 2009, no employee options outstanding whatsoever, since the plan expired on November 11, 2009. Each employee option did entitle the holder to purchase one Class B share for SEK 39.00. stocK oPtion Plans ongoing plans 2009 grant/expiry date exercise price 1) (seK) Stock Option Plan 2002 2) 11 Nov 2002/11 Nov 2009 39.00 number of participants at grant 12,800 number of participants end of 2009 – Vesting period from grant date 1/3 after 1 year, 1/3 after 2 years, 1/3 after 3 years 1) Market price at grant date – re-pricing is only permitted under limited circumstances, principally relating to changes in the capital structure of Ericsson. 2) For stock options exercised during 2009, the weighted average share price was SEK 72.18. Ericsson Annual Report 2009 | notes to the consolidated financial statements 87 NOTE C29 shares for all plans All plans are funded with treasury stock and are equity settled. Treasury stock for all plans has been issued in directed cash issues 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 social security payments when arising due to exercise of options or matching of shares. During 2009, 1,044,535 shares were sold at an average price of SEK 70.04. Sale of shares is recognized directly in equity. If, as of December 31, 2009, 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 54 million Class B shares would be transferred, corresponding to 1.7 percent of the total number of shares outstanding, 3,194 million. As of December 31, 2009, 79 million Class B shares were held as treasury stock. The table below shows how shares (representing options and matching rights but excluding shares for social security costs) are being used for all outstanding plans. From left to right the table includes (A) the number of shares originally approved by the Annual General Meeting, adjusted for rights offering and reverse split where applicable; (B) how many of the originally designated shares that were outstanding at the beginning of 2009; (C) how many shares awards that were granted over during 2009; (D) the number of shares exercised or matched during 2009; (E) the number of shares forfeited by participants or expired under the plan rules during 2009; (F) the balance left as outstanding at the end of 2009, having added new grants to the shares outstanding at the beginning of the year and deducted the shares related to awards exercised, matched, forfeited and expired. The final column (G) shows the compensation costs charged to the accounts during 2009 for each plan, calculated as fair value in SEK. For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies, Share-based employee compensation”. shaRes foR all Plans Plan (million shares) 2002 Stock Option Plan 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 2009 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans total outstanding beginning originally designated 1) awarded of 2009 during 2009 matched during 2009 during 2009 expired outstanding end of 2009 exercised/ forfeited/ compensation costs charged during 2009 (mseK) a 10.8 6.3 6.4 9.7 16.5 22.4 72.1 B 3.8 3.2 4.6 9.4 3.7 c – – – – d 3.4 e f=B+c-d-e 0.4 2.7 0.5 – 2) – g – 25 4) 1.2 0.1 3.3 126 4) 0.5 0.3 8.6 3) 189 4) 8.3 0.4 0.3 11.3 3) 183 4) – 24.7 2.5 10.8 – 8.2 – 1.6 2.5 3) 25.7 6 4) 529 5) 1) Adjusted for rights offering and reverse split when applicable. 2) All outstanding options in the 2002 Stock Option Plan expired during 2009 and no options therefore remain exercisable. 3) Presuming maximum performance matching under the Executive Performance Stock Plans. The 2005 and 2006 plans have lapsed. 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. Fair value is also adjusted for participants failing to keep hold of their contribution shares during the vesting period. 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 2009 was: February 15 SEK 68.11, May 15 SEK 60.00, August 15 SEK 60.88 and November 15 SEK 65.83. 5) Total compensation costs charged during 2008: SEK 572 million, 2007: SEK 496 million. 88 notes to the consolidated financial statements | Ericsson Annual Report 2009 NOTE C29 numBeR of emPloyees Related to cost of sales and oPeRating exPenses employee numbers, wages and salaries employee numbers aVeR age numBeR of emPloyees men Women 2009 total men Women 2008 total 30,676 9,493 40,169 32,289 9,167 41,456 Cost of sales Operating expenses total emPloyee moVements 8,168 13,513 5,876 9,366 9,999 1,831 3,825 17,338 7,130 1,254 2,358 11,724 7,028 12,111 6,151 4,556 1,723 8,751 3,343 15,454 7,486 1,335 5,842 1,286 Head count at year-end Employees who have left the Company Employees who have joined the Company Temporary employees Western Europe 1) Central and Eastern Europe, Middle East and Africa Asia Pacific Latin America North America 2009 2008 2007 41,521 40,972 35,717 43,023 33,904 40,107 82,493 78,740 74,011 2009 2008 82,493 9,147 12,900 693 78,740 3,415 8,144 1,124 total 2) 67,599 18,761 86,360 62,135 16,854 78,989 1) Of which Sweden 2) Of which EU 4,591 18,521 14,685 13,930 32,970 10,055 43,025 34,100 4,990 19,675 9,633 43,733 numBeR of emPloyees at yeaR end 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 2009 2008 38,305 41,618 10,145 16,766 6,055 11,222 7,976 15,165 8,247 5,734 82,493 78,740 18,217 41,396 20,155 43,093 49,874 24,570 8,049 45,823 23,244 9,673 82,493 78,740 emPloyees By gendeR and age at yeaR end 2009 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 1,228 6,778 6,918 2,908 784 3,321 23,022 23,749 10,768 3,017 5% 36% 37% 17% 5% 23% 77% 100% employee wages and salaries Wages and salaRies and social secuRity exPenses 2009 Wages and salaries Social security expenses Of which pension costs 41,247 13,630 3,588 2008 38,607 12,690 3,206 Amounts related to the President and CEO and the Group Management Team are included. Wages and salaRies PeR Region 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 2009 2008 23,039 24,138 4,323 5,346 2,181 6,358 3,354 4,594 1,879 4,642 41,247 38,607 10,324 4,928 23,734 11,825 3,296 24,699 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 2009 2008 315 42 34 316 41 36 BoaRd memBeRs, PResidents and gRouP management By gendeR at yeaR end 2008 females males females males 2009 Parent company Board members and President Group Management subsidiaries Board members and Presidents 38% 8% 62% 92% 38% 9% 62% 91% 10% 90% 12% 88% Ericsson Annual Report 2009 | notes to the consolidated financial statements 89 NOTe C30 C30 Related PaRty tRansaCtions During 2009, various related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. For information regarding equity and ericsson’s share of assets, liabilities and income in joint ventures and associated companies, see Note C12, “Financial Assets, Non-Current”. > > > > sony ericsson mobile communications aB (semc) In October 2001, SeMC was established as a joint venture between Sony Corporation and ericsson, and a substantial portion of ericsson’s handset operations was sold to SeMC. The joint venture is headquartered in London, United Kingdom. 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, receive license revenues for SeMC’s usage of trademarks and intellectual property rights. The decline in license revenues during 2009 is a consequence of the formation of ST-ericsson. Purchases. contracts with a number of customers for mobile systems which also include limited quantities of phones. Both owners of SeMC receive dividends, when so decided dividends. by the board of directors. During 2009 ericsson received no dividends from SeMC. ericsson purchases mobile phones from SeMC to support Both owners of SeMC, Sony Corporation and > > Related party transactions License revenues Purchases ericsson’s share of dividends Related party balances Receivables Liabilities 2009 2008 2007 1,746 164 – 5,856 261 3,627 5,743 333 3,949 369 14 1,002 176 932 204 > > > > ericsson provides ST-ericsson with services in the areas of R&D, Major transactions are as follows: sales. HR, IT and facilities. Purchases. consists of chipsets and R&D services. dividends. decided by the board of directors. During 2009 ericsson received no dividends from ST-ericsson. Both owners of ST-ericsson receive dividends, when so Major part of ericsson’s purchases from ST-ericsson Related party transactions Sales Purchases ericsson’s share of dividends Related party balances Receivables Liabilities 2009 740 624 – 244 365 ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward ST-ericsson. ericsson nikola tesla d.d. 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 Nikola Tesla d.d. is located in Zagreb, Croatia. ericsson holds 49.07 percent of the shares. ericsson sells telecommunication equipment to ericsson Nikola Major transactions are as follows: sales. Tesla d.d. license revenues. Nikola Tesla d.d.’s usage of trademarks. Purchases. Nikola Tesla d.d. dividends. during 2009. ericsson receives license revenues for ericsson ericsson purchases development resources from ericsson ericsson received dividends from ericsson Nikola Tesla d.d. SeMC has been granted a long-term loan with a maximum amount of SeK 3,606 million. The parent companies of ericsson and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. ericsson’s part thus amounted to SeK 1,803 million. As of December 31, 2009, ericsson’s part of the principal amount outstanding amounted to SeK 779 million inclusive of accrued interest SeK 6 million. Maturity date for the maximum amount of the issued guarantees occurs in 2011 (SeK 1,030 million) and 2010 (SeK 773 million). Related party transactions Sales License revenues Purchases ericsson’s share of dividends Related party balances Receivables Liabilities 2009 2008 2007 654 7 569 66 93 70 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. st-ericsson ST-ericsson, the joint venture between ericsson and STMicroelectronics, was formed on February 2, 2009, by merging ericsson Mobile Platforms with ST-NXP Wireless. The joint venture is equally owned by ericsson and STMicroelectronics. ST-ericsson is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. ST-ericsson is a key supplier to four of the industry’s top five handset manufacturers, who together represent about 80 percent of global handset shipments, as well as to other leading companies in the industry. The joint venture is headquartered in Geneva, Switzerland, and employs approximately 8,000 persons. 90 notes to the consolidated financial statements | ericsson Annual Report 2009 C31 fEEs to auDitors Price- waterhouse- coopers others total 2009 Audit fees Audit related fees Tax services fees Other fees total 2008 Audit fees Audit related fees Tax services fees Other fees total 2007 Audit fees Audit related fees Tax services fees Other fees total 98 10 16 1 125 97 7 14 1 119 102 4 13 – 119 3 – 2 2 7 4 – 2 5 11 7 – 12 6 25 101 10 18 3 132 101 7 16 6 130 109 4 25 6 144 During the period 2007–2009, 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. NOTE C31–C33 C32 EvEnts aftEr thE BalanCE shEEt DatE In a November 25 auction, 2009, ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions. On January 12, 2010, ericsson announced agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees. In January 2010, the Company made an employer contribution payment of SeK 730 million to the Swedish pension trust fund due to funding requirements. C33 ContraCtual oBligations contRactUal oBliGations 2009 (seK billion) Long-term debt 1) 2) Finance lease obligations 3) Operating leases 3) Other non-current liabilities Purchase obligations 4) Trade Payables Commitments for customer financing 5) total Payment due by period <1 year 1–3 years 3–5 years >5 years total 2009 1.2 4.2 10.8 14.2 30.4 0.2 3.2 0.3 4.7 0.4 2.2 1.2 2.4 2.1 12.5 – 0.3 0.1 1.6 2.0 7.1 18.9 3.0 33.6 – – – – – – – – – 9.5 13.5 19.4 7.1 18.9 3.0 76.0 1) Including interest payments. 2) See also Note C20, “Financial Risk Management and Financial Instruments”. 3) See also Note C27, “Leasing”. 4) The amounts of purchase obligations are gross, before deduction of any related provisions. 5) See also Note C14, “Trade Receivables and Customer Financing”. For information about financial guarantees, see Note C24, “Contingent Liabilities” except for those transactions described in this report, ericsson has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business. ericsson Annual Report 2009 | notes to the consolidated financial statements 91 Parent Company Income Statement years ended December 31, seK million Net sales 1) Cost of sales Gross income Selling expenses Administrative expenses operating expenses Other operating income and expenses 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 2009 1) 300 –21 279 –1,399 –1,738 –3,137 2,977 119 9,358 –1,396 8,081 417 485 902 –804 8,179 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 –1,733 17,227 2007 3,236 –368 2,868 –632 –719 –1,351 2,723 4,240 13,747 –3,262 14,725 –448 183 –265 –1,315 13,145 1) Effective January 1, 2009, the right to all license revenues from third parties was transferred to Ericsson AB, a wholly owned subsidiary. 92 Parent comPany financial statements | Ericsson Annual Report 2009 Parent Company Balance Sheet December 31, seK million notes 2009 20081) 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 1) Cash and cash equivalents 1) total assets P6 P7, P26 2,219 527 2,604 695 P8, P9 P8, P9 P8 P8, P12 P8, P11 P5 P8 P10 P11 P11 P12 P13 P19 P19 75,540 13,066 10 10,316 846 387 1,179 74,571 4,466 11 15,781 910 68 3,030 104,090 102,136 61 80 42 590 20,035 360 2,677 53,926 8,477 86,168 576 835 24,676 351 4,686 37,166 22,048 90,418 190,258 192,554 1) Cash and cash equivalents and Short-term investments for 2008 have been restated to reflect the transfer of highly liquid monetary short-term investments, with a remaining maturity of three months or less, from Short-term investments to Cash and cash equivalents. Ericsson Annual Report 2009 | parent company financial statements 93 Parent ComPany BalanCe Sheet (Continued) December 31, seK million notes 2009 2008 stocKHolDers’ eQUity, proVisions anD liaBilities stockholders´equity Capital stock Revaluation reserve Statutory reserve Restricted equity Retained earnings Net income Non-restricted equity Untaxed reserves provisions Pensions Other provisions non-current liabilities Notes and bond loans Liabilities to 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 P14 16,367 20 31,472 47,859 33,774 8,179 41,953 89,812 16,232 20 31,472 47,724 24,727 17,227 41,954 89,678 P15 915 1,817 P16 P17 P18 P18 P12 P18 P21 P12 P20 P22 P23 372 697 1,069 23,801 4,000 28,966 244 57,011 – 335 39,135 1,981 41,451 190,258 550 13,072 403 656 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 94 parent company financial statements | Ericsson Annual Report 2009 Parent Company Statement of Cash Flows years ended December 31, seK million notes 2009 2008 2007 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 Trade payables 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 Short-term investments cash flow from investing activities 8,179 17,227 13,145 P24 –3,831 4,348 5,146 22,373 –891 12,254 20 193 261 –132 –4 –685 4 –478 –464 16 –49 2,252 7 1,041 –155 –34 –442 978 4,001 23,654 13,649 –124 109 – –11,015 1,134 6,663 –9 –14,436 –17,678 –388 8 – –305 2,122 1,541 31 –6,760 –3,751 –262 6 –579 –35,918 6,189 3,839 –19 5,487 –21,257 cash flow before financing activities –13,677 19,903 –7,608 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 financing activities cash flow from financing activities Effect from remeasurement in cash net change in cash and cash equivalents 4,755 11,532 –8,910 68 –5,897 –1,363 – –470 4,000 –3,119 89 –7,954 –7,582 –7 185 –15,043 –79 –13,571 629 5,489 2,417 11,050 – 64 –7,943 –3,324 – 2,264 228 –5,116 cash and cash equivalents, beginning of period 22,048 16,559 21,675 cash and cash equivalents, end of period P19 8,477 22,048 16,559 From 2008, the effect from remeasurement in cash and other adjustments to reconcile net income to cash have been included, and 2007 has been restated accordingly. From 2009, Short-term investments with remaining maturity greater than three months have been moved to Investing activties from cash and short-term investments, and 2008 and 2007 have been restated accordingly. Ericsson Annual Report 2009 | parent company financial statements 95 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 Transferred to income statement at sale, net of taxes cash flow hedges Gains arising during the period Amounts transferred to initial carrying amount of hedged items Tax on cash flow items reported directly in/or transferred from equity Net income closing balance For further information, see Note P14 “Stockholders’ Equity”. notes P14 2009 89,678 135 75 139 –135 –2,403 610 –5,897 2008 82,849 100 88 36 –100 –4,288 1,155 –7,954 – –4 612 –1,385 – 204 8,179 89,812 773 –204 17,227 89,678 96 Parent comPany financial statements | Ericsson Annual Report 2009 notes to the Parent Company Financial statements Contents P1 Significant Accounting Policies .................................................................................................................................................................................................................................... 98 P2 Segment Information .............................................................................................................................................................................................................................................................. 98 P3 Other Operating Income and expenses ............................................................................................................................................................................................................... 98 P4 Financial Income and expenses .................................................................................................................................................................................................................................. 99 P5 Taxes ..................................................................................................................................................................................................................................................................................................... 99 P6 Intangible Assets ........................................................................................................................................................................................................................................................................ 99 P7 Tangible Assets ........................................................................................................................................................................................................................................................................ 100 P8 Financial Assets ........................................................................................................................................................................................................................................................................ 101 P9 Investments .................................................................................................................................................................................................................................................................................. 102 P10 Inventories ..................................................................................................................................................................................................................................................................................... 103 P11 Trade Receivables and Customer Finance ..................................................................................................................................................................................................... 104 P12 Receivables and Liabilities – Subsidiary companies ............................................................................................................................................................................ 105 P13 Other Current Receivables ............................................................................................................................................................................................................................................ 105 P14 Stockholders’ equity ........................................................................................................................................................................................................................................................... 105 P15 Untaxed Reserves .................................................................................................................................................................................................................................................................. 106 P16 Pensions .......................................................................................................................................................................................................................................................................................... 106 P17 Other Provisions ....................................................................................................................................................................................................................................................................... 107 P18 Interest-bearing Liabilities .............................................................................................................................................................................................................................................. 108 P19 Financial Risk Management and Financial Instruments ..................................................................................................................................................................... 109 P20 Other Current Liabilities..................................................................................................................................................................................................................................................... 110 P21 Trade Payables ........................................................................................................................................................................................................................................................................... 110 P22 Assets Pledged as Collateral ........................................................................................................................................................................................................................................ 110 P23 Contingent Liabilities ............................................................................................................................................................................................................................................................ 110 P24 Statement of Cash Flows ..................................................................................................................................................................................................................................................111 P25 Leasing ...............................................................................................................................................................................................................................................................................................111 P26 Tax Assessment Values in Sweden .........................................................................................................................................................................................................................111 P27 Information Regarding employees ...........................................................................................................................................................................................................................111 P28 Related Party Transactions ............................................................................................................................................................................................................................................ 112 P29 Fees to Auditors ........................................................................................................................................................................................................................................................................ 112 P30 events after the Balance Sheet Date..................................................................................................................................................................................................................... 112 ericsson Annual Report 2009 | notes to the parent company financial statements 97 NOTe P1–P3 P1 sIgnIFICant aCCountIng PolICIes The financial statements of the Parent Company, Telefonaktiebolaget LM ericsson, have been prepared in accordance with RFR 2.2 “Reporting in separate financial statements”. RFR 2.2 requires the Parent Company to use the same accounting principles as for the Group, i.e. IFRS to the extent allowed by RFR 2.2. The main deviations between accounting policies adopted for the Group 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 and accounting policies for the Parent Company are: 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 2009 2008 2007 –13 1,603 1,478 – 167 99 47 300 –56 –13 – 1,254 2,192 37 33 1,383 304 38 5,086 3,236 1,506 1,603 1,336 1,478 Parent Company net sales in 2009 relate to business segment Networks with 70 percent and with 30 percent to business segment Multimedia. (Parent Company net sales in 2008 and 2007 in Sweden were mainly related to business segment Multimedia and the remaining part of net sales were related to business segment Networks). P3 other oPeratIng InCome and exPenses License revenues and other operating revenues Subsidiary companies Other Net gains/losses (–) on sales of tangible assets total 2009 2008 2007 2,433 532 2,407 659 2,058 667 12 –1 –2 2,977 3,065 2,723 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 2.2 is chosen. Financial guarantees are included in Contingent liabilities. 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 SRS RedR 4 “Accounting for pension liability and pension cost” from the Institute for the Accountancy Profession in Sweden. According to RFR 2.2, IAS 19 shall be adopted regarding supplementary disclosures when applicable. segment information Segment information is reported according to requirements in the Swedish Annual Accounts Act regarding net sales for business segments and geographical areas. Borrowing costs All borrowing costs in relation to qualifying assets are expensed as incurred. 98 notes to the parent company financial statements | ericsson Annual Report 2009 P4 FInanCIal InCome and exPenses financial income Result from participations in subsidiary companies Dividends Net gains on sales Result from participations in joint ventures 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 total financial expenses Losses on sales of participations in subsidiary companies Write-down of investments in subsidiary companies Write-down of participations in other companies Interest expenses and similar profit/loss items Subsidiary companies Other Other financial expenses total financial net 2009 2008 2007 5,732 1,087 14,465 676 4,308 2,345 66 1 3,854 – 4,216 20 –27 – –213 –551 –7,027 –1,061 –1 – – –150 –630 –37 –1,068 –1,655 –41 –995 –918 –75 –1,396 –9,791 –3,262 7,962 14,340 10,485 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 2009 2008 2007 –610 –1,155 –1,194 –250 –250 –259 –47 103 –21 –307 –49 187 –804 –1,733 –1,315 NOTe P4–P6 reconciliation of actUal income taX rate to the sWeDish income taX rate 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 Tax effect of change in deferred tax rate 2009 2008 2007 –26.3% –28.0% –28.0% –0.2% –0.1% –0.3% –0.9% –0.3% –0.8% 20.1% 29.7% 22.0% –1.6% –10.3% –2.0% – –0.1% – actual tax rate –8.9% –9.1% –9.1% – 807 – Deferred tax assets and liabilities have been calculated with the new tax rate from December 31, 2008. 386 2,086 1,233 3,096 1,641 1,217 9,358 24,131 13,747 Deferred tax balances Tax effects of temporary differences have resulted in deferred tax assets as follows: Deferred tax assets 2009 2008 387 68 Deferred tax assets refer mainly to costs related to customer finance and provisions for restructuring costs. P6 IntangIble assets patents, licenses, traDemarks anD similar rights accumulated acquisition costs Opening balance Sales/disposals closing balance accumulated amortization Opening balance Amortization Sales/disposals closing balance net carrying value 2009 2008 3,888 – 3,888 –1,284 –385 – 5 3,893 –5 3,888 –904 –385 –1,669 –1,284 2,219 2,604 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. ericsson Annual Report 2009 | notes to the parent company financial statements 99 NOTe P7 P7 tangIble assets land and buildings other equipment and installations construction in process and advance payments 2009 accumulated acquisition costs Opening balance Additions Sales/disposals Reclassifications closing balance accumulated depreciation Opening balance Depreciation Sales/disposals closing balance net carrying value 2008 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 13 – – – 13 – – – – 13 1,113 22 –258 173 1,050 –571 –193 161 –603 447 711 77 –19 344 1,113 –454 –127 10 –571 542 140 100 – –173 67 – – – – 67 173 311 – –344 140 – – – – 140 total 1266 122 –258 – 1,130 –571 –193 161 –603 527 897 388 –19 – 1,266 –454 –127 10 –571 695 100 notes to the parent company financial statements | ericsson Annual Report 2009 P8 Financial assets investments in subsidiary companies, joint ventures and associated companies NOTe P8 associated companies 2008 2009 330 – – – – – – – – – – 330 330 330 subsidiary companies 2008 2009 joint ventures 2008 2009 74,571 1,480 508 –551 –461 –7 75,540 81,406 176 141 –7,027 –125 – 74,571 4,136 8,384 209 – – 7 12,736 4,136 – – – – – 4,136 other investments in shares and participations 2008 2009 receivables from subsidiaries, non-current 2008 2009 customer finance, non-current 1) 2009 2008 other financial assets, non-current 2008 2009 19 – – – – 19 –8 –1 – – –9 10 484 1 –466 – – 19 –9 – 1 – –8 11 15,781 – –1 –5,464 – 18,433 271 –3,243 – 320 974 363 –84 –111 –49 10,316 15,781 1 093 – – – – – – – – – – 10, 316 15,781 –64 –208 22 3 –247 846 800 620 –502 – 56 974 –49 –34 24 –5 –64 910 358 2,716 –44 3,030 178 –2,029 – – – – 1,179 3,030 – – – – – – – – – – 1,179 3,030 Opening balance Acquisitions and stock issues Shareholders’ contribution Write-downs Disposals Reclassification closing balance other financial assets accumulated acquisition costs Opening balance Additions Disposals/repayments/deductions Reclassifications Translation difference closing balance accumulated write-downs/allowances Opening balance Write-downs/allowances Disposals/repayments/deductions Translation difference closing balance net carrying value 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. ericsson Annual Report 2009 | notes to the parent company financial statements 101 NOTe P9 P9 investments The following listing shows certain shareholdings owned directly and indirectly by the Parent Company as of December 31, 2009. 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 company type company reg. no. domicile percentage of ownership par value in local currency, million carrying value, seK million 556056-6258 556251-3266 556404-4286 556030-9899 556326-0552 Sweden Sweden Sweden Sweden Sweden 100 100 100 100 100 – 100 100 100 100 100 100 100 53 1) 100 100 100 100 100 100 – 100 95 2) 100 – 100 100 100 100 70 100 80 49 3) – 50 50 50 49 50 361 2 14 5 – 4 90 13 26 20 1,301 2 23 222 75 161 5 – 328 – 2,817 60 n/a – 20 2 65 725 2 2 240 90 – – 50 436 5 65 – 20,731 2,216 306 6 5 2,058 115 216 196 524 4,227 120 15 3,151 3,200 114 1,788 5 – 4,094 428 29,006 260 1,550 61 100 2 475 147 4 1 20 17 382 75,540 4,136 8,325 275 330 13,066 Austria Denmark Finland France Germany Hungary Ireland Italy The Netherlands Norway Norway Russia Switzerland United Kingdom United States Argentina Mexico Australia China China India Malaysia Singapore Taiwan Thailand Sweden Switzerland Switzerland Croatia I I I II I I II I II I II I I II subsidiary companies ericsson AB I ericsson Shared Services AB I Netwise AB I AB Aulis II ericsson Credit AB III Other (Sweden) ericsson Austria GmbH ericsson Danmark A/S Oy LM ericsson Ab ericsson Participations France SAS ericsson GmbH ericsson Hungary Ltd. LM ericsson Holdings Ltd. ericsson Telecomunicazioni S.p.A. ericsson Holding International B.V. ericsson A/S TANDBeRG Television ASA ericsson Corporatia AO ericsson AG ericsson Holding Ltd. Other (europe, excluding Sweden) ericsson Holding II Inc. Cía ericsson S.A.C.I. ericsson Telecom S.A. de C.V. Other (United States, Latin America) Teleric Pty Ltd. ericsson Ltd. ericsson (China) Company Ltd. ericsson India Private Ltd. ericsson (Malaysia) Sdn. Bhd. ericsson Telecommunications Pte. Ltd. ericsson Taiwan Ltd. ericsson (Thailand) Ltd. Other countries (the rest of the world) II I I I I I I I II I I total joint ventures and associated companies I II III I Sony ericsson Mobile Communications AB ST-ericsson Holdings AG ST-ericsson AT Holding AG ericsson Nikola Tesla d.d. total 556615-6658 102 notes to the parent company financial statements | ericsson Annual Report 2009 shares owned by subsidiary companies type company reg. no. domicile 556044-9489 subsidiary companies II I I I II I I I I I I I I I I I I I I I I I 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. ericsson Telekomunikasyon A.S. ericsson Ltd. ericsson Canada Inc. ericsson Inc. ericsson IP Infrastructure Inc. ericsson Amplified Technologies Inc. ericsson Services Inc. Drutt Corporation Inc. Redback Networks Inc. 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 France Germany Ireland The Netherlands The Netherlands Spain Turkey United Kingdom Canada United States United States United States United States United States United States Brazil Australia China China Japan Singapore 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. NOTe P9 –P10 percentage of ownership 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 P10 inventories Finished products and goods for resale inventories 2009 2008 61 61 80 80 ericsson Annual Report 2009 | notes to the parent company financial statements 103 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”. 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 aging analysis as per december 31, 2009 2009 2008 70 –37 33 9 2 42 1,829 –393 1,436 576 –2 574 576 1,838 –93 1,745 movements in allowances for impairment trade receivables customer finance 2008 2009 2009 2008 Opening balance Additions Utilization Reversal of excess amounts Translation difference closing balance 2 38 – – –3 37 12 – –10 – – 2 94 355 –12 –20 –24 9 393 64 53 –3 –29 94 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, 2008 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 of which neither impaired nor past due 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 12 – 5 709 – – – – 1,043 –317 18 – 4 1 – 3 – – – – 1 –1 – 20 –20 36 –36 – 56 –56 of which neither impaired nor past due 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 535 – 2 1,577 – – – – 230 –67 35 – – 5 – 4 – – – – 2 –2 – 2 –2 – – – 24 –24 amount 70 –37 9 1,829 –393 amount 576 –2 2 1,838 –93 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 2009 2008 1,829 135 1,964 18 –382 1,600 1,436 590 762 1,838 168 2,006 24 –148 1,882 1,745 835 956 During 2009 the Parent Company transferred certain customer finance assets to third parties, and continues to recognize a part of such assets corresponding to the extent of its continuing involvement. The total carrying amount of the original assets transferred is SeK 560 million, the amount of the assets that the Parent Company continues to recognize is SeK 28 million, and the carrying amount of the associated liabilities is SeK 28 million. 104 notes to the parent company financial statements | ericsson Annual Report 2009 NOTe P12–P14 2009 2008 88 430 125 1,762 272 669 666 535 2,498 318 2,677 4,686 P12 reCeivables and liabilities – subsidiary COmPanies P13 Other Current reCeivables total 2009 payment due by period >5 years 1–5 years < 1 year total 2008 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 10,316 – – 10,316 15,781 2,358 2,358 17,677 17,677 20,035 20,035 – – – – 1,008 – 23,668 – 24,676 28,966 – – 28,966 27,866 560 560 38,575 38,575 39,135 39,135 – – – – 541 – 34,725 – 35,266 1) Including non interest-bearing receivables and liabilities, net, amounting to SeK –18,650 million (SeK –15,866 million in 2008). Interest-free transactions involving current receivables and liabilities may also arise at times. Receivables from associated companies and joint ventures Prepaid expenses Accrued revenues Derivatives with a positive value Other total P14 stOCkhOlders’ equity capital stock 2009 Capital stock at December 31, 2009, consisted of the following: Class A shares 1) Class B shares 1) Total number of shares 261,755,983 3,011,595,752 3,273,351,735 capital stock 1,309 15,058 16,367 1) Class A-shares (quotient value SeK 5.00) and Class B-shares (quotient value SeK 5.00). changes in stockholders’ equity 2009 January 1, 2009 cash flow hedges Gains arising during the period Amounts transferred to initial carrying amount of hedged items Tax on cash flow items reported directly in/or transferred from 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 2009 december 31, 2009 revalua- capital stock tion statutory reserve reserve total disposi- tion reserve restricted equity fair value other non- retained restricted equity reserves earnings total 16,232 20 31,472 47,724 100 569 41,285 41,954 89,678 – – – 135 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 135 – – – – – – – – – – – – – – – – – – 16,367 20 31,472 47,859 100 612 –1,385 204 – – – – – – – – – – – – – 75 139 –135 612 612 –1,385 –1,385 204 – 75 139 –135 204 135 75 139 –135 –2,403 610 –5,897 –2,403 610 –5,897 –2,403 610 –5,897 8,179 8,179 8,179 41,853 41,953 89,812 ericsson Annual Report 2009 | notes to the parent company financial statements 105 NOTe P15–P16 changes in stockholders’ equity 2008 January 1, 2008 revaluation of other investments in shares Transferred to income statement at sale cash flow hedges Gains arising during the period Tax on cash flow items reported directly in/or transferred from 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 revalua- capital stock tion statutory reserve reserve total disposi- tion reserve restricted equity fair value other non- retained restricted equity reserves earnings total 16,132 20 31,472 47,624 100 4 35,121 35,225 82,849 – – – 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 – – – – – – – – – – – – – – – – – – –6 773 –202 – – – – – – – – – – – – 88 36 –100 –6 –6 773 773 –202 – 88 36 –100 –202 100 88 36 –100 –4,288 1,155 –7,954 –4,288 1,155 –7,954 –4,288 1,155 –7,954 17,227 17,227 17,227 16,232 20 31,472 47,724 100 569 41,285 41,954 89,678 P15 untaxed reserves 2009 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 institute. Pension obligations are calculated annually, on the balance sheet date, based on actuarial assumptions. 1,260 72 1,332 485 485 1,817 –385 –32 875 40 –417 915 –485 –485 –902 – – 915 defined Benefit oBligation- amount recognized in the Balance 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 not accounted for closing balance provision for pensions 2009 2008 582 –640 –58 372 58 – 372 551 –530 21 382 403 Change in depreciation in excess of plan of intangible assets relates mainly to Marconi and Redback trademarks. 1) This FPG/PRI obligation is covered by the Swedish law on safeguarding of pension commitments. Changes in other untaxed reserves related to additions to reserve for doubtful receivables, SeK 227 million in 2008. Deferred tax liability on untaxed reserves, not accounted for in deferred taxes, amounts to SeK 241 million (SeK 478 million in 2008). 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 and in 2009 an additional transfer of SeK 23 million was made. The Parent Company utilizes no assets held by the pension trust. Return on plan assets for 2009 is 16.5 percent (–13.8) percent. P16 PensiOns The Parent Company has two types of pension plans: > > Defined contribution plans: post-employment benefit plans where the Parent Company pays fixed contributions into separate entities and has no legal or constructive obligation to pay further 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 106 notes to the parent company financial statements | ericsson Annual Report 2009 NOTe P16 –P17 2009 2008 28 35 2 65 107 107 –29 143 24 43 –5 62 86 86 85 233 2009 2008 total pension cost and income recognized in the income statement plan assets allocation equities Interest-bearing securities Of which Ericsson securities change in the defined Benefit oBligation opening balance Payment to pension trust 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 Previous excess from plan assets reclassified closing balance provision for pensions 167 363 530 224 416 640 – – 2009 2008 403 –23 63 –42 –87 58 – – 372 402 – 67 –48 85 –103 403 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 Of the total pension cost SeK 137 million (SeK 105 million in 2008) is included in operating expenses and SeK 6 million (SeK 128 million in 2008) in the financial net. estimated pension payments for 2010 are SeK 50 million. P17 Other PrOvisiOns 2009 opening balance Additions Reversal of excess amounts Utilization/Cash out Reclassification closing balance 2008 opening balance Additions Reversal of excess amounts Utilization/Cash out Reclassification closing balance Warranty commitments restruc- turing customer finance other total other provisions 1) 1 – – –1 – – 1 – – – – 1 109 297 –7 –50 – 349 114 47 –9 –31 –12 109 162 – –16 –51 – 95 177 21 – –36 – 162 384 295 –303 –123 – 253 363 181 –112 –60 12 384 656 592 –326 –225 – 697 655 249 –121 –127 – 656 1) Of which SeK 230 million (SeK 150 million in 2008) are expected to be utilized within one year. ericsson Annual Report 2009 | notes to the parent company financial statements 107 NOTe P18 P18 interest-bearing liabilities As per December 31, 2009, the Parent Company’s outstanding interest- bearing liabilities, excluding liabilities to subsidiaries, were SeK 27.8 billion. interest-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 total interest-bearing liabilities notes and Bond loans issued-maturing 2004–2012 2007–2012 2007–2012 2007–2014 2007–2017 2009–2013 2009–2016 total 2009 2008 – – 3,732 3,732 23,801 4,000 18,941 4,000 27,801 22,941 27,801 26,673 nominal amount 450 1,000 2,000 375 500 600 625 coupon currency Book value (sek million) maturity date (yy-mm-dd) unrealized hedge gain/loss (incl. in book value) 1.275% 5.100% 0.730% 1.006% 5.380% 5.000% 3,29875% SeK SeK SeK eUR eUR eUR USD 450 1,058 1) 2,000 3,863 5,714 1) 6,229 1) 4,487 23,801 12-12-07 2) 12-06-29 12-06-29 3) 14-06-27 4) 17-06-27 13-06-24 16-06-23 5) –59 –591 –81 –731 1) Interest rate swaps are designated as fair value hedges. 2) Next contractual repricing date 2010-06-03 (semi annual). 3) Next contractual repricing date 2010-03-25 (quarterly). 4) Next contractual repricing date 2010-03-25 (quarterly). 5) Next contractual repricing date 2010-03-19 (quarterly). All outstanding notes and bond loans are issued under the euro Medium- Term Note (eMTN) 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 2.88 percent at December 31, 2009. These bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. On May 20, 2009, the USD bond issued in 1999 of 483 million matured and was repaid. On June 22, 2009, a new eUR fixed rate bond was issued under the eMTN program. The nominal amount of the issue was 600 million eUR and the maturity date 24 June 2013. The yearly coupon of the bond is 5 percent. On June 23, 2009, ericsson signed a seven year floating rate loan of USD 625 million with Svensk exportkredit. This loan is issued under the eMTN program. On November 30, 2009, ericsson called the eUR bond issued in 2003 of eUR 471 million with maturity date 28 November 2010 at par. In 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. 108 notes to the parent company financial statements | ericsson Annual Report 2009 2009 asset liability 2008 asset liability total 17.6 2.6 34.4 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”. 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 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 606 531 2,562 2,742 1,039 134 84 3 817 44 – – 4,887 167 – – 1,866 1) 3) 1,392 2) 7,616 3) 4,054 700 – – 7,496 – – 28 49 175 685 937 3) – – 40 151 40 58 289 – – 315 129 105 711 1,260 3) 845 – 1,152 10 – 121 25 – 53 199 – 1) Of which internal counterparts 200. 2) Of which internal counterparts 538. 3) Of which 843 million is reported as non-current assets for 2009 and 2,814 million for 2008. NOTe P19 cash, cash equivalents and short-term investments seK billion remaining time to maturity 1–5 < 3 > 5 year years years months < 1 2009 2008 Bank deposits 6.9 – – – 6.9 14.5 type of issuer/ counterpart Governments Banks Corporations Mortgage institutes 7.4 3.1 0.2 – 2.6 – – – 19.5 – – 14.9 7.4 – – 0.4 7.8 36.9 3.1 0.2 15.3 23.9 6.2 1.6 13.0 62.4 59.2 The instruments are classified as held for trading and are therefore short- term investments. During 2009, cash, cash equivalents and short-term investments increased by SeK 3.2 billion to SeK 62.4 billion. repayment schedule of long-term borrowings nominal amount seK billion 2010 2011 2012 2013 2014 2015 and later total current maturities of long- term debt borrowings (non-current) – – – – 3.5 6.2 3.9 13.7 27.3 total – – 3.5 6.2 3.9 13.7 27.3 Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets. funding programs 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) amount utilized unused 5,000 3,158 1,842 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”. ericsson Annual Report 2009 | notes to the parent company financial statements 109 seK billion Assets at fair value through profit or loss Loans and receivables Available for sale assets Financial liabilities at amortized cost total seK billion Current maturities of long-term borrowings Borrowings non-current NOTe P19 –P23 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 financial instruments carrying amount had a net gain of SeK 1.8 billion. For further information about valuation principles, see Notes to the Consolidated Financial Statements – Note C1, “Significant Accounting Policies”. short- trade term receiva- bles invest- p11 ments receiva- bles and liabilities borrow- subsidia- ries p12 ings payables p21 p18 trade financial assets p8 other current receiva- bles p13 other current liabilities p20 2009 2008 55.5 1.5 –0.3 30.2 0.8 1.8 0.1 –1.1 1.5 55.5 –67.6 –37.8 –27.8 –27.8 –0.3 –0.3 0.8 1.9 –1.1 –9.7 financial instruments carried at other than fair value carrying amount 2008 2009 fair value 2008 2009 P21 tRade Payables – 27.8 27.8 3.7 23.0 26.7 – 26.0 26.0 3.9 19.0 22.9 Trade payables excluding associated companies and joint ventures total 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. All trade payables fall due within 90 days. P22 assets Pledged as collateRal P20 otheR cuRRent liabilities Bank deposits total Accrued interest Accrued expenses, of which employee related other Deferred revenues Derivatives with a negative value Other current liabilities total 2009 2008 341 411 283 44 23 1,143 147 266 45 1,252 7,268 161 1,981 9,403 The major item in bank deposits is the internal bank’s clearing and settlement commitments of SeK 383 million (SeK 266 million in 2008). P23 contingent liabilities total contingent liabilities 2009 2008 13,072 13,029 Contingent liabilities include pension commitments of SeK 10,797 million (SeK 10,783 million in 2008) and guarantees for Sony ericsson Mobile Communications AB’s borrowing from financial institutions of SeK 779 million (SeK 0 million in 2008). 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 2009 was SeK 18,001 million (SeK 20,997 million in 2008). Potential payments due under these bonds are related to ericsson’s performance under applicable contracts. 110 notes to the parent company financial statements | ericsson Annual Report 2009 56.7 31.8 – – –95.7 45.9 39.9 –90.0 –4.2 2009 2008 335 335 605 605 2009 2008 550 550 414 414 P24 stateMent oF cash Flows P26 tax assessMent Values in sweden Interest paid in 2009 was SeK 508 million (SeK 2,376 million in 2008 and SeK 1,977 million in 2007) and interest received was SeK 2,083 million (SeK 3,520 million in 2008 and SeK 3,066 million in 2007). Income taxes paid were SeK 341 million (SeK 370 million in 2008 and SeK 559 million in 2007). adjustments to reconcile net income to cash 2009 2008 2007 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 total adjustments to reconcile net income to cash 193 193 385 385 578 463 127 127 385 385 512 1,363 111 111 389 389 500 756 –521 5,545 –1,088 –902 –1,254 –2,195 478 –5 –2,747 265 – –1,324 –3,831 5,146 –891 P25 leasing leasing with the parent company as lessee At December 31, 2009, future payment obligations for leases were distributed as follows: 2010 2011 2012 2013 2014 2015 and later operating leases 969 859 638 412 500 751 4,129 leasing with the parent company as lessor At December 31, 2009, future minimum payment receivables were distributed as follows: 2010 2011 2012 2013 2014 2015 and later operating leases 20 6 1 1 1 2 31 The operating lease income is mainly income from sublease of real estate. See Notes to the Consolidated Financial Statements – Note C27, “Leasing”. NOTe P24–P27 2009 2008 8 8 8 8 Land and land improvements total P27 inFoRMation RegaRding eMPloyees average number of employees Western europe 1) 2) Central and eastern europe, Middle east and Africa total 1) Of which Sweden 2) Of which EU 2008 men women total men women total 2009 194 147 341 181 149 330 108 302 194 194 15 162 147 147 123 464 341 341 3 184 181 181 1 150 149 149 4 334 330 330 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 Long-term absence due to illness total 1) 2009 2008 0% 2% 1% 1% 1% 0% 2% 1% 1% 0.6% 1) Defined as absence during a consecutive period of time of 60 days or more. Information Absence due to illness regards employees employed in Sweden. remuneration wages and salaries and social security expenses 2009 Wages and salaries Social security expenses Of which pension costs 480 421 174 2008 353 404 265 wages and salaries per geographical area Western europe 1) 2) Central and eastern europe, Middle east and Africa total 1) Of which Sweden 2) Of which EU 2009 2008 380 351 100 2 480 380 380 353 351 351 Remuneration in foreign currency has been translated to SeK at average exchange rates for the year. ericsson Annual Report 2009 | notes to the parent company financial statements 111 NOTe P28–P30 remuneration policy and remuneration to the board of directors and the president and ceo See Notes to the Consolidated Financial Statements – Note C29, “Information Regarding Members of the Board of Directors, the Management and employees”. The Parent Company holds 49.99 percent of shares in ST-ericsson Holding AG and 50.01 percent in ST-ericsson AT Holding AG, both in Switzerland. The Parent Company has no major transacions or balances toward ST- ericsson in 2009 The Parent Company does not have any contingent liabilities, assets pledged as collateral or guarantees toward ST-ericsson. long-term variable remuneration the stock purchase plan Compensation costs for all employees of the Parent Company amounted to SeK 9,1 million in 2009 (SeK 5.6 million in 2008). other related parties For information regarding the remuneration of management, see Notes to the Consolidated Financial Statements – Note C29, “Information Regarding Members of the Board of Directors, Management and employees”. P28 Related PaRty tRansactions During 2009, 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. SeMC has been granted a long-term loan with a maximum amount of SeK 3,606 million. The Parent Company and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. As of December 31, 2009, the Parent Company´s share of the outstanding principle and accrued interest, in the total amount of SeK 779 million, has been reported as a contingent liability in the Parent Company. P29 Fees to auditoRs 2009 Audit fees Audit related fees Tax services fees total 2008 Audit fees Audit related fees Tax services fees total 2007 Audit fees Audit related fees Tax services fees 2009 2008 total price- waterhouse- coopers 33 3 2 38 33 2 1 36 37 3 – 40 related party transactions License revenues Dividends related party balances Receivables 293 – 2,011 3,627 90 626 During the period 2007–2009, 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. P30 eVents aFteR the balance sheet date On November 25, 2009, the Parent Company entered into an agreement to acquire certain assets relating to Nortel´s GSM business in North America for a cash purchase price of USD 70 million. This asset transaction will not directly affect the Parent Company´s balance sheet as these assets will be transferred to operating subsidiaries. In January 2010, as per the trust´s funding requirements, the Parent Company made an employer contribution payment of SeK 31 million to the Swedish pension trust fund. 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 related party balances Payables 2009 2008 7 9 66 227 3 – The Parent Company does not have any contingent liabilities, assets pledged as collateral or guarantees toward ericsson Nikola Tesla d.d. st-ericsson ST-ericsson was formed on February 2, 2009, by merging ericsson Mobile Platforms with STMicroelectronics’s wireless business. It is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. 112 notes to the parent company financial statements | ericsson Annual Report 2009 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 risk factors discussed elsewhere in this report, could have a material negative effect on our business, operational and after-tax results, financial position, cash flow, liquidity, credit rating, brand 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”. Market, technology and Business Risks Demand is difficult to predict Adverse economic conditions could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position. This could result in significantly reduced expenditures for network infrastructure and services, in which case our operating results would suffer. We have established flexibility to cost-effectively accommodate fluctuations in demand. However, if demand were to fall in the future, we may experience material adverse effects on our revenues, cash flow, capital employed and value of our assets and we may even incur operating losses. If demand is significantly weaker or more volatile than expected, this may have a material adverse impact on our credit rating, borrowing opportunities and costs as well as on the trading price of our shares. When deemed necessary, we undertake specific restructuring or cost saving initiatives, however, there are no guarantees that such initiatives are sufficient, successful or executed in time to deliver necessary improvements in earnings. The extent of the current adverse conditions in the financial markets and global economic downturn may exacerbate some of the risk factors we are exposed to. Most of our customers are financially stable and have networks with good utilization. However, some operators, in particular in markets with weak currencies, may incur borrowing difficulties and lower traffic than expected, which may affect their investment plans. The potential adverse effects of the economic downturn include: > > > > > > Reduced demand for products and services, resulting in increased price competition or deferrals of purchases, with lower revenues not being possible to compensate with reduced costs. Risks of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among our suppliers. Increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterpart failures. Risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products. Increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results. Decline in the value of the assets in the Company’s pension plans. short-term volatility has an impact Our sales to network operators represent a mix of equipment, software and services, which normally generate different gross margins. Third party products normally have lower margins than own products. As a consequence, reported gross margin in a specific period will be affected by the overall mix of products and services as well as the relative content of third party products. Network expansions and upgrades have much shorter lead times for delivery than initial network buildouts. Such orders Contents Market, Technology and Business Risks ...................................113 Regulatory, Compliance and Corporate Governance Risks .............116 Risks associated with owning Ericsson shares .................................116 are normally placed with short notice by customers, i.e. less than a month, and consequently variations in demand are difficult to forecast. As a result, changes in our product and service mix may affect our ability to accurately forecast sales and margins or detect in advance whether actual results will deviate from market consensus. convergence brings opportunity and risk We are affected by market conditions within the telecom industry, including the convergence of the telecom, data and media industries. The convergence is largely driven by technological development related to IP-based communications. This change increases our addressable market, changes the competitive landscape, and affects our objective setting, risk assessment and strategies. If we fail to understand the market development, acquire the necessary competence or develop and market products, services and solutions that are competitive in this changing market, our future results will suffer. We depend on growth and the success of new services Most of our business depends on continued growth in mobile communications in terms of both number of subscriptions and usage per subscriber, which in turn requires the continued deployment and evolution of our network systems by customers. If operators are not successful in their attempts to increase the number of subscribers and/or stimulate increased usage, our business and operational results could be materially adversely affected. Fixed and mobile networks converge and new technologies, such as IP and broadband, enable operators to deliver a range of new types of services in both fixed and mobile networks. We are dependent upon the market acceptance of such services, e.g. music, internet and navigation in the handset, and on the outcome of regulatory and standardization activities in this field, such as spectrum allocation. If delays in standardization or market acceptance occur, this could adversely affect our business and operational results. We operate in a highly competitive industry The markets we operate in are highly competitive in price, functionality and service quality as well as in the timing of development and introduction of new products and services. Ericsson Annual Report 2009 | Risk factoRs 113 We face intense competition from significant competitors and Chinese companies in particular have become relatively stronger in recent years. Our competitors may implement new technologies before we do, offer more attractively priced or enhanced products, services or solutions, or they may offer other incentives that we do not provide. Some of our competitors may have greater resources in certain business segments or geographic markets than we do. We may also encounter increased competition from new market entrants, alternative technologies or evolving industry standards. The rapid technological change also results in shorter life-cycles for products, increasing the risk in all product investments. Continuous price erosion is a symptom of this rapid technological change and we must counteract this by introducing new products to the market and by continuously enhancing the functionality while reducing the cost of new and existing products. Our operating results depend largely on our ability to compete in this market environment. Vendor consolidation may lead to a new competitive landscape Industry convergence and consolidation among equipment suppliers could potentially result in stronger competitors that are competing as end-to- end suppliers as well as competitors more specialized in particular areas. Consolidation may also result in competitors with greater resources than we have or in reduction of our current scale advantages. This could have a material adverse effect on our business, operating results, and financial condition. operator consolidation may increase our dependence on a limited number of customers We derive most of our business from large, multi-year agreements with a limited number of significant customers. Although no single customer currently represents more than 5 percent of sales, a loss of or a reduced role with a key customer could have a significant adverse impact on sales, profit and market share for an extended period. In recent years, network operators have undergone significant consolidation, resulting in a large number of operators with activities in several countries. This trend is expected to continue, and also intra-country consolidation is likely to accelerate as a result of competitive pressure. A market with fewer and larger operators will increase our reliance on key customers and may negatively impact our bargaining position and profit margins. Moreover, if the combined companies operate in the same geographic market, networks may be shared and less network equipment and associated services will be required. Another possible consequence of customer consolidation could be a delay in network investments pending negotiations of e.g. merger/acquisition agreements, securing necessary approvals, or integration of their businesses. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment. Long-term frame agreements can expose us to risk Long-term agreements are typically awarded on a competitive bidding basis. In some cases, such agreements also include commitments to future price reductions. In order to maintain the gross margin with such price reductions, we continuously strive to reduce the costs of our products. We reduce costs through design improvements, negotiation of better purchase prices, allocation of more production to low-cost countries and increased productivity in our own production. However, there can be no assurance that our actions to reduce costs will be sufficient or quick enough to maintain our gross margin in such contracts. transforming into a more service-based company Operators are increasingly outsourcing parts of their operations as a way to reduce cost and focus on new services. This has opened up a market which we have addressed. The growth rate is difficult to forecast and each new contract carries a risk that transformation and integration of the operations is not as fast or smooth as planned. Early contract margins are generally lower and the mix of new/old contracts may affect reported results negatively in a given period. Contracts normally cover several years and revenues are of a recurring nature. However, sometimes contract scopes are reduced with negative impact on sales and earnings. Ericsson is the market leader in managed services but competition in this area is increasing, which may have adverse effects on growth and profitability. success of R&D investments is uncertain To be a player in our industry requires large investments in technology and creates exposure to rapid technological and market changes. We spend significant amounts and resources in innovation work for new technology, products and solutions. In order for us to be successful, those technologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. If we invest in the development of technologies, products and solutions that do not function as expected, are not adopted by the industry, are not ready in time or are not successful in the marketplace our sales and earnings may suffer. acquisitions and divestments In addition to in-house innovation efforts, we make strategic acquisitions in order to obtain various benefits, e.g. to reduce time-to-market, to gain access to technology and/or competence, to increase our scale or to broaden our product portfolio or expand our customer base. From time to time we also divest parts of our operations to optimize our product portfolio or operations. There are no guarantees that such acquisitions or divestments are successful or that we will succeed in integrating the acquired entities to gain the expected benefits within the time frame we expect or at all. Joint ventures and partnerships If our partnering arrangements fail to perform as expected (whether through an incorrect assessment of our needs or the capabilities or financial stability of our strategic partners), our ability to work with these partners or 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, such partnerships may adversely affect our results of operations or financial position. a limited number of suppliers of components, production capacity and R&D and it services Our ability to deliver according to market demands and contractual commitments depends significantly on obtaining timely and adequate supply of materials, components and production capacity and other vital services on competitive terms. Although we strive to avoid single-source supplier solutions, this is not always possible. Failure by any of our suppliers could interrupt our product supply or operations and significantly limit our sales or increase our costs. To find an alternative supplier or re-design products to replace components may take significant time. If we fail to anticipate customer demand properly, an over/under-supply of components and production capacity could occur. In many cases, some of our competitors utilize the same contract manufacturers and if they have purchased capacity ahead of us we could be blocked from acquiring the needed products. This factor could limit our ability to supply our customers or could increase our costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs. We are also exposed to financial counterpart risks to suppliers where we pay in advance. We conduct regular supplier audits and evaluations to mitigate the risks mentioned as well as brand risks related to the suppliers’ compliance with e.g. labor and environmental regulations. 114 Risk factoRs | Ericsson Annual Report 2009 Product or service quality issues Litigations Sales contracts normally include warranty undertakings for faulty products and often also provisions regarding penalties and/or termination rights in the event of a failure to deliver ordered products or services on time or with required quality. Although we undertake a number of quality assurance measures to reduce such risks, product quality or service performance issues may affect our results negatively. significant foreign exchange exposures With the majority of our cost base in SEK and a very large share of sales in other currencies, and significant operations outside Sweden, our foreign exchange exposures are significant. Currency exchange rate fluctuations affect our consolidated income statement, balance sheet and cash flows when foreign currencies are exchanged or translated to SEK, which increases volatility in reported results. As market prices are predominantly established in USD or EUR, and with a net revenue exposure in foreign currencies, a stronger SEK exchange rate would generally have a negative effect on our reported results. Our attempts to reduce the effects of exchange rate fluctuations through a variety of hedging activities may not be sufficient or successful, resulting in an adverse impact on our results. intellectual property rights (iPR) Although we have a large number of patents, there can be no assurance that they will not be challenged, invalidated, or circumvented, or that any rights granted in relation to our 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 protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing laws of some countries in which we conduct business offer only limited protection of intellectual property rights, if at all. Our solutions may also require us to license technologies from third parties. It may be necessary in the future to seek or renew licenses and there can be no assurance that they 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 proprietary rights in our products. Many key aspects of telecommunications and data network technology are governed by industry-wide standards usable by all market participants. As the number of market entrants and the complexity of technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. Third parties have asserted, and may assert in the future, claims, directly against us or indirectly against our customers, alleging infringement of their intellectual property rights. Defending such claims may be expensive, time-consuming and divert the efforts of our management and/or technical personnel. As a result of litigation, we could be required to pay damages and other compensation directly or indemnifying our customers for such damages and other compensation, develop non-infringing products/technology or enter into royalty or licensing agreements. However, we cannot be certain that such licenses will be available to us on commercially reasonable terms or at all. In the normal course of our business we are involved in legal proceedings. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, reputation, operating results, or financial condition. As a publicly listed company, Ericsson may be exposed to lawsuits, in which plaintiffs allege that the Company or its officers have failed to comply with securities laws, stock market regulation or other laws, regulations or requirements. 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 impact on our reported results and reputation. For additional information regarding certain of the lawsuits in which we are involved, see “Legal and Tax Proceedings” in the Board of Directors’ Report. Business interruption Our business operations rely on complex IT operations and communications networks, which are vulnerable to damage or disturbance from a variety of sources. Having outsourced a significant portion of our IT operations, we depend partly on security and reliability measures of external companies. Regardless of protection measures, essentially all IT systems and communications networks are susceptible to disruption from equipment failure, vandalism, computer viruses, security breaches, natural disasters, power outages and other events. We also have a concentration of operations on certain sites, e.g. for production, R&D, network operation centers, logistic centers, shared services centers, where business interruptions could cause material damage and costs. Although we have assessed these risks, implemented controls, performed business continuity planning and selected reputable companies for outsourced services, we cannot be sure that interruptions with material adverse effects will not occur. attract and retain highly qualified employees We believe that our future success largely depends on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. Competition for skilled personnel and highly qualified managers in the telecommunications industry remains intense. We are continuously developing our corporate culture, remuneration, promotion and benefit policies as well as other measures aimed at empowering our employees and reducing employee turnover. However, there are no guarantees that we will be successful in attracting and retaining employees with appropriate skills in the future. access to short-term and long-term capital If we do not generate sufficient amounts of capital to support our operations, service our debt and continue our research and development and customer finance programs, or if we cannot raise sufficient amounts of capital at the times and on the terms required by us, our business is likely to be adversely affected. Access to short-term funding may decrease or become more expensive as a result of our operational and financial condition and market conditions or due to deterioration in our credit rating. We cannot assure that additional sources of funds that we from time to time may need will be available or available on reasonable terms. Ericsson Annual Report 2009 | Risk factoRs 115 Regulatory, compliance and corporate Governance Risks Regulatory environment changes Telecommunications is an industry subject to particular regulation and regulatory changes affect both our customers’ and our own operations. For example, regulations imposing more stringent, time-consuming or costly planning and zoning requirements or building approvals for radio base stations and other network infrastructure could adversely affect the timing and costs of network construction or expansion, and ultimately the commercial launch and success of these networks. Similarly, tariff and roaming regulations or rules on network neutrality could also affect operators’ ability or willingness to invest in network infrastructure, which in turn could affect the sales of our systems and services. Also radio frequency spectrum allocation between different types of usage may affect operator spending adversely or force us to develop new products to be able to compete. License fees, environmental, health and safety, privacy and other regulatory changes, in general or particular to our industry, may increase costs and restrict operations for network operators and service providers or us. Also indirect impacts of such changes could affect our business adversely even though the specific regulations may not apply directly to our products or us. country-specific political, economic and regulatory risks We conduct business throughout the world and are subject to the effects of general global economic conditions as well as conditions unique to a specific country or region. We conduct business in more than 170 countries, with a significant proportion of our sales to emerging markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. We expect that sales to such emerging markets will represent an increasing portion of total 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 where we do 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. In addition we must comply with the export control regulations of the countries and any trade embargoes in force at the time of sale and/or delivery. Although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and brand. compliance with high standards of corporate governance Ericsson applies mandatory corporate governance statutes and rules, such as the Swedish Code of Corporate Governance and is also committed to several corporate responsibility and environmental initiatives. To ensure that our operations are executed in accordance with these requirements, our management system includes a robust corporate culture and a Code of Business Ethics as well as policies and directives to govern our processes and operations. We regularly perform communication and training in these areas, and we monitor and audit internal compliance with the policies and directives as well as our suppliers’ adherence to our Supplier Code of Conduct. There is however no guarantee that violations will not occur, which could have material adverse effects on our brand, reputation and business. compliance with a 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 laws and regulations. However, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain compliance with current or future laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, including potential liabilities. This is due to several factors, particularly the length of time often involved in resolving such matters. Potential health risks related to electromagnetic fields The mobile telecommunications industry is subject to claims that mobile handsets and other 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, 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 affect us through a reduction in sales or through liability claims. Although Ericsson’s products are designed to comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot guarantee that we or the jointly owned Sony Ericsson Mobile Communications or ST-Ericsson will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effect on our business. Risks associated with owning Ericsson shares our share price has been and may continue to be volatile Our share price has been volatile partly due to the high volatility in the securities markets generally and for telecommunications and technology companies in particular. The share price is also likely to be affected by the development in our market, our reported financial results and the expectations of financial analysts, as well as statements and market speculation regarding our future prospects. or the timing or content of any profit warning by us or our competitors. 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 other circumstances with adverse effects on our reputation. Announcements by our customers, competitors or us regarding capital spending plans of network operators. Financial difficulties for our customers. Awards of large supply or service contracts. Speculation in the press or investment community about the business level or growth in the market for mobile communications. Technical problems, in particular those relating to the introduction and viability of new network systems like LTE/4G. Actual or expected results of ongoing or potential litigation. Announcements concerning bankruptcy or investigations into the accounting procedures of other telecommunications companies, even if we are not involved. Our ability to forecast and communicate our future results in a manner consistent with investor expectations. currency fluctuations may adversely affect share value or value of dividends Because our shares are quoted in SEK on NASDAQ OMX Stockholm (our primary stock exchange), but in USD on NASDAQ (ADSs), fluctuations in exchange rates between SEK and USD may affect the value of your investment. In addition, because we pay cash dividends in SEK, fluctuations in exchange rates may affect the value of distributions if arrangements with your bank, broker or depositary call for distributions to you in currencies other than SEK. An increasing part of the trade in our shares is carried out on alternative exchanges or markets, which may lead to less accurate share price information on NASDAQ OMX Stockholm or NASDAQ, 116 Risk factoRs | Ericsson Annual Report 2009 Auditors’ report to the Annual General Meeting of the shareholders of telefonaktiebolaget LM ericsson (publ), organization number 556016-0680 and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the Company We have audited the annual accounts, the consolidated accounts, the in order to be able to determine the liability, if any, to the Company of any accounting records and the administration of the Board of Directors and the Board Member or the President and CEO. We also examined whether any President and CEO of Telefonaktiebolaget LM Ericsson (publ) for the year Board Member or the President and CEO has, in any other way, acted in 2009. (The Company’s annual accounts are included in the printed version contravention of the Companies Act, the Annual Accounts Act or the Articles on pages 10-116). The Board of Directors and the President and CEO are of Association. We believe that our audit provides a reasonable basis for our responsible for these accounts and the administration of the Company as opinion set out below. well as for the application of the Annual Accounts Act when preparing the The annual accounts have been prepared in accordance with the Annual annual accounts and the application of international financial reporting Accounts Act and give a true and fair view of the Company’s financial standards IFRSs as adopted by the EU and the Annual Accounts Act position and results of operations in accordance with generally accepted when preparing the consolidated accounts. Our responsibility is to express accounting principles in Sweden. The consolidated accounts have been an opinion on the annual accounts, the consolidated accounts and the prepared in accordance with international financial reporting standards, administration based on our audit. IFRSs, as adopted by the EU and the Annual Accounts Act and give a true We conducted our audit in accordance with generally accepted auditing and fair view of the group’s financial position and results of operations. The standards in Sweden. Those standards require that we plan and perform Board of Directors’ report is consistent with the other parts of the annual the audit to obtain reasonable assurance that the annual accounts and accounts and the consolidated accounts. the consolidated accounts are free of material misstatement. An audit We recommend to the annual general meeting of share holders that the includes examining, on a test basis, evidence supporting the amounts income statements and balance sheets of the Parent Company and the and disclosures in the accounts. An audit also includes assessing the Group be adopted, that the profit of the Parent Company be dealt with in accounting principles used and their application by the Board of Directors accordance with the proposal in the Board of Directors’ report and that and the President and CEO and significant estimates made by the Board of the members of the Board of Directors and the President and CEO be Directors and the President and CEO when preparing the annual accounts discharged from liability for the financial year. Stockholm, February 26, 2010 peter Clemedtson Authorized Public Accountant PricewaterhouseCoopers AB Ericsson Annual Report 2009 | Auditors’ report 117 Forward-looking statements This Annual Report includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events and expected operational and financial performance. The words “believe”, “expect”, “foresee”, “anticipate”, “assume”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative, and similar words are intended to help identify forward-looking statements. Forward-looking statements may be found throughout this document, but in particular in the chapters “Board of Directors’ Report” and “Information on the Company”, and include statements regarding: > > > > > > > > > our goals, strategies and operational or financial performance 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, our credit ratings and the development in the capital markets, affecting our industry or us; the expected demand for our existing as well as new products and services; the expected operational or financial performance of our joint ventures and other strategic cooperation activities; the time until acquired entities will be accretive to income; technology and industry trends including regulatory and standardization environment, competition and our customer structure; our plans for new products and services including research and development expenditures. Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, 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 whether and to what extent any of our forward-looking statements materialize include, but are not limited to: > > our ability to respond to changes in the telecommunications market and other general market conditions in a cost effective and timely manner; developments in the political, economic or regulatory environment affecting the markets in which we operate, including trade embargoes, changes in tax rates, changes in patent protection regulations, allegations of health risks from electromagnetic fields, cost of radio licenses for our customers, allocation of radio frequencies for different purposes and results of standardization activities; the effectiveness of our strategies and their execution, including partnerships, acquisitions and divestments; financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes in tax liabilities, credit risks in relation to counterparties, customer defaults under significant customer finance arrangements and risks of confiscation of assets in foreign countries; the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse 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 not sell at the rates or levels we anticipate; the product mix and margins of our sales; the volatility of market demand and difficulties to forecast such demand; 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 deliver quality products on time and in sufficient volumes, and risks related to concentration of proprietary or outsourced production in a single facility or sole source situations with a single vendor; our ability to successfully manage operators’ networks to their satisfaction with satisfactory margins; our ability to maintain a strong brand and good reputation and to be acknowledged for good corporate governance; our ability to recruit and retain qualified management and other key employees. > > > > > > > > > > > Certain of these risks and uncertainties are described further in “Risk Factors”. We undertake no obligation to publicly update or revise any forward-looking statements included in this Annual Report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation. 118 Forward-looking statements | Ericsson Annual Report 2009 Share information Stock exchange trading The Ericsson Class A and Class B shares are listed on NASDAQ OMX Stockholm. In the United States, the Class B shares are listed 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. In 2009, approximately 7 (20) billion shares were traded on NASDAQ OMX Stockholm and NASDAQ, of which about 74 (84) percent were on NASDAQ OMX Stockholm and about 26 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 71 percent on NASDAQ OMX Stockholm and increased by approximately 7 percent on NASDAQ as compared to 2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a 10:1 to 1:1 change in the ADS ratio from June 10, 2008 which affects the comparative figures above.) Share price trend In 2009, Ericsson’s total market value increased by about 13 (–22) percent to approximately SEK 215 billion (SEK 191 billion in 2008). The OMXSP Index on NASDAQ OMX Stockholm increased by 47 percent, the NASDAQ telecom index (CUTL) increased by approximately 48 percent and the NASDAQ composite index (CCMP) increased by approximately 44 percent. share data Earnings per share, diluted (SEK) Operating income per share (SEK) 2) Cash flow from operating activities per share (SEK) Stockholders’ equity per share, basic, end of period (SEK) P/E ratio Total shareholder return % Dividend per share (SEK) 1) 2) 2009 2008 2007 2006 2005 1.14 3.52 6.84 8.23 7.64 5.80 7.50 9.64 11.29 10.44 7.67 7.54 6.04 5.82 5.26 43.79 57 15 2.00 44.21 17 –20 1.85 42.17 11 –43 2.50 37.82 17 3 2.50 32.03 18 31 2.25 1) 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. 2) For 2009 and 2008 excluding restructuring charges. 3) For 2009 as proposed by the Board of Directors. All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency. share PriCes on nasdaQ omx stoCkholm (sek) 2009 2008 2007 2006 2005 Class A at last day of trading 1) Class A high for year (April 17, 2009) 1) Class A low for year (January 20, 2009) 1) Class B at last day of trading 1) Class B high for year (April 17, 2009) 1) Class B low for year (January 20, 2009) 1) 65.00 59.30 76.80 138.00 137.50 78.80 83.60 148.50 154.50 143.50 55.40 40.60 73.00 104.50 99.00 65.90 58.80 75.90 138.25 136.50 79.60 83.70 149.50 155.00 145.00 55.50 40.60 72.65 104.50 97.00 1) 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. share PriCe trend, nasdaQ omx stoCkholm, 2005–2009 (sek) share PriCe trend, nasdaQ omx stoCkholm, JanUarY–deCemBer 2009 (sek) 250 250 200 200 150 150 100 100 50 50 0 0 120 120 100 100 80 80 60 60 40 40 0 0 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Jan Jan Feb Feb Mar Mar Apr Apr May May Jun Jun Jul Jul Aug Aug Sep Sep Oct Oct Nov Nov Dec Dec Class B share, SEK Class B share, SEK OMXSP Index OMXSP Index Class B share, SEK Class B share, SEK OMXSP Index OMXSP Index Ericsson Annual Report 2009 | share information 119 offer and liSting detailS Principal trading market – nasdaQ omx stockholm – share prices 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 258 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 Period annual high and low 2005 2) 2006 2) 2007 2) 2008 2009 nasdaQ omx stockholm sek per sek per Class a share Class B share low high high low high low nasdaQ Usd per ads 1) 143.50 99.00 145.00 97.00 18.60 13.89 154.50 104.50 155.00 104.50 20.57 14.44 11.12 148.50 73.00 149.50 72.65 21.71 5.49 83.60 40.60 83.70 40.60 14.00 6.60 78.80 55.40 79.60 55.50 10.92 Quarterly high and low 2008 First Quarter Second Quarter Third Quarter Fourth Quarter 2009 First Quarter Second Quarter Third Quarter Fourth Quarter monthly high and low August 2009 September 2009 October 2009 November 2009 December 2009 January 2010 51.10 78.90 50.25 12.28 79.50 83.60 58.70 83.70 57.50 14.00 75.80 61.60 75.80 61.20 12.65 9.15 66.60 40.60 65.90 40.60 9.65 78.00 55.40 78.70 55.50 78.80 64.10 79.60 64.00 9.92 78.60 65.80 79.50 66.10 10.84 76.25 64.70 76.95 65.25 10.92 70.60 65.80 71.20 66.10 10.04 74.30 67.10 74.70 67.50 10.84 76.25 67.00 76.95 67.30 10.92 75.40 65.65 76.00 66.30 10.74 9.96 68.35 64.70 68.90 65.25 72.20 65.20 73.30 65.90 10.31 8.52 9.76 9.03 5.49 6.60 8.10 9.10 8.94 9.10 9.29 9.73 9.56 8.94 9.46 1) One ADS = 1 Class B share. 2) 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. share PriCe trend, nasdaQ, JanUarY–deCemBer 2009 (Usd) share tUrnover 2009 (million shares) 15 12 9 6 3 0 800 600 400 200 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. 120 share information | Ericsson Annual Report 2009 Changes in nUmBer of shares and CaPital stoCk 2005–2009 2005 2006 2007 2008 2008 2008 2009 2009 December 31 (no changes) December 31 (no changes) December 31 (no changes) June 2, reverse split 1:5 July 23, new issue. (Class C shares, later converted to Class B) December 31 June 8, new issue (Class C-shares, later converted to Class B) December 31 number of shares share capital 16,132,258,678 16,132,258,678 16,132,258,678 3,226,451,735 19,900,000 3,246,351,735 27,000,000 3,273,351,735 16,132,258,678 16,132,258,678 16,132,258,678 16,132,258,678 99,500,000 16,231,758,678 135,000,000 16,366,758,678 Share capital In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million. As of December 31, 2009, the Parent Company’s share capital was SEK 16,366,758,678 (16,231,758,678) represented by 3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5.00 (SEK 5.00). As of December 31, 2009, the shares were divided into 261,755,983 (261,755,983) Class A shares, each carrying one vote, and 3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2009, Ericsson held 78 978 533 Class B shares as treasury shares. ShareholderS As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository – CSD), of which 1,421 holders had a US address. According to information provided by Citibank, there were 242,229,433 ADSs outstanding as of December 31, 2009, and 5,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/ or nominees for the accounts of their customers. As of year end 2009, banks, brokers and/or nominees held ADSs on behalf of 240,915 accounts. According to information known at year-end 2009, almost 77 percent of our Class A and Class B shares were owned by institutions, Swedish and international. Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares. As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly. ten largest CoUntries, ownershiP toP exeCUtives and direCtors, ownershiP Percent of capital Sweden United States United Kingdom Norway Canada Japan Switzerland France Netherlands Denmark Other countries as of december 31, 2008 2009 47.9% 24.2% 7.9% 1.9% 1.2% 1.2% 1.1% 1.1% 0.8% 0.8% 11.9% 47.2% 25.0% 8.9% 1.3% 1.1% 1.3% 1.7% 1.1% 0.8% 0.8% 10.8% number of Class a shares number of Class B shares voting rights, percent Top executives and directors as a group (28 persons) 2,416 3,844,472 0.07 For individual holdings, see “Corporate Governance Report”. The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2009. Source: Capital Precision, December 31, 2009. The information from Capital Precision is based on the shareholders’ domicile or in case of funds, areas of operation. Ericsson Annual Report 2009 | share information 121 The following table shows share information, as of December 31, 2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 and 2007. largest shareholders, deCemBer 31, 2009 and PerCentage of voting rights, deCemBer 31, 2009, 2008 and 2007 identity of person or group 1) number Percentage of Class a of total Class a shares shares number Percentage 2007 of Class B of total Class voting rights voting rights voting rights percent B shares percent percent shares 2008 2009 102,664,038 76,680,600 19,800,000 1,510,466 15,270,077 Investor AB AB Industrivärden Handelsbankens Pensionsstiftelse Swedbank Robur Fonder AB Skandia Liv AB Pensionskassan SHB Försäkringsföreningen 12,672,000 BlackRock Advisors, Inc. 0 Brandes Investment Partners LP 0 AMF Pensionsforsakring AB 800,000 OppenheimerFunds, Inc. 0 0 Dodge & Cox, Inc. Gamla Livförsäkringsbolaget SEB Trygg Liv 4,675,919 2,335 Handelsbanken Fonder AB Norges Bank Investment Management 0 480,909 SEB Investment Management AB 27,199,639 Others 39.22 29.29 7.56 0.58 5.83 4.84 0.00 0.00 0.31 0.00 0.00 1.79 0.00 0.00 0.18 10.40 61,414,664 0 0 157,785,431 17,079,591 0 101,632,540 55,603,761 65,104,680 72,541,045 29,149,700 8,475,600 52,894,889 50,368,857 45,030,567 2,294,514,427 2.04 0.00 0.00 5.24 0.57 0.00 3.38 2.54 2.16 2.41 1.96 0.28 1.76 1.67 1.50 74.49 19.33 13.62 3.52 3.07 3.02 2.25 1.81 1.36 1.30 1.29 1.05 0.98 0.94 0.89 0.89 44.68 19.42 13.28 3.00 2.44 2.89 2.26 0.00 2.08 1.55 1.31 0.98 1.04 1.02 0.46 0.98 47.29 19.49 13.36 3.01 1.67 2.75 2.27 0.06 1.73 0.89 1.57 0.00 1.04 1.08 0.35 0.78 49.95 total 261,755,983 100.00 3,011,595,752 100.00 100.00 100.00 100.00 1) Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, December 31, 2007. earnings Per share, dilUted 2005–2009 (sek) stoCkholders’ eQUitY Per share, BasiC 2005–2009 (sek) 9 9 50 50 8.23 7.64 8.23 7.64 6 6 6.84 6.84 40 40 42.17 44.21 42.17 44.21 43.79 43.79 37.82 37.82 30 30 32.03 32.03 3 3 3.52 3.52 0 0 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 1.14 1.14 20 20 10 10 0 0 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 122 share information | Ericsson Annual Report 2009 MARKET TRENDS Telecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level. With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low- usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the subscription dilution. Thus the total voice traffic continues to grow. Mobile broadband is fast becoming the main growth driver for operators and equipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and driving the need for ever greater bandwidth and data speeds. The industry focus is shifting from connecting places and people to connecting devices and applications. There are many devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to the majority of people. Particularly in the case of machine-to-machine communications, it will also enable applications for a variety of industries and uses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the capability and scope of today’s networks. We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect ericsson to benefit from this as network operators and service providers: > > > > > Accelerate the transition from legacy technologies to IP- based technologies. Respond to rising demands for services that aid economic, societal and environmental development. Invest in mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport. Prioritize suppliers that combine technology with services for lower total cost, faster time-to-market and reduced project risks. Outsource more of their network-related activities and operations for increased flexibility and focus more on the consumer experience. These are all areas where the Company is well positioned and continues to invest heavily. ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-ericsson and Sony ericsson. VIsIOn OF 50 BIllIOn COnneCtIOns ICt BOOsts GdP GrOWtH s n o i t c e n n o c n o i l l i B 50 40 30 20 10 0 Turning point for mobile communication THINGS 1980 1990 2000 2010 2020 PEOPLE PLACES i s t n o p e g a t n e c r e P 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.4 1.2 1.1 0.8 0.75 0.7 0.6 0.45 Fixed Voice Mobile Voice Internet Broadband High-income economies Low-and middle-income economies GDP growth for every 10 percent penetration increase ericsson Annual Report 2009 | market trends 123 mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels – suggesting the possibility of increased spending once the economy recovers. At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers. The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which ericsson has a market- leading position. ICt, especially mobile, positively affects GdP levels as well as the environment even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2 emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more. A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks. mobile communications market Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets. Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and ericsson estimates, the mOBIle sUBsCrIPtIOns By system standard mOBIle sUBsCrIPtIOns PenetratIOn By reGIOn ) 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 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 ) n o i l l i m ( s n o i t p i r c s b u S d e t r o p e R 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 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 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 LTE GSM/GPRS/EDGE WCDMA/HSPA/TD-SCDMA CDMA Latin America North America Asia Pacific Central and Eastern Europe, Middle East and Africa Western Europe 124 market trends | ericsson Annual Report 2009 Fixed and mobile broadband main market drivers The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years. These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service. However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest. The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption. mobile broadband creates bottlenecks in parts of the network The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network. Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies. Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used – a change from TDM/STM/ATM structures to IP/ethernet. ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/ethernet products. Convergence and network transformation in focus Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services. ericsson has developed a network architecture that meets consumer desires and operator requirements for converged BrOadBand sUBsCrIPtIOns sUBsCrIBer traFFIC In mOBIle aCCess netWOrks ) 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 2008 2009 2010 2011 2012 2013 2014 2015 s e t y b a x E y l r a e Y 50 40 30 20 10 0 n o s s c i r E : e c r u o S 2008 2009 2010 2011 2012 2013 2014 2015 n o s s c i r E : e c r u o S Mobile broadband: Mobile handheld (the vast majority), dongles, embedded modules. Fixed broadband: DSL, FTTx, cable modems. Mobile PC – Mobile data traffic generated by PCs using cellular access Mobile handheld – Mobile data traffic generated by handheld terminals Mobile voice ericsson Annual Report 2009 | market trends 125 services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution. ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (entrisphere) and IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration. the internet is changing tV The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance. Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition. Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL- based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access. mobility is changing the internet Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go. Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets. The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use ericsson’s mobile broadband technology. FIxed BrOadBand sUBsCrIPtIOns By teCHnOlOGy FIxed data traFFIC – last mIle aCCess 600 600 500 500 ) 1,200 1,200 1,000 1,000 400 400 n o i l l i m ( 300 300 ) n o i l l i m ( s n o i t p i r c s b u S s n o i t p i r c s b u S 200 200 100 100 0 0 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 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 800 800 600 600 s e t y b a x E y l r a e Y 400 400 200 200 0 0 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 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 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 DSL DSL Cable Cable Fiber Fiber IPTV IPTV 126 market trends | ericsson Annual Report 2009 Operator consolidation and network sharing Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In europe, mergers continue along with other collaborations such as network sharing and outsourcing of 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). Western european- based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far. Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate. Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks. ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies. Opportunities in Professional services Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like ericsson via managed services. ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations. Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience. The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network. More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number arCHIteCtUre COnCePt-netWOrk transFOrmatIOn CaPex and OPex sHare OF OPeratOr reVenUes 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 Service Network Core Network Fixed broadband access Mobile broadband access BEFORE NOW Connectivity to any device 2009 Opex; excluding network operations Opex; network operations part Capex; excluding equipment Capex; equipment part ericsson Annual Report 2009 | market trends 127 security of unlicensed phones, but enforcement is far less strict in most other emerging markets. Sony ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market. effects of the macro-economic slowdown While not a trend, the economic recession affected ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions. The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession. of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance. replacement rates affect mobile handset sales With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales. Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones. In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national mOBIle PHOne sHIPments 100 80 60 40 20 0 2006 2007 2008 2009 Replacements New subscribers 128 market trends | ericsson Annual Report 2009 120 100 80 60 40 20 0 120 100 80 60 40 20 0 103.4 96.6 74.8 51.2 42.3 2004 2005 2006 2007 2008 103.4 96.6 74.8 51.2 42.3 2004 2005 2006 2007 2008 9%XX% 23% 2008 17% 2008 41% 9%XX% 23% 2008 17% 2008 41% 7% 8% 27% 7% 8% 27% 9%XX% 23% 2008 17% 2008 41% 7% 8% 27% 120 100 80 60 40 20 0 103.4 96.6 74.8 51.2 42.3 2004 2005 2006 2007 2008 NETWORK SALES OF NETWORK SALES BY MULTIMEDIA SALES MULTIMEDIA SALES TOTAL REGION (SEK billion and percent) OF TOTAL BY REGION (SEK billion and percent) 9% 23% 2008 7% 8% 17% 2008 68% 27% XX% 9% 41% 23% 41% 2008 17% 2008 7% 8% 27% Networks Professional Services Multimedia Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America Networks Professional Services Multimedia Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America NETWORK SALES OF NETWORK SALES BY TOTAL REGION (SEK billion and percent) 9% 23% XX% 2008 Networks Professional Services Multimedia 41% 17% 2008 7% 8% 27% Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America NET SALES (SEK billion) SALES BY REGION 2008 Ericsson net sales (SEK billion) and change year-over-year Percent ot total sales 51.6 7% 7% 7% 208.9 179.8 187.8 153.2 132.0 2004 2005 2006 2007 2008 17.9 23 34% 25% –2% 2008 16% 53.3 9% 53.1 Western Europe Central & Eastern Europe, Middle East and Africa Asia Pacific Latin America North America 5% 4% 4% 4% 4% 3% 3% India C hina U nited States Italy Ind onesia S w eden Brazil Japan S pain U nited King d o m information on the company Company history and development innovating to empower people, business and society Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment. Today, Ericsson is a leading provider of communications equipment, professional services and multimedia solutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment. More than 40 percent of all mobile traffic goes through Ericsson equipment. We invest heavily in R&D and promote standardization and open systems. We have a long history of innovation and pioneering future telecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios with approximately 25,000 patents. 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 access information whenever and wherever they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is Contents Company history and development ..................................... 129 General facts on the Company ......... 130 Market environment .......................... 132 Segment overview ............................ 134 a key enabler for a sustainable and prosperous society and for bridging the digital divide. > > > Our strategy to realize our vision and reach our goals is to: Excel with a leading portfolio in mobile and converged networks. Expand in services by enabling world-class operations and network evolution. Extend in multimedia, with leading applications and business support solutions. Successful execution of the strategy is built on (1) close customer relations; (2) technology and services leadership and (3) operational excellence in all we do. the mobiLe inDUStry haS eVoLVeD (2000–2009) ericSSon haS eVoLVeD 700 million subscriptions 4.5 billion subscriptions Equipment-led business Services-led business Voice and SMS Internet and multimedia Many competitors Few competitors Telecom Hardware IP Software Hardware Software Equipment Services culture and competence remain key Ericsson Annual Report 2009 | information on the company 129 close customer relations The foundation for our business is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and technology needs. We are a major supplier to most of the world’s leading mobile operators and many leading wireline operators. We believe that our ability to offer superior end-to-end solutions and services makes us well positioned to assist operators with their network development and operations. With our significant scale advantage, custom-tailored end-to-end solutions and local presence, we are able to serve as a true partner – providing fast time-to-market and competitive total cost of ownership – helping our customers reach their business objectives. Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions. technology and services leadership Innovation is an important element of our corporate culture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies. By early involvement in creating new standards we are often first to market with new solutions – a distinct competitive advantage. We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America. Within our ambitious R&D program, we have approximately 18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 27 billion (excluding SEK 6 billion restructuring charges) or 13 percent of sales. Most of this is invested in product development, of which the greater part is in network infrastructure. We have continued to invest in strategically important areas of broadband access, converged core networks, 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. Through many years of development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR). As of December 31, 2009, we held approximately 25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and LTE. We also hold essential patents for many other areas, e.g. IMS, Voice-over- IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet. Our intellectual property rights are valuable business assets. We license these rights to many other companies (infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers) in return for royalty payments and/or access to their intellectual property rights. We believe that we have access to all essential patents that are material to our business in part or in whole. For more information, please see also Risk Factors, “Market, Technology and Business Risks”. General faCts on the Company Legal name of the parent company: Telefonaktiebolaget LM Ericsson (publ) organization number: 556016-0680 Legal form of the parent company: A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. country of incorporation: Sweden. Date of incorporation: The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB. Domicile: Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden. telephone number: +46 10 719 0000 Website: www.ericsson.com agent in the US: Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000. Shares: Ericsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ. parent company operations: The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly 130 information on the company | Ericsson Annual Report 2009 We continuously focus on improving processes, support systems and our ways of working. Our mission, to empower people, business and society, requires strong change capabilities and efficient and effective processes, delivering innovative, high-quality solutions with low cost of ownership. The Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this - a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape. To further increase flexibility and efficiency and reduce cost, we have several partnerships with strong players in outsourced manufacturing, IT services and certain areas of R&D and services. Examples are: Flextronics, HP, IBM and Tieto. operational excellence in all we do Ericsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes. > Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers. The main operational functions/processes are: Business units: product management product/service and solution development sourcing, manufacturing and supply of products sales of spare parts and repair. Market units: marketing and sales service delivery customer support . > > > > > > > Operational excellence is an important competitive advantage. and we focus on three areas: > > > Speed – to reduce time to market and working capital and to increase flexibilty and responsiveness. Scale – to leverage our market-leading position, enabling us to afford developing best-in-class solutions. Skills – to work according to standardized processes with highly educated employees and partners. of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis. Subsidiaries and associated companies: For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements – Note P9, “Investments”. In addition to our joint ventures Sony Ericsson and ST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements please see Risk Factors, “Market, Technology and Business Risks”. Documents on display: We file annual reports and other information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations. You may order any of these reports from their website www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports. filing in the US: Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec. gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database. Ericsson Annual Report 2009 | information on the company 131 market environment Ericsson has evolved with the changes in the industry: > > > from equipment driven, to services driven, with close to 40 percent of sales and almost 50 percent of employees now related to services from hardware to software, with more and more of the functionality in our solutions being software-based from narrow-band voice to all-IP broadband, with strong focus on converged networks and services capabilties. customers We supply equipment, integrated solutions, multimedia applications and services to almost all major operators globally. We derive most of our sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 425 network operators, the 10 largest customers account for 42 (42) percent of our net sales and the 20 largest customers account for 57 (61) percent of our net sales. Our largest customer accounted for approximately 5 (6) percent of sales in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks” Our customers have different needs and demands when interacting with us: > > > > Strategy and business model development in an increasingly complex environment. Network expansion and evolution in response to subscriber and traffic growth and new technology. Support, training and spare parts. Efficient operations to keep operating expenses competitive. Our own market units are our primary sales channel. They perform most of the sales where the customer is a fixed or mobile telecommunications operator. > > > For certain products or solutions we also use other channels: TV solutions are sold through other equipment vendors as resellers as well as directly by business unit Multimedia to cable-TV operators. Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers. For newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated. A central IPR unit is managing sales of licenses to equipment vendors or others who wish to use our patented technology. Our two joint ventures are the channels to the handset and mobile platform/chipset markets. > > Our sales to network operators is normally based on multi-year frame agreements after an initial tender with a system and supplier selection. During the frame agreement, equipment, software, services and spare parts are called off according to price lists. On a highly selective basis we occasionally provide customer financing. The vast majority of customer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of services, such as training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations. We have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way. conVerGinG inDUStrieS teLecom’S roLe in Society GroWS (2009–2050) Media/content Internet AN ALL-COMMUNICATING WORLD Telecom Devices Devices 132 information on the company | Ericsson Annual Report 2009 Broadband everywhere – society’s new highways Internet goes mobile Communication for all – bridging the digital divide Broadband from “installation” to “deployment” Sustainability in focus for ICT As this segment grows, we expect to see additional competitors emerge, possibly as a result of network sharing or of network operators attempting to expand their business. In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered. Competitors include many of the traditional communication equipment and IT suppliers as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson. Within the handset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, LG, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our joint venture with SONY Corporation creates a distinctive competitive advantage by combining our telecom expertise with their media, content and consumer equipment know-how. We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada. For more information on competitive risks, see Risk Factors, “Market, Technology and Business Risks”. Seasonality Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the average seasonal effect on sales for the five-year period 2005 through 2009. moSt recent 5-year aVeraGe SeaSonaLity first Second fourth quarter quarter quarter quarter third Sequential Change Share of annual sales –20% 22% 13% 25% –6% 23% 29% 30% competitors In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Our most significant competitors include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services. We believe the most important competitive factors in this industry include; existing customer relationships, superior network performance and subscriber experience, technological innovation, product design and cost, and the ability to scale/ upgrade/migrate existing network investments, and the systems integration capability. Competition in the Professional Services segment includes not only many of the suppliers mentioned above, but also large companies from other industry sectors, such as Accenture, HP/ EDS, IBM, and several India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis. Anything that benefits from being connected will be connected. Ericsson Annual Report 2009 | information on the company 133 seGment overview operating segments Ericsson is a vendor of solutions and services to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets. When determining our operating segments, we have looked at which markets and what type of customers our products and services aim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments: > > > > > Networks Professional Services Multimedia Sony Ericsson ST-Ericsson Segment Networks Networks includes products/solutions for: > > > > > wireless and wireline access IP core networks transmission/backhaul network management network rollout services In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales. Wireless and wireline access Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience. We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions. ip core network (switching, routing and control) Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity. transmission/backhaul Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions. network management Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services, such as: configuration, performance monitoring, security management, conVerGeD netWorK architectUre eration and ss Sup p ort p O e in s u B Customized Services ort p s n a r T Standard Services Multi Access Edge T r a n s p ort Wireline Access Radio Access B O u s i p e n r e a s t i s o S n u a n d p p o r t teChniCal milestones > > > > > > > 1878 Telegraph to telephone 1923 Manual switching to automatic switching 1981 Fixed communications to mobile communications 1998 Integration of voice and data in mobile networks 2001 Launch of WCDMA/3G networks in Western Europe 2006 Launch of HSPA mobile broadband networks globally 2009 Mobile broadband traffic gains momentum and first LTE network launched 134 information on the company | Ericsson Annual Report 2009 inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of managing also multi-vendor networks. network rollout services Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our capabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers. Sourcing, manufacturing and supply and availability of materials Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc. For manufacturing of products we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. We produce certain types of components in-house, such as power modules and cables. The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand. Where possible, we rely on alternative supply sources for the purchased elements of our products. This avoids sole source situations and secures sufficient supply at competitive prices. When selecting a new supplier, we try to ensure that our technical standards and other requirements are met, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not foresee any supply constraints to meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a limited effect on our total cost of goods sold. For more information related to sourcing, see Risk Factors, “Market, Technology and Business Risks”. We continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary manufacturing and assembly facilities” summarizes where we have major sites as well as the total floor space at year-end. In Sweden, the majority of the floor space within our production facilities is used for node assembly and verification. 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 27 percent of total sales in 2009, up from 23 percent in 2008. managed services We are the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry: > > > > Network design and planning. Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US. Field operations and maintenance of sites. Shared solutions; e.g. managed backhaul or hosting of platforms like pre-paid or real time billing/charging. primary manUfactUrinG anD aSSembLy faciLitieS ericSSon manaGeD SerViceS 2009 2008 Sites thousands Sites thousands Sites thousands of sq meters of sq meters of sq meters 2007 Strategy Design Plan Build Operate Field Operations Network Operations Sweden China Estonia Italy Brazil India USA Other 8 4 1 2 1 1 – – 224.7 46.4 26.6 20.1 23.3 13.6 – – 8 4 – 2 1 1 1 1 226.0 38.5 – 20.1 18.0 9.0 5.0 0.3 8 4 – 2 1 1 1 1 total 18 354.7 18 316.9 18 244.3 33.9 – 20.1 25.9 6.4 5.0 0.3 335.9 Business Support System Service Network Core Network Trans Network Access Network Ericsson responsibility Operator responsibility Ericsson Annual Report 2009 | information on the company 135 Systems integration Operators can minimize risk by engaging Ericsson to: > > > integrate equipment from multiple suppliers manage technology change programs design and integrate new solutions. More and more operators who introduce multimedia services or face challenging technology transformations ask us to serve as prime integrator, ensuring successful deployment of the total solution. consulting With expertise in business, strategy and technology, our consultants support customers in decision-making, planning and execution in order 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. education We provide our customers with tailored education programs to ensure their employees have the skills and competences necessary for managing today’s and tomorrow’s complex technologies. customer support Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the world with over one billion customers in total. Segment Multimedia Sales in segment Multimedia were 6 of total sales excluding mobile platforms and PBX business. consumer and business applications We provide our operator customers with multimedia solutions for the consumer and business markets. For the consumer segment, we offer Rich Communication Suite (RCS), mobile TV solutions, messaging, a social media portal, and location-based services. In the business communication segment, we provide converged, fixed-mobile, business communication solutions for enterprise needs. Ericsson Business Communication Suite (BCS) is a network operator application for business users. multimedia brokering Ericsson Multimedia Brokering offers a range of payment, messaging and location-based services solutions: e.g. IPX Payment, IPX Messaging and IPX Subscriber Information services. We offer multimedia brokering solutions, to help network operators monetize their network assets by facilitating payment and distribution of content through interconnection of network operators with content and media companies, information and search services, consumer brands and a variety of enterprises. Service delivery and provisioning Our service delivery platforms and provisioning solutions enable operators and service providers to create, sell, and manage multimedia services and multi-play offerings. By combining products, solutions, systems integration and business consulting into one offering, we create a multimedia marketplace for each customer’s specific needs. a new player ST-Ericsson enters the arena as a powerful driving force in the wireless semiconductor industry. Find out more at www.ericsson.com 136 information on the company | Ericsson Annual Report 2009 revenue management We provide revenue management solutions, enabling new business models, utilizing our unique combined competence in prepaid and postpaid. Our convergent charging and billing offering helps operators reduce cost and increase revenues by creating one unified solution to manage all their customers and services. tV We have an industry-leading IMS-enabled middleware in the IPTV market, and also offer a full system integration and solutions delivery role. We have strengthened our compression market leadership through the launch of the next-generation encoding platforms. In the Video on Demand and Content Management area, we extended our product range. Segment Sony Ericsson Sony Ericsson delivers innovative and feature-rich mobile phones, and accessories, 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. It forms an essential part of our end-to-end capability for mobile multimedia services. Sony Ericsson’s 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”. Segment ST-Ericsson Ericsson and STMicroelectronics formed ST-Ericsson as a 50/50 joint venture in February 2009. The combined company has one of the industry’s strongest product offerings in semiconductors and platforms for mobile devices for GSM/ in toUCh in tUne China’s largest social network, Kaixin001, goes mobile, connecting 50 million people anytime, anywhere. Find out more at www.ericsson.com EDGE, WCDMA/HSPA and TD-SCDMA as well as LTE. ST-Ericsson is a leading supplier to the top handset vendors, and its products and technologies enable more than half of all handsets in use today. ST-Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement. Please see also Notes to the Consolidated Financial Statements – Note C3, “Segment Information”. Geographical areas Sales are reported in five geographical areas; Western Europe, CEMA (Central and Eastern Europe, Middle East and Africa), Asia Pacific, Latin America and North America. The areas have different characteristics in terms of penetration of fixed and mobile telephony, network traffic, sophistication of services, average country GDP and other economic factors. The distribution of sales between the areas mitigates volatility, as a decrease in one area is often offset by an increase in another. No individual country accounts for more than 10 percent of sales. However, due to our improved market position there, the US is expected to account for between 10 and 15 percent of sales next year. SaLeS per reGion anD SeGment 2009 networks professional Services multi- media SeK billion Western Europe CEMA 1) Asia Pacific Latin America North America total 23.8 32.7 50.5 13.0 17.1 137.1 18.3 12.9 12.2 5.9 6.7 56.1 total 44.6 50.7 65.8 20.0 25.4 2.4 5.1 3.1 1.1 1.6 13.3 206.5 1) Central and Eastern Europe, Middle East and Africa. Ericsson Annual Report 2009 | information on the company 137 remuneration report the Remuneration Committee advises the Board of Directors on an ongoing basis on the remuneration of Group management. this includes fixed salaries, pensions, other benefits and short-term and long-term variable remuneration, all in the context of pay and employment conditions throughout ericsson. the Remuneration Committee also approves variable remuneration outcomes, prepares remuneration related proposals for Board and shareholder approval and develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration. Remuneration 2009 During 2009, as the financial crisis hit the world with its full force, there was an increased public focus on compensation and benefits matters. In its work the Remuneration Committee has followed the debate closely. The Committee met seven times during the year. The winter meetings were primarily dedicated to reviewing and implementing a zero salary increase for senior management, the vesting of variable compensation awards and proposals to shareholders at the Annual General Meeting (AGM). In 2009 the policy for senior management remuneration and the Long-Term Variable share-based plans were brought to the AGM with no major changes proposed. During the summer the Committee reviewed short-term targets to ensure that they remained appropriate and challenging. In the fall it began the cycle again with a review of the remuneration strategy, the variable compensation plans and levels of fixed compensation. As is illustrated below, the Committee has also considered market trends, existing and potential remuneration risks, target setting, its working arrangements and investor consultations. annual CyCle of the RemuneRation Committee’s woRk Contents Remuneration 2009 .......................... 138 The Remuneration Committee .......... 139 Remuneration policy ......................... 139 Key elements of remuneration .......... 140 Activities during the second half of 2009 resulted in an updated remuneration policy being brought to the AGM which better demonstrates the basic remuneration principles within Ericsson. This chapter outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best practice, with specific references to senior management. To begin with, the work of the Remuneration Committee and our remuneration policy are explained, followed by descriptions of plans and approaches. More details of the remuneration of senior management and Board members’ fees can be found in the Notes to the Consolidated Financial Statements – Note C29, “Information regarding Members of the Board of Directors, Management and Employees” (“Note C29”). Senior management comprises the Group Management Team, including the CEO, and will hereafter be referred to as “Group Management”. FALL • Review of committee working arrangements • Issues, trends and market practice analyses • Review of Executive Performance Stock Plan target achievement and vesting decision • Review of risks associated with remuneration • Review of remuneration policy, package construction and design of individual elements SUMMER • Review of appropriateness of targets 138 RemuneRation RepoRt | Ericsson Annual Report 2009 WINTER • Salary review for Group Management and other senior executives • Review of target achievements for Short-Term Variable plan, vesting and target setting decisions • Target setting for Long-Term Variable plan • Proposals for AGM • Communications to investors, including Annual Report • Review of total remuneration outcomes and costs SPRING • Annual General Meeting of shareholders summaRies of 2009 shoRt- anD lonG-teRm VaRiaBle RemuneRation what we call it what is the objective? what is it? who participates? how is it earned? short-term: Remuneration delivered over 12 months or less Fixed salary Fixed remuneration paid at set times Attract and retain employees, delivering part of annual remune- ration in a predictable format Short-Term Variable compensation (STV) A variable plan that is measured and paid over a single year Local and Sales Incentive Plans Tailored versions of the STV Align employees with clear and relevant targets, providing an earnings opportunity in return for variable cost and performance As for STV, tailored for local or business requirements, such as sales long-term: Remuneration delivered over 3 years or more Stock Purchase Plan (SPP) All-employee stock- based plan Reinforce a “One Ericsson” and align employees’ interests with those of shareholders All employees Managers, including Group Management Most employees All employees are eligible Key Contributor Retention Plan (KC) Share-based plan for selected individuals Recognize, retain and motivate key contributors for performance, critical skills and potential Up to 10 percent of employees Market appropriate levels set accor- ding to position and evaluated according to individual performance Achievements against set targets. Reward can increase to up to twice the target level and decrease to zero, depending on performance Similar to STV. All plans have maximum award and vesting limits Buy one share and it will be matched by one share after 3 years if still employed If selected, get one more matching share in addition to the SPP one Executive Performance Share-based plan for Stock Plan (EPSP) senior executives Remuneration for long-term commitment and earnings performance Senior executives, including Group Management Get up to 4, 6 or, for CEO, 8 further matching shares to the SPP one for EPS growth performance the Remuneration Committee The Remuneration Committee’s work is the foundation for the governance of our remuneration processes together with our internal systems and audit controls. The Committee is chaired by Michael Treschow and its other members are Nancy McKinstry, Börje Ekholm and Karin Åberg. Karin Åberg replaced Monica Bergström after the 2009 Annual General Meeting. All the members are non-executive directors, independent (except for the employee representative) as required by the Swedish Code of Corporate Governance and have relevant knowledge and experience of remuneration matters. The Company’s General Counsel acts as secretary to the Committee. The Chief Executive Officer, the Senior Vice President Human Resources & Organization and the Vice President Compensation & Benefits attend the Remuneration Committee meetings by invitation and assist the Committee in its considerations, except when issues relating to their own remuneration are being discussed. The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advise the Committee. Gerrit Aronson provided no other services to the Company during 2009. The Remuneration Committee is also provided with national and international pay data collected from external survey providers and can call on other independent expertise, should it so require. The Chairman continues to ensure that contact is maintained, as necessary and appropriate, with principal shareholders on the subject of remuneration. The purpose and function of the Remuneration Committee will continue going forward and its terms of reference can be found on the Ericsson website (www.ericsson.com). These terms of reference, together with the remuneration policy, are reviewed annually in light of matters such as changes to corporate governance best practice or changes to accounting, legislation, political opinion or business practices among peers. This helps to ensure that the policy continues to provide Ericsson with a competitive remuneration strategy. The policy for senior management remuneration is, in accordance with Swedish law, brought to shareholders annually for approval. Remuneration policy Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. Our remuneration policy together with the mix of remuneration elements are designed to reflect these remuneration principles by creating a balanced remuneration package. The policy for 2009 can be found in Note C29. The proposed resolution for the 2010 AGM can be found in the Board of Directors’ Report and, together with resolutions relating to the long-term variable remuneration plans, in the Notice of Annual General Meeting on our website. The auditors’ opinion on how we have followed our policy during 2009 is also posted on the website. Ericsson Annual Report 2009 | RemuneRation RepoRt 139 shoRt-teRm VaRiaBle RemuneR ation stRuC tuRe CEO 2009 CEO 2010 Average Group Management 2009 1) Average Group Management 2010 1) short-term Variable remuneration as percentage of fixed salary target maximum actual paid for 2009 level level 40% 40% 31% 34% 80% 80% 62% 68% 39.5% – 39.0% – percentage of short-term Variable remuneration opportunity Group financial targets financial targets unit/functional non-financial targets 90% 90% 62% 73% 0% 0% 23% 16% 10% 10% 15% 11% 1) Excludes CEO – differences in target and maximum levels from year to year are due to changes in the composition of Group Management key elements of remuneration For Group Management, total remuneration consists of fixed salary, short-term and long-term variable remuneration, pension and other benefits. If the size of any one of these elements is increased or decreased, at least one other element has to change where the competitive position should remain unchanged. Variable remuneration At Ericsson we strongly believe that, where possible, we should encourage variable compensation. First and foremost this aligns employees with clear and relevant targets but it also enables more flexible payroll costs and emphasizes the link between performance and pay. All variable remuneration plans have maximum award and vesting limits. Fixed salary Fixed salaries are set to be competitive within an individual’s home market. When setting fixed salaries the Remuneration Committee considers the impact on total remuneration, including pension and associated costs. The absolute levels are determined by the size and complexity of the position and the year-to-year performance of the individual. Together with other elements of remuneration, Group Management salaries are subject to an annual review by the Remuneration Committee, which considers external pay data to ensure that levels of pay remain competitive and appropriate to the remuneration policy. For 2009 it was decided that it was strategically appropriate not to increase fixed salaries for Group Management and other senior executives. short-term Variable remuneration The annual variable remuneration is delivered through cash- based programs. Specific business targets are derived from the annual business plan approved by the Board of Directors and, in turn, defined by the Company’s long-term strategy. Ericsson strives to grow faster than the market with best-in-class margins and strong cash conversion and therefore the starting point is to have these as three core targets: > > > Sales Growth Operating Income Cash Flow For Group Management, targets are thus predominantly financial targets at either Group level or at the individual unit level and may also include operational targets like customer satisfaction and employee motivation. Targets are cascaded to all managers and will vary depending on the specific position. fixeD salaRy, shoRt-teRm anD lonG-teRm VaRiaBle RemuneRation as peRCent of total taRGet RemuneRation shoRt-teRm VaRiaBle RemuneRation payouts anD taRGet leVels 100 80 60 40 20 0 CEO 2009 CEO 2010 Average GMT excl. CEO Long-Term Variable Target Short-Term Variable Target Fixed salary Max Target 2005 2006 2007 2008 2009 CEO Average Group Management excluding CEO 200 175 150 125 100 75 50 25 0 96.6 140 RemuneRation RepoRt | Ericsson Annual Report 2009 All variable remuneration targets have to be objective and measurable and typically refer to a result that is achieved on a collective basis. Each target is, in accordance with our strict governance instructions, defined in a “target specification” and measured over the calendar year. The target setting process is fully integrated with the strategy work and target levels are tested against plans and forecasts up until they are finalized around the turn of the year. The Board of Directors and the Remuneration Committee decide on all Ericsson Group targets, which are cascaded to unit-related targets throughout the Company, always subject to a two levels of management approval process. The Remuneration Committee monitors the appropriateness and fairness of Group target levels throughout the performance year and has the authority to revise them should they cease to be relevant, stretching and/or enhance shareholder value. During 2009, approximately 65,000 employees participated in short-term variable plans. Of these 6,000 were in the global Short-Term Variable remuneration plan (“STV”) for management, including Group Management, and 4,000 were in the global Sales Incentive Plan. Local plans vary in design according to local competitive practice. The chart on the previous page illustrates how payouts to Group Management have varied with performance over the past five years. long-term Variable remuneration Share-based long-term variable remuneration plans are submitted each year for approval by shareholders at the Annual General Meeting. All long-term variable remuneration plans are designed to form part of a well-balanced total remuneration and span over a minimum of three years. As these are variable plans, outcomes are unknown and rewards depend on long-term personal investment, corporate performance and resulting share price performance. During 2009, share-based remuneration was made up of three different but linked plans: The all-employee Stock Purchase Plan, the Key Contributor Retention Plan and the Executive Performance Stock Plan. the stock purchase plan The all-employee Stock Purchase Plan is designed to offer, where practicable, an incentive for all employees to participate, reinforcing a “One Ericsson” aligned with shareholder interests. Employees can save up to 7.5 percent (CEO 9 percent) of gross fixed salary for purchase of class B shares at market price on the NASDAQ OMX Stockholm or ADSs on NASDAQ (contribution shares) over a twelve-month period. If the contribution shares are retained by the employee for three years after the investment and 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. The plan was introduced in 2002 and employees in 94 countries participate. In December 2009 the number of participants was in excess of 18,000 or approximately 25 percent of eligible employees. 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 and hence the matching spans over two financial years and two tax years. the key Contributor Retention plan The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to give individuals recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, operating units around the world are given quotas that total no more than 10 percent of employees world-wide. Each unit nominates individuals that have been identified according to performance, critical skills and potential. The nominations are calibrated in management teams locally and reviewed by both local and corporate Human Resources to ensure that there is a minimum of bias and a strong belief in the system. Participants selected obtain one extra matching share in addition to the one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve-month program period. The plan was introduced in 2004. the executive performance stock plan The Executive Performance Stock Plan was also first introduced in 2004. The plan is designed to focus management on driving earnings and provide market competitive remuneration. Senior executives, including Group Management, are selected to obtain up to four or six extra shares (performance matching shares). This is in addition to the one matching share for each contribution share purchased under the all employee Stock Purchase Plan and the performance matching is subject to the fulfillment of an Earnings per Share (EPS) performance target. For the programs since 2006, the CEO is 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 use of average annual EPS growth with challenging and stretching targets as a performance measure has reflected Ericsson’s ongoing strategy of adding shareholder value through the long-term improvement of profitability. The Remuneration Committee has been satisfied that the use of an EPS performance target has been preferable to other measures, including those that reflect relative performance. However, alternative measures are being considered for future plans. 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. The Remuneration Committee analyzes the financial results against those of competitors in the industry. Ericsson Annual Report 2009 | RemuneRation RepoRt 141 RemuneRation leVels as at the BeGinninG of 2009 (sek) CEO Average Group Management 1) 2009 fixed salary 15,750,000 3,815,272 2009 target short-term Variable 6,300,000 1,234,359 2009 target total target total target long-term Remuneration Remuneration 2008 Variable 2) 2009 3) 7,087,500 1,144,581 29,137,500 6,194,212 29,137,500 6,620,636 1) Excludes CEO 2) Excludes personal investment from net income of up to 7.5% of gross fixed salary (9% CEO). Stock Purchase Plan matching shares plus half the maximum number of matching shares under the Executive Performance Stock Plan 3) The cost of pensions and other benefits are shown in Note C29. Swedish vacation pay costs are shown under Salary in Note C29 Benefits and terms of employment Pension benefits follow the competitive practice in the employee’s home country and may contain various supplementary plans, in addition to any national system for social security. Where possible, pension plans are operated on a defined contribution basis. Under these plans, Ericsson pays contributions into a plan but does not guarantee the ultimate benefit, unless local regulations or legislation prescribe that defined benefit plans that do give such guarantees have to be offered. For the CEO and other members of Group Management employed in Sweden a supplementary pension plan is applied in addition to the occupational pension plan for salaried staff on the Swedish labor market (ITP). The pension age is according to local practice, for Group Management normally 60 years. The pensionable salary for Group Management in Sweden consists of the annual fixed salary including vacation pay and the target value of the Short-Term Variable remuneration. For members of Group Management who are not employed in Sweden similar market competitive pension arrangements apply. Other benefits, such as company car and medical insurance, are also set to be competitive in the local market. Group Management may not receive loans from the Company. Group Management members have a mutual notice period of up to six months. Upon termination of employment by the Company, severance pay can amount to up to 18 months fixed salary. Total remuneration When we consider the remuneration of an individual, it is the total remuneration that matters. We first consider the total annual cash compensation, looking at target level of short-term variable compensation plus fixed salary. We then add target long-term variable remuneration to get total target remuneration RemuneR ation outComes 2009 (sek) and, finally, pension and other benefits to arrive at the total package. The remuneration costs for the CEO and Group Management are reported in Note C29 but as those numbers reflect costs recognized in the income statement rather than the remuneration offered or the amounts received, we outline in the tables above and below how the total remuneration adds up in its structure and the alternative viewpoint of what was received during 2009. The table above shows the remuneration levels expected at the beginning of 2009 with the fixed salary level for the year and the expected value of short- and long-term variable remuneration. The table below shows how much was received during 2009 as remuneration outcomes. This means adding the fixed salary paid; the short-term variable remuneration from the previous year which was paid out in 2009; and the long-term variable remuneration outcomes from the 2002 stock option plan, and parts of the 2005 and 2006 Stock Purchase Plans (the Executive Performance Stock Plan did not vest for either program). The different tables show different aspects but illustrate, in particular, the variability of variable remuneration through the differences of costs, outcomes and expected rewards. Board of Directors The remuneration of Directors not employed by Ericsson is handled separately by the Nomination Committee and approved by the Annual General Meeting of shareholders. The remuneration consists of fees for Board and committee work, part of which can be delivered under a synthetic share program. The synthetic shares, which are valued in line with Ericsson’s Class B shares, vest in cash after the publication of the year- end financial statement during the fifth year after award. CEO Total Group Management 1) 2009 fixed salary 2008 short-term Variable 2) 15,750,000 44,277,637 630,000 16,287,601 2002, 2005 and 2006 long-term Variable 3) 646,470 3,266,122 total total Remuneration Remuneration Received 2008 Received 2009 4) 17,026,470 63,831,360 20,230,551 75,170,676 1) Excludes CEO 2) The STV payouts for 2009, paid in 2010, were 6,226,920 for the CEO and 15,137,637 for the rest of Group Management 3) The CEO did not participate in the 2002 stock option plan. The 2005 and 2006 Long-Term Variable remuneration consists of vesting from the 2005 and 2006 Stock Purchase Plans only as the 2005 and 2006 Executive Performance Stock Plans did not vest 4) The cost of pensions and other benefits are shown in Note C29. Swedish vacation pay costs are shown under Salary in Note C29 142 RemuneRation RepoRt | Ericsson Annual Report 2009 Shareholder Information Telefonaktiebolaget LM Ericsson’s shareholders are invited to participate in the Annual General Meeting to be held on Tuesday, April 13, 2010 at 3 p.m. at Kistamässan, Kistagången 1, Kista/Stockholm. registration and notice of attendance Shareholders who wish to attend the Annual General Meeting must > > be recorded in the share register kept by Euroclear Sweden AB (the Swedish Securities Registry) on Wednesday, April 7, 2010; and give notice of attendance to the Company at the latest on Wednesday, April 7, 2010. Notice of attendance can be given on Ericsson’s website: www.ericsson.com, by telephone: +46 8 402 90 54 on weekdays between 10 a.m. and 4 p.m. or by fax: +46 8 21 60 87. Notice of attendance may also be given in writing to: Telefonaktiebolaget LM Ericsson General Meeting of Shareholders Box 7835, SE-103 98 Stockholm, Sweden When giving notice of attendance, please state name, date of birth, address, telephone no. and number of assistants. The meeting will be conducted in Swedish and simultaneously interpreted into English. shares registered in the name of a nominee In addition to giving notice of attendance, shareholders who have their shares registered in the name of a nominee must request the nominee to temporarily enter the shareholder into the share register in order to be entitled to attend the meeting. In order for such registration to be effective on Wednesday April 7, 2010, shareholders should contact their nominee well before that day. Proxy Shareholders represented by proxy shall submit to the Company a power of attorney for the representative. A power of attorney issued by a legal entity must be accompanied by a copy of the entity’s certificate of registration (should no such certificate exist, a corresponding document of authority must be submitted). Such documents must be no more than one year old. In order to facilitate the registration at the Annual General Meeting, the power of attorney in original, certificates of registration and other documents of authority should be sent to the Company in advance. All documents should be sent to the Company at the address above for receipt by Monday, April 12, 2010. Forms of power of attorney in Swedish and English are available on Ericsson’s website: www.ericsson.com/investors. dividend The Board of Directors has decided to propose the Annual General Meeting to resolve on a dividend of SEK 2.00 per share for the year 2009 and that Friday, April 16, 2010 will be the record day for dividend. financial information from ericsson > Interim reports 2010: April 23, 2010 (Q1) July 23, 2010 (Q2) October 22, 2010 (Q3) January 25, 2011 (Q4) Annual Report 2010: March, 2011 Form 20-F for the US market 2009: during Q2, 2010 > > Annual reports and other financial reports are available on our website: www.ericsson.com/investors. for printed publications, contact Strömberg Distribution i Huddinge AB SE-120 88 Stockholm, Sweden Phone: +46 8 449 89 57 Email: ericsson@strd.se In the United States, Ericsson’s Transfer Agent Citibank: Citibank Shareholder Services Registered holders: +1 877 881 59 69 (toll free within the U.S.) Interested investors: +1 781 575 45 55 (outside of the U.S.) Email: ericsson@shareholders-online.com www.citi.com/dr Ordering a hard copy of the Annual Report: Phone toll free: +1 866 216 046 http://proxy.georgeson.com/annualreport/ericsson.htm Contact information Investor Relations for Europe, Middle East, Africa and Asia Pacific: Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden Telephone: +46 10 719 00 00 Email: investor.relations@ericsson.com Investor Relations for the Americas: Ericsson The Grace Building 1114 Ave of the Americas, Suite #3410 New York, NY 10036, USA Telephone: +1 212 685 40 30 Email: investor.relations@ericsson.com Ericsson Annual Report 2009 | shareholder information 143 Corporate Governance Report 2009 Our corporate governance is based on a strong ethos of ethical business practice that starts at the top and permeates to all ericsson employees. The Board is committed to high standards of corporate governance and we encourage all employees to constantly seek ways of making our internal controls and oversight even more effective and reliable. It is during challenging times that the quality of a company’s governance truly shows and during the past year we have been able to draw on our strengths in this area. Michael Treschow Chairman of the Board of Directors Corporate governance describes the ways in which rights and responsibilities are distributed among the various corporate bodies according to the laws, rules and processes to which they 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 report has not been reviewed by ericsson’s auditor and does not constitute a part of the formal Annual Report. Contents Regulation and compliance ............... 145 Shareholders ..................................... 146 General Meeting of Shareholders ...... 147 Nomination Committee ..................... 148 Board of Directors ............................. 149 Members of the Board of Directors ... 156 Company Management ..................... 159 Members of the Group Management Team ............................ 161 Auditors ............................................. 164 Internal control over financial reporting 2009 ................................... 164 HiGHliGHts of 2009 > > > Hans Vestberg, CFO, was appointed new President and CeO succeeding Carl-Henric Svanberg as of January 1, 2010. Jan Frykhammar was appointed new CFO succeeding Hans Vestberg as of November 1, 2009. Three new members joined the Group Management Team. 144 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 ReGulation and ComplianCe 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 rules include: > > > > > The Swedish Companies Act. Rulebook for issuers of NASDAQ OMX Stockholm. The Swedish Code of Corporate Governance (the “Code”). NASDAQ Stock Market Rules – including applicable NASDAQ corporate governance requirements, subject to certain exemptions principally reflecting mandatory Swedish legal requirements. 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: > > > 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 to be applied in the product development, production, supply and support of ericsson products and services worldwide. Further, the Board of Directors has included internal rules in its work procedure. Compliance with the Swedish Code of Corporate Governance The Code has been applied by ericsson since July 2005. ericsson is committed to complying with best-practice corporate governance on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code. An ethical business ericsson’s Code of Business ethics sets out how the Group achieves and maintains its high ethical standards and summarizes the Group’s fundamental policies and directives. The ethical code has been translated into more than 20 languages. This ensures that it is accessible to all employees and underpins the importance of ethical conduct in all business activities. During recruitment employees sign a form to acknowledge that they are aware of the principles of the Code of Business ethics. This procedure is repeated at regular intervals throughout the term of employment. Through this meticulous process, ericsson strives to ensure that high ethical standards are upheld continuously. All employees have an individual responsibility to ensure that business practice adheres to the rules of the Code of Business ethics. The Code of Business ethics satisfies the applicable requirements of the Sarbanes-Oxley Act of 2002 and NASDAQ Stock Market rules. The Code of Business ethics can be found at: www.ericsson.com/ericsson/corporate_responsibility/ employees/code_businessethics.shtml (information on the ericsson website does not form part of this Report). CaRBon-lean CommuniCation ericsson is at the forefront of sustainable development, enabling the use of ICT in smarter ways to reduce global CO2 emissions. Find out more at www.ericsson.com ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 145 sHaReHoldeRs Ownership structure According to the share register kept by euroclear Sweden AB, as of December 31, 2009 ericsson had 690,726 shareholders. Almost 77 percent of the shares are owned by institutions, both Swedish and international. Investor and Industrivärden, two public listed Swedish industrial holding companies, are the largest shareholders. They hold 5.01 and 2.34 percent of the share capital and 19.33 and 13.62 percent of the voting rights, respectively. A significant number of the shares held by foreign investors are nominee-registered, i.e. held off record by banks, brokers and/or nominees. This means that the actual shareholder is not displayed in the share register or included in the shareholding statistics. As a result, the ultimate shareholder does not show in the shareholder statistics used, for example, for the purpose of appointing members of the Nomination Committee. For more information on the Company’s shareholders, see the chapter “Share Information” in the Annual Report. Shares and voting rights The share capital of Telefonaktiebolaget LM ericsson consists of two classes of listed shares; A and B. each class A share carries one vote and each class B share carries one tenth of one vote. Class A and B shares entitle the holder to the same proportion of assets and earnings and carry equal rights in terms of dividends. In addition, the Parent Company may issue Class C shares in order to create treasury stock to hedge incentive programs resolved by the General Meeting. Class C shares held by ericsson do not entail rights to dividend or voting rights. The class C shares are converted into class B shares before they are transferred to participants of the incentive programs. The members of the Board of Directors and the Group Management Team do not have different voting rights on shares than other shareholders. OWNERSHIP PERCENTAGE (CAPITAL) OUR GOVERNANCE STRUCTURE 11% 2009 53% 36% Foreign Investors 53% Swedish Institutions 36% Private Swedish Investors 11% 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 146 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 GeneRal meetinG of sHaReHoldeRs The decision-making rights of ericsson’s shareholders are exercised at General Meetings. The Annual General Meeting is held in Stockholm. The date and venue for the meeting is announced on the ericsson website no later than in conjunction with the release of the third-quarter report. Shareholders who cannot participate in person may be represented by proxy. Shareholders who have their shares nominee-registered must, to be able to vote, request to be entered into the share register in the owner’s own name by the record date for the General Meeting. The Annual General Meeting is held in Swedish and simultaneously interpreted into english. All documentation provided by the Company is also available in english. The Annual General Meeting gives shareholders the opportunity to raise questions relating to the operations of the Group. Normally, the members of the Board of Directors and the Group Management Team are present to answer such questions. The auditor is always present at the Annual General Meeting. Shareholders and other interested parties may also correspond in writing with the Company at any time. Most resolutions at General Meetings are passed by a simple majority. However, the Swedish Companies Act requires qualified majorities in certain cases. For example, qualified majority is required for the resolution to transfer own shares to employees participating in ericsson’s Stock Purchase Plan and for amending the articles of association. Ericsson’s Annual General Meeting 2009 696 shareholders, representing approximately 59 percent of the votes, attended the Annual General Meeting (AGM) held on April 22, 2009. The meeting was held at the Annex to the ericsson Globe in Stockholm. The Board of Directors, members of the Group Management Team and the external auditor were present at the meeting. Decisions of the AGM 2009 included: > > > > > > > Payment of a dividend of SeK 1.85 per share for 2008. Re-election of Chairman of the Board of Directors, Michael Treschow. Re-election of members of the Board of Directors, Roxanne S. Austin, Sir Peter L. Bonfield, Börje ekholm, Ulf J. Johansson, Sverker Martin-Löf, Marcus Wallenberg, Nancy McKinstry, Anders Nyrén and Carl-Henric Svanberg. Board of Directors’ fees to remain unchanged: Chairman SeK 3,750,000 and other non-employed Board members SeK 750,000 each. SeK 350,000 to the Chairman of the Audit Committee and SeK 250,000 each to the other two non-employed members of the Audit Committee. SeK 125,000 each to the Chairmen and other non-employed members of the Finance and Remuneration committees. Additionally, part of the Directors’ Board fees may be paid in the form of synthetic shares. Approval of the remuneration policy for senior management. Implementation of a Long-Term Variable Remuneration Program. Conditional amendments to the Articles of Association regarding the way General Meetings are convened. The minutes of the AGM 2009 are available at: www.ericsson.com/ericsson/investors/shareholders/agm (information on the ericsson website does not form part of this Report). annual General meeting 2010 Ericsson’s Annual General Meeting 2010 will take place on April 13, at Kistamässan, Kista/Stockholm. Shareholders who wish to have a matter considered at the AGM shall make a written request to the Board in due time before the AGM. Further information on Ericsson’s website. How to contact the Board of directors Telefonaktiebolaget LM Ericsson The Board of Directors’ Secretariat SE-164 83 Stockholm, Sweden boardsecretariat@ericsson.com ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 147 Ericsson’s Annual General Meeting 2009 nomination Committee A Nomination Committee was elected by the Annual General Meeting for the first time in 2001. Since then, each Annual General Meeting has appointed a Nomination Committee, or resolved on the procedure for appointing the Nomination Committee. The Annual General Meeting 2009 resolved that the Nomination Committee shall consist of representatives of the four largest shareholders by voting power by the end of the month in which the Annual General Meeting was held plus the Chairman of the Board of Directors. However, as further described in the procedure for appointing members of the Nomination Committee, it may include additional members following a request by a larger shareholder. Such a request must be justified by changes in the shareholder’s share ownership and be received by the Nomination Committee no later than December 31. Members of the Nomination Committee The current Nomination Committee consists of, in addition to the Chairman of the Board of Directors, the four representatives appointed by the four shareholders with the largest voting power as of April 30, 2009: These are Petra Hedengran (Investor AB), Carl-Olof By (AB Industrivärden, Svenska Handelsbankens Pensionsstiftelse and Pensionskassan SHB Försäkringsförening, Chairman of the Nomination Committee), Caroline af Ugglas (Livförsäkrings- aktiebolaget Skandia) and Marianne Nilsson (Swedbank Robur Fonder). Marianne Nilsson replaced Mats Lagerqvist (Swedbank Robur Fonder) during the year. The tasks of the Nomination Committee Over the years the tasks of the Nomination Committee have evolved to comply with the requirements of the Code. The main task of the Committee is to propose candidates for election to the Board of Directors. The Committee must consider all applicable rules on the independence of the Board of Directors. Work of the Nomination Committee for the Annual General Meeting 2010 As of February 18, 2010 the Nomination Committee has held six meetings. The Committee starts its work by orientating itself on the functioning of the Board work and ericsson’s strategy and future development. In 2009, the Nomination Committee has met with both the resigning President and CeO, Carl-Henric Svanberg, and the incoming President and CeO, Hans Vestberg, both of whom have given their views on the Company’s development and future. From this basis the Committee is able to make assessments on the competence and experience required by the Board members. The Committee has been informed of the results of the evaluation of the Board work and procedures, including the performance of the Chairman of the Board. The Committee applies a recruitment procedure where it assesses potential candidates for the Board of Directors. The Committee has also acquainted itself with the assessments made by the Company and the Audit Committee in terms of quality and efficiency of external auditor work, including recommendations regarding audit fees. Shareholders may submit proposals to the Nomination Committee at any time, but should do so in due time It also prepares remuneration proposals for those Directors before the Annual General Meeting to assure that elected by the Annual General Meeting but not employed by ericsson, for the auditors and for members of the Nomination Committee, for resolution by the Annual General Meeting. To date, the Committee has not proposed that it should be paid any fees. When proposing auditors, the Nomination Committee selects candidates in co-operation with the Audit Committee of the Board. they are considered by the Committee. See further information on Ericsson’s website. Contact the nomination Committee Telefonaktiebolaget LM Ericsson The Committee also proposes a candidate for election of the The Nomination Committee Chairman of General Meetings. c/o General Counsel’s Office SE-164 83 Stockholm, Sweden nomination.committee@ericsson.com 148 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 BoaRd of diReCtoRs The Board of Directors is ultimately responsible for the organization of ericsson and the management of the operations. It develops guidelines and instructions for the day- to-day operations, managed by the President and CeO. In turn, the President and CeO ensures the Board is updated regularly on events of importance to the Parent Company, including business development, results, financial position and liquidity of the Group. According to the Articles of Association, the Board of Directors shall consist of no less than five directors and no more than 12 directors, with no more than six deputies. Directors will serve from the close of the Annual General Meeting where they are elected to the close of the following Annual General Meeting, but can serve any number of consecutive terms. In addition, under Swedish law, trade unions have the right to appoint three directors and their deputies to the Board. While the President and CeO may be elected as a director of the Board, the Swedish Companies Act prohibits the President of a public company from being elected Chairman of the Board. ericsson strictly follows rules and regulations regarding conflicts of interest. Directors are disqualified to participate in any decision regarding agreements between themselves and ericsson. The same applies for agreements between ericsson and any third party or legal entity in which the Board member has an interest. In order to ensure compliance with NASDAQ Stock Market Rules, the Audit Committee has implemented a procedure on related-party transactions. Further, the Audit Committee has established a pre-approval process for non-audit services carried out by the external auditor. Composition of the Board of Directors The Board of Directors consists of 10 Directors, including the Chairman of the Board, elected by the shareholders at the Annual General Meeting 2009, for the period until the close of the Annual General Meeting 2010, and three employee representatives, each with a deputy, appointed by the trade unions for the same period of time. The President and CeO, Carl-Henric Svanberg, is the only Board member who was also a member of ericsson’s management during 2009. Work procedure of the Board of Directors Pursuant to the Swedish Companies Act, the Board of Directors has adopted a work procedure that outlines rules for the distribution of tasks between the Board and its Committees as well as between the Board, its Committees and the President and CeO. This complements the regulation in the Swedish Companies Act and the Articles of Association of the Company. The work procedure is reviewed, evaluated and adopted by the Board at least once a year as required. Independence of the Directors The Board of Directors and its Committees are subject to a variety of independence requirements. ericsson applies independence rules in applicable Swedish law, the Rulebook for issuers of NASDAQ OMX Stockholm, the Swedish Code of Corporate Governance, the NASDAQ Stock Market Rules and in the Sarbanes-Oxley Act of 2002. However, ericsson has sought and received exemptions from certain requirements in the Sarbanes-Oxley Act and in the NASDAQ Stock Market Rules, including those that are contrary to Swedish Law. The composition of the Board of Directors meets all applicable independence criteria. The Nomination Committee concluded before the Annual General Meeting of Shareholders 2009, that, for the purposes of the Code of Corporate Governance, at least five of the Board of Directors ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 149 persons nominated to the Board were independent of ericsson, its senior management and its major shareholders. These were Roxanne S. Austin, Sir Peter L. Bonfield, Ulf J. Johansson, Nancy McKinstry and Michael Treschow. Work of the Board of Directors The work of the Board follows a yearly cycle, starting with the statutory Board meeting which is held in connection with the Annual General Meeting. At this meeting, members of each of the three Committees are appointed and the Board resolves on matters such as signatory power. At the next ordinary meeting, the Board handles the first interim report for the year. In June, a Board meeting generally takes place away from the headquarters, giving Directors a chance to visit major ericsson business operations. In July, the Board convenes to handle the interim report for the second- quarter of the year. Particular strategy matters are regularly addressed at appropriate Board meetings and a two-day Board meeting following the summer is mainly devoted to the overall strategy of the Group. The strategy meeting also addresses the overall risk management of the Group. A Board meeting is held at the end of October to handle the third-quarter interim report. The Board has developed a process to thoroughly evaluate its own work. The results of the evaluation are presented and discussed by the Board during the fall. The last meeting of the calendar year addresses budget and financial outlook. At the first meeting of the calendar year the Board focuses on the financial result of the entire year and handles the fourth- quarter report. At the second Board meeting in February, which closes the yearly cycle of work, the Board concludes the Annual Report. As the Board is responsible for financial oversight, financials are presented and evaluated at each Board meeting. each Board meeting generally also includes reports on committee work by the Chairman of each committee. In addition, minutes THE BOARD’S ANNUAL WORK CYCLE from the committee meetings are distributed to all Directors prior to the Board meeting. A Board meeting also typically includes the President and CeO’s report on business and market developments, including the financial performance of the Company. The Board is regularly informed of developments in legal and regulatory matters of importance. The Board meets with ericsson’s external auditor at least once a year to receive and consider the auditor’s observations. The auditor also prepares reports for the management on the accounting and financial reporting practices of the Group. The Audit Committee also meets with the auditor to receive and consider observations on the interim reports. The auditor has been instructed to report on whether the accounts, the management of funds and the general financial position of the Group are well controlled in all material respects. The Board also reviews and assesses the process for financial reporting, as described later in “Internal control over financial reporting 2009”. Combined with the internal controls, the Board’s and the auditor’s review of interim and annual reports are deemed to give reasonable assurance on the quality of the financial reporting. Training of the Board of Directors All new Directors receive comprehensive training tailored to their individual requirements. Introductory training typically includes meetings with the heads of the major businesses and functions and training arranged by NASDAQ OMX Stockholm on listing issues and insider rules. In addition, full-day training sessions are generally held twice a year for all Directors, to enhance their knowledge of specific operations and specific issues as appropriate. Training sessions organized in 2009 have provided the Directors with an in-depth knowledge of the industry landscape, new technologies, network transformation and future products. Budget, financial outlook meeting Q4 meeting – Financial result of the entire year Q3 meeting – Q3 Financial report – Board work evaluation Q4 Nov Dec Jan Q1 Feb Annual report meeting – Board signs the annual report Oct Sep Aug Q3 Board meetings – yearly cycle Mar Apr Jul Jun May Q2 Statutory meeting – Appointment of Committee Members – Authorization to sign for the Company Q1 meeting – Q1 Financial report Q2 meeting – Q2 Financial report Meeting – Generally off-site Two-day strategy meeting – Overall strategy and risk management of the Group 150 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 In addition, annual training has been conducted to advise the Board on material issues and key focus areas regarding corporate responsibility and sustainability. These include energy efficiency, climate and health, human rights, supply chain management and anti-corruption. Work of the Board of Directors in 2009 The work of the Board of Directors is continuously characterized by a high level of activity and 14 Board meetings were held in 2009. Two meetings were held away from the headquarters, one in Geneva, Switzerland and one in Lund, Sweden. Both meetings were particularly focusing on the joint ventures ST-ericsson and Sony ericsson respectively. For attendance at Board meetings see table on page 155. 2009 has been characterized by the financial turmoil and uncertainty in the market development. During the year the Board has thoroughly monitored and analyzed related risk factors. In a market downturn, focus on key strategic areas such as maintaining technology and services leadership, profitability and risk management has been continuously important. A leading position and effectiveness in research and development is key in the rapid technology evolution and in the increasingly competitive landscape, sharpened over the year by the uncertainty in the financial market. Apart from regular matters in the annual Board work cycle, the Board addressed various acquisitions that were completed during the year, namely Nortel’s North American CDMA and LTe businesses, Bizitek and certain operations of elcoteq and also the establishment of the new joint venture ST-ericsson together with STMicroelectronics. The Board addressed long and short-term goals and strategies with regard to the joint ventures Sony ericsson and ST-ericsson and a network transformation strategy. Also, in 2009, Hans Vestberg was appointed new President and CeO following Carl-Henric Svanberg’s resignation as of January 1, 2010. The heads of the business units have provided the Board with thorough updates of their respective business operations and strategies. In terms of remuneration, the Board put forward a proposal for a Long-Term Variable Remuneration Program 2009 (LTV) to the Annual General Meeting 2009. For the purposes of financing the LTV, the Board further proposed a new directed issue and re-purchase of Class C shares to be converted into B shares. The Board is continuously working to improve its ways of working based on the Board evaluation and discussions with the Chairman of the Board and the Committee Chairmen. Board work evaluation A key objective of the Board evaluation is to ensure that the Board is functioning well. This includes gaining an understanding of the issues which the Board thinks warrant greater scope and determining areas within the Board where additional competence is needed. The evaluation also serves as guidance for the work of the Nomination Committee. each year, the Chairman of the Board initiates and leads the evaluation of Board and Committee work and procedures. The evaluation tools include detailed questionnaires, interviews and discussions. In 2009, the Chairman held individual meetings with all the Directors, following their response to two separate written questionnaires; one covering the Board work in general and one covering the Chairman’s performance. The Chairman was not involved in the development, compilation or evaluation of the questionnaire which related to his performance. Nor was he present when his performance was evaluated. The results of the evaluations were thoroughly discussed in order to further improve the work of the Board. Normally, an evaluation of the CeO’s work is conducted. However, in view of Carl-Henric Svanberg’s resignation as of January 1, 2010, it was deemed redundant this year. time to tHRiVe Investments in ICT infrastructure can drive growth across societies and play a role in speeding recovery in a global recession. The US House of Representatives says that for every USD investment in broadband, the economy sees a tenfold return. Find out more at www.ericsson.com ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 151 Committees of the Board of Directors The Board of Directors has established three Committees: Audit Committee, Finance Committee and Remuneration Committee. Members of each Committee are appointed amongst the Board members. > Reviewing matters arising from reviews and audits performed. The Audit Committee itself does not perform audit work. ericsson has an internal audit function, which reports to the Audit Committee and performs independent audits. The work of the Committees is mainly to prepare matters for final resolution by the Board. However, the Board has authorized each Committee to determine certain issues in limited areas and may also on occasion provide extended authorization to determine specific matters. If deemed appropriate, the Board of Directors and each Committee have the right to engage external expertise, either in general or in respect to specific matters. Prior to every Board meeting, each Committee submits, in addition to minutes, a written summary to the Board on the issues handled or resolved since the previous ordinary Board meeting. In addition to the minutes and the written summary, the Chairman of the Committee also reports on the Committee work at each Board meeting. Audit Committee On behalf of the Board, the Audit Committee monitors the scope and correctness of the financial statements, compliance with legal and regulatory requirements and internal control over financial reporting. The Audit Committee also reviews the annual and interim financial reports and oversees the external audit process, including audit fees. > > This involves: Reviewing, with management and the external auditor, the financial statements, including conformity with generally accepted accounting principles. Reviewing, with management, the reasonableness of significant estimates and judgments made in preparing the financial statements, as well as the quality of the disclosures in the financial statements. When applicable, the Committee is also involved in the preparatory work of proposing candidates for the election of auditor. It also monitors Group transactions and the ongoing performance and independence of the auditor to avoid conflicts of interest. To achieve this, the Audit Committee has implemented approval procedures for audit and other services performed by the external auditor (see “Audit Committee pre-approval policies and procedures”). A process for reviewing transactions with related parties and a whistle-blower procedure for the reporting of violations relating to accounting, internal control and auditing matters are also in place. Alleged violations are investigated by ericsson’s internal audit function in conjunction with the relevant Group Function. Information regarding any incidents, including measures taken, details of the responsible Group Function and the status of any investigation are reported to the Audit Committee. Members of the Audit Committee The Audit Committee consists of four Board members as appointed by the Board. In 2009, the Audit Committee comprised: Ulf J. Johansson (Chairman of the Committee), Roxanne S. Austin, Sir Peter L. Bonfield and Jan Hedlund. All members, except Jan Hedlund, who is appointed Board member by the unions pursuant to Swedish mandatory law, are independent from the Company and senior management. each member is financially literate and familiar with the accounting practices of an international company such as ericsson. At least one member must be an audit committee financial expert, in accordance with the Sarbanes-Oxley Act, 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 152 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 Section 407. The Board of Directors has determined that Ulf J. Johansson, Roxanne S. Austin and Sir Peter L. Bonfield all satisfy this requirement. Former authorized public accountant, Peter Markborn, is appointed external expert advisor to assist and advise the Audit Committee. Chairman reports any pre-approval to the Audit Committee at its next meeting. For matters which may not be handled by the Chairman and, hence, require specific pre-approval by the Audit Committee, the auditor submits an application to the Parent Company for final approval by the Audit Committee. Work of the Audit Committee in 2009 The Audit Committee held eight meetings in 2009. Directors’ attendance is reflected in the table on page 155. During the year, the Audit Committee reviewed the scope and results of external financial audits and the independence of the external auditors and monitored the external audit fees. Further, certain additional non-audit services performed by the external auditor were approved by the Audit Committee Chairman under the Committee’s pre-approval policies and procedures. The Committee approved the annual audit plan for the internal audit function and reviewed its reports. Prior to publishing, the Committee also reviewed and discussed each interim report with the external auditor. The Committee also monitored the continued compliance with the Sarbanes-Oxley Act and the internal control and risk management process. The Committee has also reviewed certain related-party transactions in accordance with its established process. Audit Committee pre-approval policies and procedures The Audit Committee reviews and approves the scope of audits to be performed (external and internal) and analyzes the results and costs of the audits. The Committee makes recommendations to the Board of Directors regarding the auditor’s performance and to the Nomination Committee regarding the external auditor’s fees. In order to ensure the auditor’s independence, the Audit > Committee has established pre-approval policies and procedures for non-audit related services to be performed by the external auditor. Pre-approval authority may not be delegated to management. The policies and procedures include a list of prohibited services and services that require pre- approval by the Committee. Such services fall into two broad categories; general pre-approval and specific pre-approval: General pre-approval – certain services regarding taxes, transactions, risk management, corporate finance, attestation and accounting and so called general services. These services have received general pre-approval by the Audit Committee, provided that the estimated fee for each project does not exceed SeK 1 million. The external auditor must advise the Audit Committee of services rendered under the general pre-approval policy. Specific pre-approval – all other non-audit related services must receive specific pre-approval. The Audit Committee Chairman has the delegated authority for specific pre- approval in between Committee meetings, provided that the fee in each case does not exceed SeK 2.5 million. The > Finance Committee The Finance Committee is primarily responsible for: > > > > Handling matters related to acquisitions and divestments. Handling capital contributions to companies inside and outside the ericsson Group. Raising of loans, issuances of guarantees and similar undertakings, and the approval of financial support to customers and suppliers. Continuously 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 Finance Committee The Finance Committee consists of four Board members as appointed by the Board. In 2009, the Finance Committee comprised: Marcus Wallenberg (Chairman of the Committee), Anna Guldstrand, Anders Nyrén, and Michael Treschow. Work of the Finance Committee in 2009 The Finance Committee held seven meetings in 2009. Directors’ attendance is reflected in the table on page 155. The Committee has devoted considerable time to the uncertainty in the financial market and has thoroughly monitored the Company’s financial position and credit exposure. In order to reduce gross debt and to gain net interest savings, the Committee has approved a premature re-purchase during 2009 of a eUR 471 million bond loan, maturing in November 2010. In view of the unstable financial sector over the year, the Committee has re-arranged the investment policy and procedures to reduce the credit exposure. During the year the Committee has also approved customer finance and credit facility arrangements, with a continued focus on capital structure, cash flow and cash generating ability. ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 153 particularly regarding international trends and developments. Work of the Remuneration Committee in 2009 The Remuneration Committee held seven meetings in 2009. Directors’ attendance is reflected in the table on page 155. The Committee reviewed and prepared for resolution by the Board a proposal for a Long-term Variable Remuneration Program 2009, which was approved by the Annual General Meeting in April 2009. The Committee further resolved on salaries and short term variable pay for 2009 for CeO direct reports and prepared for resolution by the Board remuneration to the incoming President and CeO, Hans Vestberg. Also, the Committee prepared a remuneration policy, which was subsequently referred by the Board to the Annual General Meeting for approval. Towards the end of the year, the Committee concluded its analysis of the current long-term variable remuneration structure and remuneration policy. Proposals in respect hereof will be referred to the Annual General Meeting 2010 for resolution. For further information on remuneration, fixed and variable pay, please see Note C29 “Information Regarding Members of the Board of Directors, the Management and employees” in the Annual Report and the “Remuneration Report” included the Annual Report. Remuneration Committee The Remuneration Committee’s main responsibility is to prepare for resolution by the Board of Directors matters regarding salary and other remuneration. This includes pension benefits of the President and CeO, the executive Vice Presidents and other officers who report directly to the President and CeO. Other responsibilities include: > > > > Developing and monitoring strategies and general guidelines for employee remuneration, including short-term variable remuneration and pension benefits. Reviewing the results of short-term variable pay plans before pay out. Preparation of the long-term variable remuneration program for referral to the Board and resolution by the General Meeting. Preparation of targets for short-term variable pay for the following year, for resolution by the Board. To achieve this, the Committee holds annual remuneration reviews with Company representatives to determine the strategic direction and align program designs and pay policies with the business objectives. 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 before approving any salary adjustment for CeO direct reports. In addition the Committee prepares salary adjustments for the President and CeO for resolution by the Board. Members of the Remuneration Committee The Remuneration Committee consists of four Board members as appointed by the Board. In 2009, the Remuneration Committee comprised: Michael Treschow (Chairman of the Committee), Börje ekholm, Nancy McKinstry, and Karin Åberg. Gerrit Aronson is appointed by the Remuneration Committee as an independent expert advisor to assist the Committee, MEMBERS OF THE COMMITTEES Members of the Committees of the Board of Directors 2009 Audit Committee Finance Committee > Ulf J Johansson (Chairman) > Roxanne S. Austin > Sir Peter L. Bonfield > Jan Hedlund > Marcus Wallenberg (Chairman) > Anna Guldstrand > Anders Nyrén > Michael Treschow Remuneration Committee > Michael Treschow (Chairman) > Nancy McKinstry > Karin Åberg > Börje Ekholm 154 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 Remuneration to Board members Remuneration to Board members not employed by the Company is proposed by the Nomination Committee for resolution by the Annual General Meeting. The Annual General Meeting 2009 approved the Nomination Committee’s proposal for fees to the non-employed Board members for Board and Committee work. For information on Board of Directors’ fees 2009, please refer to Notes to the Consolidated Financial Statements – Note C29 “Information Regarding Members of the Board of Directors, the Management and employees” in the Annual Report. The Annual General Meeting 2009 also approved the Nomination Committee’s proposal that non-employed Board members may be paid part of their Board fee in the form of synthetic shares. A synthetic share gives the right to receive a future cash payment of an amount which corresponds to the market value of a Class B share in ericsson at the time of payment. The purpose of paying part of the Board of Director’s fee in the form of synthetic shares is to further align the Directors’ interest with shareholder interest. For more information on the terms and conditions of the synthetic shares, please refer to the notice convening the Annual General Meeting 2009 (www.ericsson. com/ericsson/investors/shareholders/agm). (Information on the ericsson website does not form part of this document.) DIRECTORS’ ATTENDANCE AND FEES 2009 Fees resolved by the AGM 2009 Number of Board/Committee meetings attended Board member Board fees 4) Committee fees Board Audit Committee Finance Committee Remuneration Committee 250,000 125,000 250,000 250,000 125,000 350,000 125,000 125,000 Michael Treschow Sverker Martin-Löf 1) Marcus Wallenberg Roxanne S. Austin Sir Peter L. Bonfield Börje ekholm Ulf J. Johansson Nancy McKinstry Anders Nyrén Carl-Henric Svanberg Monica Bergström 2) Jan Hedlund Pehr Claesson Anna Guldstrand Kristina Davidsson Karin Åberg 3) Total number of meetings 3,750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 - - - - - - - 14 14 14 13 14 13 13 14 12 14 13 12 14 14 14 13 14 3 5 8 8 6 8 7 7 7 7 7 7 7 7 1 6 7 1) Member of the Audit Committee until April 22, 2009 and thereafter replaced by Roxanne S. Austin 2) Deputy employee representative as of April 22, 2009. 3) Ordinary employee representative and member of the Remuneration Committee as of April 22, 2009 (replacing Monica Bergström). 4) Non-employed Directors can choose to receive part of their Board fee (i.e. exclusive of Committee fees) in the form of synthetic shares. ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 155 MeMbers of the board of directors Board members elected by the Annual General Meeting 2009 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): 164,008 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 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): 1,200 Class A shares and 140,800 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 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 (first elected 2008) Member of the Audit Committee Born 1961, B.B.A. in Accounting, University of Texas, San Antonio USA. Board member: Move Networks Inc., Abbott Laboratories, Teledyne Technologies Inc., Target Corporation. Holdings in Ericsson 1): 3,000 Class B shares. Principal work experience and other information: President and CeO of Move Networks Inc. since 2009. President of Austin Investment Advisors since 2004. 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. Michael Treschow Marcus Wallenberg Sverker Martin-Löf Roxanne S. Austin Sir Peter L. Bonfield 156 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 Chairman and CeO of ICL PLC 1990–1996. Positions with STC PLC and Texas Instruments Inc. Member of the International Advisory Board of Citigroup. Member of the Advisory Boards of New Venture Partners LLP, The Longreach Group and Apax Partners LLP. Non-executive Director of Actis Capital LLP. 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, eQT Partners AB, 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, he 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 as President and CeO and at 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, 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, SSAB, ernströmgruppen and AB Volvo. 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 member: Sony ericsson Mobile Communications AB and ST-ericsson until end of 2009, the Confederation of Swedish enterprise, Melker Schörling AB, Uppsala University and BP PLC. Holdings in Ericsson 1): 3,234,441 Class B shares. Principal work experience and other information: President and CeO of ericsson 2003 – 2009. Prior to this, Carl-Henric Svanberg was the President and CeO of Assa Abloy AB (1994–2003). He held 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 Annual Report 2009 | CORPORATE GOVERNANCE REPORT 157 MeMbers of the board of directors Board members and deputies appointed by the unions Jan Hedlund (first appointed 1994) Pehr Claesson (first appointed 2008) Employee representative Member of the Audit Committee Born 1946. Appointed by the IF Metall union. Holdings in Ericsson 1): 735 Class B shares. Deputy employee representative Born 1966. Appointed by the union The Swedish Association of Graduate engineers. Holdings in Ericsson 1): 513 Class B shares Anna Guldstrand (first appointed 2004) Monica Bergström (first appointed 1998) Employee representative Member of the Finance Committee Born 1964. Appointed by the union The Swedish Association of Graduate engineers. Holdings in Ericsson 1): 1,373 Class B shares. Deputy employee representative Born 1961. Appointed by the union Unionen. Holdings in Ericsson 1): 1,508 Class B shares. Karin Åberg (first appointed 2007) Employee representative Member of the Remuneration Committee Born 1959. Appointed by the union Unionen. Holdings in Ericsson 1): 1,596 Class B shares. Kristina Davidsson (first appointed 2006) Deputy employee representative Born 1955. Appointed by the IF Metall union. Holdings in Ericsson 1): 988 Class B shares. Carl-Henric Svanberg was the only Director who held an operational management position at ericsson in 2009. 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 and American Depositary Receipts, where applicable. Jan Hedlund Anna Guldstrand Karin Åberg Kristina Davidsson Pehr Claesson Monica Bergström 158 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 coMpany ManageMent The President/CEO and Group Management The Board of Directors appoints the President and CeO and the executive Vice Presidents. The President and CeO is responsible for the management of day-to-day operations and is supported by the Group Management Team which, in addition to the President and CeO, consists of heads of Group functions and heads of business units. The role of the Group Management Team is to: > > > establish a long-term vision, a strong corporate culture and group strategies and policies, all based on objectives stated by the Board. Determine targets for operational units, allocate resources and monitor unit performance. Secure operational excellence and realize global synergies through efficient organization of the Group. Remuneration of Group Management Guidelines on remuneration and other employment terms for Group Management were approved by the Annual General Meeting 2009. For further information on remuneration, fixed and variable pay, see Remuneration Report and Notes to the Consolidated Financial Statements – Note C29, “Information Regarding Members of the Board of Directors, the Management and employees” in the Annual Report. The Ericsson Group Management System The CeO and heads of Group functions have implemented a 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 reliable internal > > > control, so that the Company is compliant with applicable laws, listing requirements and governance codes and fulfills its corporate social responsibilities. ericsson is ISO 9001 and ISO 14001 certified. The management system is an important foundation and is continuously evaluated and improved in line with ISO requirements. The ericsson Group Management System comprises three elements: > > Management and control; i.e. corporate culture, objective setting and strategy formulation, and steering documents, such as Group policies and directives. Operational processes and IT tools, to support operational excellence and leverage ericsson’s scale advantages. Organization and resources. > Risk management is an integrated part of the ericsson Group Management System. Management and control ericsson uses balanced scorecards as tools for translating strategic objectives into a set of performance indicators for its operating units. These focus primarily on market and customer performance, competitive position, internal efficiency, financial performance and employee satisfaction and empowerment. Based on the annual strategy work, these scorecards are updated with targets for each unit for the next year and communicated throughout the organization. The balanced scorecard is also used as a management tool to align operating unit and personal goals to Company goals, follow up progress and monitor identified risks. Corporate culture has long been acknowledged as an important factor for driving behavior, not only for compliance but also in communication, decision making, efficiency and the reaching of objectives. Respect, professionalism and ERiCSSON GROUP MANAGEMENT SYSTEM ERiCSSON’S CORE VALUES Demands and Expectations Objectives Strategies Performance Improvement Customers Key Stakeholders Business Environment Management and Control Vision Policies and Directives Corporate Culture Satisfaction through Value Deliverables Results Performance Evaluation The Ericsson Business Process IT Organization and Resources 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 Perserverance > Lead change – shape the future > Always deliver – walk the extra mile > Trusted global partner for more than a century ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 159 Risk management Risks are broadly categorized into operational and financial risks. ericsson’s 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. Decisions are made or escalated according to a well-defined delegation of authority. Financial risks are coordinated through Group Function Finance. Risks are dealt with during the strategy process, the annual planning and target setting and during operational processes by transaction (customer bid/contract, acquisition, investment, product development project). They are subject to 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 physical security. A Crisis Management Council deals with ad- hoc events of a serious nature. For more information on ericsson’s risk management, see the “Board of Directors’ Report” in the Annual Report. perseverance are the values that underpin ericsson’s culture, guiding daily work, relationships and business. Consequently, executive management makes the communication and development of ericsson’s culture a key task in the management of the Group. Group-wide policies and directives govern how the organization works. These include important areas, such as a code of business ethics, policies on roles and responsibilities, segregation of duties, capital expenditures, management of intellectual property rights, financial reporting, environmental matters, and risk management. Operational Processes and iT tools As a leading vendor, ericsson tries to utilize the competitive advantages that are gained through scale and has implemented common processes and IT tools across all its operating units. Through management and continuous improvement of these processes and IT tools, ericsson reduces costs with standardized internal controls and performance indicators. Organization and resources ericsson is operated in two dimensions: > Legal entities: more than 200 companies in more than 100 countries, each with a board of directors, in many cases also with local non-ericsson employee members. ericsson also operates through two joint ventures. Operational units: business units (4) and market units (23). > In addition, Group functions coordinate ericsson’s strategies, operations and resource allocation and define the necessary directives, processes and organization for the effective governance of the Group. For more information on ericsson’s organization, see chapter “Information on the Company” in the Annual Report. 160 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 Ericsson Group Management Team Missing from picture is Cesare Avenia. MeMbers of the group ManageMent teaM Carl-Henric Svanberg Jan Frykhammar President and CEO until December 31, 2009 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 and Linköping University of Technology. Board member: Sony ericsson Mobile Communications AB and ST-ericsson until end of 2009, the Confederation of Swedish enterprise, Melker Schörling AB, Uppsala University and BP PLC. Holdings in Ericsson 1): 3,234,441 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 until December 31, 2009. President and CEO as of January 1, 2010. Born 1965, Bachelor of Business Administration and economics, University of Uppsala. Board member: Sony ericsson Mobile Communications AB, Chairman of ST-ericsson and Svenska Handbollsförbundet. Holdings in Ericsson 1): 39,825 Class B shares. Background: Hans Vestberg was Chief Financial Officer and Head of Group Function Finance until October 31, 2009. Prior to these positions Hans Vestberg was executive Vice President and Head of Business Unit Global Services. He 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. Executive Vice President and Chief Financial Oficer and Head of Group Function Finance (since November 1, 2009) and Head of Business Unit Global Services (since 2008) Born 1965. Bachelor of Business Administration and economics, University of Uppsala. Holdings in Ericsson 1): 2,307 Class B shares. Background: Jan Frykhammar has held various positions within ericsson such as 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. Johan Wibergh Executive Vice President (as of January 1, 2010) and Head of Business Unit Networks (since 2008) Born 1963. Master of Computer Science, Linköping Institute of Technology. Holdings in Ericsson 1): 14,024 Class B shares. Background: Prior to assuming these positions, Johan Wibergh was President of ericsson Brazil. He has also been President of Market Unit Nordic and Baltics, Vice President and Head of Sales at Business Unit Global Services. 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, ST-ericsson, LHS Telekommunikation. Holdings in Ericsson 1): 41,733 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 Jan Frykhammar Johan Wibergh Jan Wäreby ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 161 Magnus Mandersson Håkan Eriksson Senior Vice President, Chief Technology Officer and Head of Group Function Technology & Portfolio Management (since 2003). As of January 1, 2010 also Head of Ericsson Silicon Valley. Born 1961, Master of Science and Honorary Ph D, Linköping Institute of Technology. Board member: Linköping University, Anoto, Vestas, Stockholm Chamber of Commerce. Holdings in Ericsson 1): 25,500 Class B shares. Background: Prior to assuming these positions, Håkan eriksson was Senior Vice President and Head of Research and Development. He has held various positions within ericsson since 1986. Douglas L. Gilstrap Senior Vice President and Head of Group Function Strategy (since September 2009) Born 1963, Master of Business Administration, emory University, Atlanta. Holdings in Ericsson 1): 385 Class B shares. Background: Prior to assuming this position, Douglas L. Gilstrap held senior management positions at equant Networks and Cable and Wireless. Senior Vice President and Head of Business Unit CDMA (since November 2009) Born 1959, Bachelor of Business Administration, University of Lund. Holdings in Ericsson 1): 5,146 Class B shares. Background: Prior to assuming this position, Magnus Mandersson was Head of Market Unit Northern europe and Global Customer Account Deutsche Telekom AG. Cesare Avenia Chief Brand Officer (since November 2009) and Head of Market Unit South East Europe (since 2006) Born 1950, Bachelor’s degree of science, Tele Communication, University of Naples, Italy. Board member: ericsson Telecomunicazioni S.P.A. and sole Director in ericsson Network Services Italia S.P.A. Holdings in Ericsson 1): 10,913 Class B shares. Background: Prior to assuming these positions he was Head of Market Unit Italy. 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. Board member: Aktiemarknadsbolagens Förening and the Swedish Securities Council (since 2010). Holdings in Ericsson 1): 1,216 Class A shares and 31,839 Class B shares. Background: Prior to assuming this position, Carl Olof Blomqvist was a partner of Mannheimer Swartling law firm. Magnus Mandersson Cesare Avenia Carl Olof Blomqvist Håkan Eriksson Douglas L. Gilstrap 162 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 Up to August 31, 2009, Bert Nordberg was executive Vice President and Chairman of Redback and entrisphere, and also Head of ericsson Silicon Valley and a member of the Group Management Team of the Company. Bert Nordberg joined Sony ericsson as Co-President on September 1, 2009, to become its President as of October 15, 2009. 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 Members of the Board of Directors, the Management and employees” in the Annual Report. 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): 29,554 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): 21,874 Class B shares. Background: Prior to assuming this position, Torbjörn Possne was Head of Market Unit Northern europe and Global Customer Account Deutsche Telekom. He has held various positions within ericsson since 1979. 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. Holdings in Ericsson 1): 22,729 Class B shares. Background: Prior to assuming this position, Henry Sténson was Head of SAS Group Communication. Marita Hellberg Torbjörn Possne Henry Sténson ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 163 auditors According to the Articles of Association, the Parent Company shall have no less than one and no more than three registered public accounting firms as external independent auditors. The auditors are elected by the shareholders at the Annual General Meeting for a period of four years. The auditors report to the shareholders at General Meetings. The auditors: > > Update the Board of Directors regarding the planning, scope and content of the annual audit. examine the year-end financial statements to assess accuracy and completeness of the accounts and adherence to accounting procedures and principles. Advise the Board of Directors of non-audit services performed, the consideration paid and other issues that determine the auditors’ independence. For further 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. Current auditor 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 Peter Clemedtson, Authorized Public Accountant, to serve as auditor in charge. Peter Clemedtson is also auditor in charge of Skandinaviska enskilda Banken. Fees to the auditor ericsson paid the fees (including expenses) for audit- related and other services listed in the table in Notes to the Consolidated Financial Statements – Note C31, “Fees to Auditors” in the Annual Report. 164 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 internal control over financial reporting 2009 This section has been prepared in accordance with the Swedish Code of Corporate Governance, section 10.5, and is limited to internal control over financial reporting. Since ericsson is listed in the United States, the requirements outlined in the Sarbanes-Oxley Act (SOX) apply. These regulate the establishment and maintenance of internal controls over financial reporting and also management’s assessment of the effectiveness of the controls. In order to comply with SOX, the Company has implemented detailed controls as well as documentation, testing and reporting procedures in accordance with the COSO framework for internal control. The COSO framework is issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s internal control report according to SOX will be included in ericsson’s Annual Report on Form 20-F and filed with the SeC in the United States. During 2009, the Company has continued to improve the design and execution of its financial reporting controls as well as include operations in acquired entities. Disclosure policies ericsson’s financial disclosure policies aim to ensure transparent, relevant and consistent communication with the equity and debt investors on a fair and equal basis. This will support a fair market value for ericsson shares. ericsson wants current and potential investors to have a good understanding of how the Company works, including operational performance, prospects and potential risks. To achieve these objectives, financial reporting and disclosure must be: > > > > > > > Transparent – enhance understanding of the economic drivers and operational performance of the business, hence build trust and credibility. Consistent – comparable in scope and level of detail to facilitate comparison between reporting periods. Simple – to support understanding of business operations and performance and to avoid misinterpretations. Relevant – with focus on what is relevant to ericsson’s stakeholders or required by regulation or listing agreements, to avoid information overload. Timely – with regular scheduled disclosures as well as ad-hoc information, such as press releases on important events, performed on a timely basis. Fair and equal – where all material information is published via press releases to ensure the whole investor community receives the information at the same time. Complete, free from material errors and a reflection of best practice – disclosure is compliant with applicable financial reporting standards and listing requirements and in line with industry norms. ericsson’s website (www.ericsson.com/investors) includes comprehensive information on the Group, including an archive of annual and interim reports, on-demand access to recent news and copies of presentations given by senior management at industry conferences. (Information on the ericsson website does not form part of this document.) Disclosure controls and procedures ericsson has controls and procedures in place to ensure timely information disclosure under the U.S. Securities exchange Act of 1934 and under agreements with NASDAQ and NASDAQ OMX Stockholm. These procedures also ensure that such information is provided to management, including the CeO and CFO, so timely decisions can be made regarding required disclosure. A Disclosure Committee comprising 15 members with various expertise assists managers in fulfilling their responsibility regarding disclosures made to the shareholders and the investment community. One of the main tasks of the committee is to monitor the integrity and effectiveness of the disclosure controls and procedures. ericsson has investments in certain entities that the Company does not control or manage. With respect to such entities, disclosure controls and procedures are substantially more limited than those maintained with respect to subsidiaries. During the year, ericsson’s President and CeO and the CFO evaluated the disclosure controls and procedures and concluded that they were effective at a reasonable assurance level as at December 31, 2009. During the period covered by the Annual Report 2009, there were no changes to the disclosure controls and procedures that have materially affected, or are likely to materially affect, the internal control over financial reporting. internal control over financial reporting ericsson has integrated risk management and internal control into its business processes. As defined in the COSO framework, internal control includes components such as a control environment, risk assessment, control activities, information and communication and monitoring. Control environment The Company’s internal control structure is based on the division of labor between the Board of Directors and its Committees and the President and CeO. The Company has implemented a management system that is based on: > > > Steering documents, such as policies, directives and a code of business ethics, and a strong corporate culture. The Company’s organization and mode of operations, with well-defined roles and responsibilities and delegations of authority. Several well-defined group-wide processes for planning, operations and support. 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. each reporting legal entity, market unit and business unit has a financial controller function supporting the entity management with execution of controls related to transactions and reporting. A financial controller function is also established on group level, reporting to the CFO. Risk assessment Risks of material misstatements in financial reporting may occur in relation to recognition and measurement of assets, liabilities, revenue and cost or insufficient disclosure. Other risks related to financial reporting include fraud, loss or embezzlement of assets and undue favorable treatment of counterparties at the expense of the Company. Policies and directives regarding accounting and financial reporting cover areas of particular significance to support correct, complete and timely accounting, reporting and disclosure. Identified types of risks are mitigated through well defined business processes with integrated risk management activities and segregation of duties and appropriate delegation of authority. This requires specific approval of material transactions and ensures adequate asset management. Control activities The Company’s business processes include financial controls regarding the approval and accounting of business transactions. The financial closing and reporting process has controls regarding recognition, measurement and disclosure. These include the application of critical accounting policies and estimates, in individual subsidiaries as well as in the consolidated accounts. Regular analyses of the financial results for each subsidiary, market unit and business unit cover the significant elements of assets, liabilities, revenues, costs and cash flow. Together with further analysis of the consolidated financial statements performed at Group level, this ensures that the financial reports do not contain material errors. For external financial reporting purposes, additional controls performed by the Disclosure Committee ensure that all disclosure requirements are fulfilled. The Company has implemented controls to ensure that the financial reports are prepared in accordance with its internal accounting and reporting policies and IFRS as well as with relevant listing regulations. The Company also maintains detailed documentation on internal controls related to accounting and financial reporting, as well as records on the monitoring of the execution and results of such controls. This ericsson Annual Report 2009 | CORPORATE GOVERNANCE REPORT 165 ensures that the CeO and CFO can assess the effectiveness of the controls in a way that is compliant with SOX. entity-wide controls, focusing on the control environment and compliance with the financial reporting policies and directives, are implemented in all subsidiaries. Detailed process controls and documentation of controls performed are also implemented in almost all subsidiaries, covering all items with significant materiality and risk. To ensure efficient and standardized accounting and reporting processes, the Company operates several shared services centers. Based on a common IT platform, a common chart of account and common master data, the centers perform accounting and financial reporting services for most subsidiaries. information and communication The Company’s information and communication channels support complete, correct and timely financial reporting by making all relevant internal process instructions and policies accessible to all the employees concerned. Regular updates and briefing documents regarding changes in accounting policies, reporting and disclosure requirements are also supplied. Subsidiaries and operating units prepare regular financial and management reports to internal steering groups and Company management. These include analysis and comments on financial performance and risks. The Board of Directors receives financial reports monthly. The Audit Committee of the Board has established a whistle blower procedure for reporting violations in accounting, internal controls and auditing matters. Monitoring The Company’s process for financial reporting is reviewed annually by the management. This forms a basis for evaluating the internal management system and internal steering documents to ensure that they cover all significant areas related to financial reporting. The shared service center management continuously monitors the accounting quality through a set of performance indicators. Compliance with policies and directives is monitored through annual self-assessments and representation letters from heads and controllers in all subsidiaries as well as in business units and market units. The Company’s financial performance is also reviewed at each Board meeting. The committees of the Board fulfill important monitoring functions regarding remuneration, borrowing, investments, customer finance, cash management, financial reporting and internal control. The Audit Committee and the Board of Directors review all interim and annual financial reports before they are released to the market. The Company’s internal audit function, which reports to the Audit Committee, performs independent audits. The Audit Committee also receives regular reports from the external auditor. The Audit Committee follows up on any actions taken to improve or modify controls. 166 CORPORATE GOVERNANCE REPORT | ericsson Annual Report 2009 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. 4G See LTE. 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. ATM (Asynchronous Transfer Mode) A communication standard for transmission and management of high-speed packet-switched networks. Backhaul Transmission between radio base stations and the core network. Broadband Data speeds that are high enough to allow transmission of multimedia services with good quality. Capex Capital expenditure. CDMA (Code division multiple access ) The cdmaOne (2G) and CDMA2000 (3G) mobile communication standards are both based on CDMA. 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. Evo RAN A Radio Access Network (RAN) solution to run GSM, WCDMA and LTE as a single network. Exabyte = billion gigabytes. FTTx Fiber-To-The-x, e.g. FTTH (Fiber- to-the-home) refers to fiber optic broadband connections to individual homes. 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. ICT Information and Communication Technology. 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. JV (Joint venture) A business enterprise in which two or more companies enter a partnership. 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. 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. Ericsson Annual Report 2009 | GLOSSARY, FINANCIAL TERMINOLOGY AND EXCHANGE RATES 167 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. 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. 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, as a percentage of Net Sales. Equity ratio Equity, expressed as a percentage of total assets. Gross Cash Gross cash consists, in addition to cash and cash equivalents plus short-term cash investments less interest-bearing liabilities and post-employment benefits, also of short-term investments held for cash management purposes. Inventory turnover days (ITO-days) 365 divided by inventory turnover, calculated as total adjusted cost of sales divided by the average inventories for the year (net of advances from customers). 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). Exchange Rates EXCHANGE RATES USED IN THE CONSOLIDATION SEK/EUR Average rate Closing rate SEK/USD Average rate Closing rate Jan–Dec 2009 2008 10.63 10.30 7.63 7.18 9.67 10.95 6.61 7.73 168 GLOSSARY, FINANCIAL TERMINOLOGY AND EXCHANGE RATES | Ericsson Annual Report 2009 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 shares: www.ericsson.com/investors Project Management Ericsson Investor Relations Design and production Harley Marketing Communications and Paues Media All Group Management and Board of Directors photography Andreas Lind Reprographics Litografia Alfaprint AB 2010 Printing Litografia Alfaprint AB 2010 S M A R T I I T H N K N G S M A R T L I V N G I I E R C S S O N a n n u a l r e p o r t 2 0 0 9 Telefonaktiebolaget LM Ericsson SE-126 25 Stockholm, Sweden Telephone +46 10 719 0000 www.ericsson.com Printed on Maxi Offset and TerraPrint Silk – chlorine free paper that meets international environmental standards EN/LZT 138 0301 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2010 SMART THINKING SMART LIVING ERICSSON ANNUAL REPORT 2009 

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