Ericsson
Annual Report 2011

Plain-text annual report

I S H A P N G T H E N E T W O R K E D S O C E T Y I SHAPING THE NETWORKED SOCIETY Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden Telephone +46 10 719 0000 www.ericsson.com Printed on Maxi Offset and Artic Matt Wind – chlorine free paper that meets international environmental standards EN/LZT 138 0622 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2012 I E R C S S O N a n n u a l r e p o r t 2 0 1 1 Annual Report 2011 COVERXEN_v19.indd 1 07/03/2012 10:19 With everything connected, our World changes. 7 11 44 126 157 Starting with voice, telecommunication began by connecting places. It let homes and businesses communicate better, making lives easier. Later, mobile telephony untied all those possibilities from a fixed place. Now, the same has happened to broadband. It too has gone mobile, meaning greater efficiency, more freedom, and more fun too. In the future, we see a world where everything that can benefit from being connected is connected. That means all people in all places – but it means connecting things as well. Today, this includes power meters and emergency services vehicles. Eventually, it could be anything and everything. This will transform individual lives. It will revolutionize individual businesses. But more than that, it will have a profound impact on our entire society, changing the whole world for good. There’s a long way to go. But that just means more potential – for us and for our customers. Everyone is part of the networked society. Our role is to make it possible. INTROXTOCXEN_v56.indd 1 29/02/2012 12:31 2011 at a glance SaleS increaSed by 12% to SeK 226.9 (203.3) billion net income of SeK 12.6 (11.2) billion Strong financial poSition with a net caSh of SeK 39.5 (51.3) billion earningS per Share (diluted) of SeK 3.77 (3.46) mobile broadband buildout and expanSion in all regionS 70 new or renewed managed ServiceS contractS increaSed intereSt in operationS and buSineSS Support SyStemS announced diveStment of Sony ericSSon joint venture acquiSition of telcordia to Strengthen ericSSon in oSS/bSS contents Annual Report 2011 2 4 4 5 6 8 12 13 14 18 19 46 50 98 103 117 124 125 127 152 158 160 Letter from the CEO Our Operations – The Market – Our Business – How We Stay Ahead – Operator Portfolio 2011 Highlights Five-Year Summary Share Information Letter from the Chairman Board of Directors’ Report* Consolidated Financial Statements* Notes to the Consolidated Financial Statements* Parent Company Financial Statements* Notes to the Parent Company Financial Statements* Risk Factors* Auditors’ Report Forward-Looking Statements Corporate Governance Report 2011 Remuneration Report Glossary, Financial Terminology and Exchange Rates Shareholder Information * Chapters covered by the Auditors’ Report, constituting the legal annual report. Annual Publications The Annual Report describes Ericsson’s financial and operational performance during 2011. This publication includes a Corporate Governance Report. Ericsson issues a separate Sustainability and Corporate Responsibility Report. Find our Annual Report online: www.ericsson.com/annualreport2011 INTROXTOCXEN_v56.indd 1 29/02/2012 12:31 Ericsson Annual Report 2011 1 LETTER FROM THE CEO Letter from HANS VeStBerG Dear shareholders, The world is entering a new communications era. Technology is enabling us to interact, innovate and share knowledge in entirely new ways – creating a dynamic shift in mindset. At Ericsson, we are just beginning to explore the possibilities of what we call the networked society. At its foundation, three forces must come together: mobility, broadband and the cloud. When these combine, you can get access to anything, anytime, anywhere. But the networked society is about much more than what the individual can achieve. Eventually, everything that benefits from being connected will be connected – and this will fundamentally change our world. It is amazing what is happening around us, global mobile broadband subscriptions grew by 60% to reach a total of almost 1 billion at year-end. We forecast almost 5 billion mobile broadband subscriptions by 2016. At the same time, the data consumed by smartphone users is surging. Across all devices, mobile data traffic is expected to grow 10 times between 2011 and 2016. Increasing subscription numbers and traffic levels drive increased complexity in networks. In turn this puts further demand on our ability to deliver cutting-edge solutions and to understand our customers’ needs. Prime driver and thought leader I believe that Ericsson has the necessary assets and strengths to be the prime driver and thought leader in the networked society. Our key assets are technology and services leadership, as well as global presence and scale. We focus on early involvement in creating new technologies, strong contributions to standardization work and development of intellectual property rights. We pioneered the development of digital AXE switching, GSM, WCDMA/HSPA and LTE, resulting in 30,000 granted patents. In 2011, we increased our investment in R&D to further strengthen our technology leadership and we currently have more than 22,000 employees in R&D. Today, customers in more than 180 countries use our solutions and services. In 2010, we started delivery of our multi-standard radio base station RBS 6000. We have carried out the quickest product ramp-up in our history and by the end of 2011 the RBS 6000 accounted for almost all our radio base station deliveries. This gives us significant scale advantages. Our services offering covers all areas within the operational scope of a telecom operator. We have 56,000 services professionals around the globe and we manage networks that serve more than 900 million subscribers. We estimate our market share in telecom services at over 10%, making us the leader in this market. Sustainability and Corporate Responsibility We continue to be strongly committed to Sustainability and Corporate Responsibility. We remain focused on our ambitious targets, including our carbon footprint intensity reduction goals. Over the last decade we have increased 3G/4G radio base station energy efficiency by over 85%. The result is that despite the growing bandwidth demands of the networked society, we are able to keep the energy consumption per subscriber at a low and constant level. We see an increasing interest from customers to drive energy efficiency in their networks, and to use broadband to shape the low carbon economy of the future. Such diverse events during 2011 as the Arab Spring and the publication of the UN guidelines on Business and Human Rights, show the increasing importance and relevance of human rights in our business. Our policies remain strong and we are committed to high levels of governance standards wherever we do business in the world. We will continue to give people in all parts of the world access to communications, improving quality of life. Our separate Sustainability and Corporate Responsibility Report will provide additional information on these topics. 2 LETTER FROM THE CEO | Ericsson Annual Report 2011 CEOXResultsXEN_v43.indd 2 29/02/2012 12:41 Leading ICT player We are a leading Information and Communications Technology (ICT) player. Many people are surprised when they discover that we are the world’s fifth largest software company. The vast majority of our R&D engineers are engaged in software development. Our long-term ambitions are to grow faster than the market, deliver the industry’s best-in-class margins, grow earnings in joint ventures and generate strong cash conversion. The Annual General Meeting approved the transformation of these ambitions into clear targets in the Executive Performance Stock Plan. We have identified three growth levers. The first is portfolio momentum in mobile broadband, managed services and operations and business support systems (OSS/BSS). The second is to gain market share. The third is mergers, acquisitions and partnering. In 2011, we grew revenues by 12% to SEK 227 billion and sales for comparable units, adjusted for currency effects, increased by 19%. Early internal market data indicates that we increased market share in mobile network equipment by 6 percentage points to 38%. This makes us the world leader, twice as big as the second largest player. We gained market share through our strategy to capture footprint when networks are modernized in Europe, by preserving our relationships with the most successful operators and by gaining market share with new customers. During the year, we announced the acquisition of Telcordia, a leading player in OSS and BSS. We also announced the divestment to Sony Corporation of our share in the 50/50 joint venture Sony Ericsson. The transaction is a logical strategic step that makes it possible for us to focus on enabling connectivity for all devices, handsets and beyond. fINANCIAL reSULtS IN SHort NET SALES AND NET INCOME SEK billion 250 200 187.8 150 22.1 100 50 0 208.9 206.5 203.3 226.9 12.6 11.2 11.7 4.1 2007 2008 2009 2010 2011 Net sales Net income SEK billion NET SALES 250 SEK 226.9 (203.3) billion, +12% 200 OPERATING MARGIN 1) SEK 22.1 150 7.53 8 9.6% (12.0%) 206.5 187.8 208.9 203.3 7 100 NET INCOME 6 11.7 4.80 SEK 12.6 (11.2) billion, +12% 50 5 4.1 4.24 11.2 226.9 12.6 4.72 NET CASH 2) 2.87 2007 2009 SEK 39.5 (51.3) billion 2008 1.85 2.50 2.00 2010 2.25 2.50 2011 Net sales Net income 30 25 20 15 10 5 0 30 25 20 15 10 5 0 EARNINGS PER SHARE (non-IFRS) 3) 2007 2008 AND DIVIDEND 4) 2010 2009 2011 EPS (non-IFRS) 3) Dividend 4) 4 0 3 2 1 0 Gross margin declined due to a changed business mix with more coverage SEK projects, modernization projects in Europe, and a higher share of services sales. Net income increased to SEK 12.6 billion. Our JVs had a tough 2011 and both reported losses. Ericsson has a strong financial position with a net cash position of SEK 39.5 billion. Solid industry fundamentals We carefully monitor the potential impact from increased economic uncertainties around the world. Short-term, we expect operators to continue to be cautious with spending, reflecting factors such as macroeconomic and political uncertainty. With the move towards the networked society, we remain confident that the fundamentals for longer-term positive development in the industry remain solid. With strong customer relationships and one of the world’s largest and best pools of industry talent, we believe Ericsson is well positioned to continue to drive and to benefit from this development. 8 7 6 5 4 3 2 1 0 7.53 4.24 4.80 4.72 2.50 2.87 1.85 2.00 2.25 2.50 2007 2008 2009 2010 2011 EPS (non-IFRS) 3) Dividend 4) EPS (non-IFRS) 3) SEK 4.72 (4.80), –2% DIVIDEND 4) SEK 2.50 (2.25), +11% Hans Vestberg President and CEO 1) Excl. share in earnings of JVs. For 2011 incl. restructuring charges and for 2010 excl. restructuring charges. 2) Cash and cash equivalents plus short-term investments less interest-bearing liabilities and post-employment benefits. 3) EPS, diluted, excl. amortizations and write-downs of acquired intangible assets, SEK. 4) Dividend for 2011 as proposed by the Board of Directors. Ericsson Annual Report 2011 3 CEOXResultsXEN_v43.indd 3 29/02/2012 12:41 THE MARKET THE MARKET Telecom trends Everything is going mobile. This evolution is driven by video, cloud-based services, the internet and machine-to-machine (M2M) connectivity. It changes how consumers behave and how they leverage mobility to communicate and to improve their daily lives, through existing and new services. Users now demand connectivity anywhere and anytime. Enterprises are also beginning to exploit the new opportunities provided by mobility, both to improve efficiency, such as by streamlining processes, and to find new business models. Important driving forces are new, more affordable smartphones, and the many new connected devices on the market. The total number of mobile subscriptions globally (excluding M2M) reached approximately 6 billion at year end 2011, of which close to 1 billion were for mobile broadband. Approximately 30% of all handsets sold during 2011 were smartphones compared to around 20% for 2010. Out of the installed base of subscriptions worldwide only around 10% use smartphones. Globally, the average mobile PC user currently generates about 2 Gbytes of data per month, while a high-traffic smartphone user generates approximately 500 Mbytes per month. Usage has been increasing over time. With all these devices and 24/7 connectivity, we expect global mobile data traffic to grow tenfold by the end of 2016. Operators are capitalizing on this changing market, enabling users and machines to leverage connectivity in new ways. During 2011 various operators started to introduce tiered pricing, to provide price plans, such as volume, time or speed-based plans, which are better aligned to users’ needs. As a result of that, operators are able to create various business models to capitalize on different consumer and enterprise segments. In order to enable these new services, improve user experience and provide tiered pricing, operators are investing in and transforming their operations and business support systems (OSS and BSS). These systems monitor and optimize network performance for customer relations handling and subscriber support. OSS/BSS investments also enable operators to optimize operations and reduce costs. To accommodate for the increase in data traffic, operators are putting in new equipment and upgrading their networks for greater efficiency and better revenue capture. Network capacity can be increased through additional features, such as software upgrades, as well as through additional equipment, such as radio base stations and transmission. In today’s competitive markets, speed and capacity alone are not enough to ensure best user experience and provide differentiation. Quality of service is becoming an important way for operators to differentiate. Our customers Our business is defined by long-term relationships mainly with large telecom operators around the world. We serve approximately 400 customers, most of whom are network operators. Our ten largest customers, of which half are multinational, account for 44% of net sales. Our customers operate in a wide range of local economies and are at various technology stages. They have different business focuses depending on the maturity of the mobile broadband market. We set up a new go-to-market model in 2010, with ten regions which approach customers with solutions and services. With this, we are moving towards a solutions-led sales approach, selling the full breadth of the portfolio. TOTAL nuMbER Of MObILE subscRIPTIOns nuMbER Of MObILE bROAdbAnd subscRIPTIOns MObILE TRAffIc – dATA And vOIcE 2011–2016 2011–2016 2011–2016 Growth: 30% Growth: 30% Growth: 30% 2011–2016 2011–2016 2011–2016 Growth: 5 times Growth: 5 times Growth: 5 times 2011–2016 2011–2016 2011–2016 Growth: 10 times Growth: 10 times Growth: 10 times 2010 2010 2010 2011 2011 2011 2012 2012 2012 2013 2013 2013 2014 2014 2014 2015 2015 2015 2016 2016 2016 2010 2010 2010 2011 2011 2011 2012 2012 2012 2013 2013 2013 2014 2014 2014 2015 2015 2015 2016 2016 2016 2010 2010 2010 2011 2011 2011 2012 2012 2012 2013 2013 2013 2014 2014 2014 2015 2015 2015 2016 2016 2016 Mobile subscriptions Mobile subscriptions Mobile subscriptions Mobile PCs/tablets Mobile PCs/tablets Mobile PCs/tablets Handheld devices Handheld devices Handheld devices 2011: approximately 6 billion mobile subscriptions 2011: approximately 6 billion mobile subscriptions 2011: approximately 6 billion mobile subscriptions 2016: reaching more than 8 billion 2016: reaching more than 8 billion 2016: reaching more than 8 billion Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 2011: approximately 970 million mobile 2011: approximately 970 million mobile 2011: approximately 970 million mobile broadband subscriptions broadband subscriptions broadband subscriptions 2016: reaching almost 5 billion 2016: reaching almost 5 billion 2016: reaching almost 5 billion Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 Data: mobile Data: mobile Data: mobile PCs/tablets PCs/tablets PCs/tablets Data: mobile Data: mobile Data: mobile handheld handheld handheld Voice Voice Voice 2011: smartphone traffic tripled 2011: smartphone traffic tripled 2011: smartphone traffic tripled Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 APPROXIMATELY 6 bILLIOn MObILE subscRIPTIOns uP >10% 2011 APPROXIMATELY 970 MILLIOn MObILE bROAdbAnd subscRIPTIOns, uP 60% In 2011 MObILE dATA TRAffIc EXPEcTEd TO HAvE MORE THAn dOubLEd In 2011 4 OUR OPERATIONS | Ericsson Annual Report 2011 OurXBusinessXEN_v72.indd 4 29/02/2012 12:46 OuR busInEss OUR BUSINESS Our mission is to innovate to empower people, business and society. We are a world-leading provider of network infrastructure, telecom services and multimedia solutions, which in combination meet a broad range of operator needs. To best reflect our business, we report five business segments, two of which are the joint ventures Sony Ericsson and ST-Ericsson. nETWORKs GLObAL sERvIcEs MuLTIMEdIA Segment Networks develops and delivers mobile and fixed infrastructure equipment and software. We are a market leader in 2G/GSM and 3G/WCDMA mobile technologies. We now provide all-IP 4G/LTE networks as the evolution of mobile broadband. Our portfolio also includes CDMA solutions, as well as xDSL, fiber and microwave transmission. With more than 56,000 services professionals globally, we deliver managed services, consulting and systems integration, customer support and network rollout. We manage complex projects with advanced IS/IT competence and multi-vendor experience, using a mix of local knowledge and global expertise. Segment Multimedia develops and delivers software-based solutions for operations and business support systems (OSS and BSS), real-time, multi-screen and on- demand TV and consumer and business applications. Revenue management, i.e. software based solutions for charging and billing, is part of BSS. nET sALEs (sHARE Of TOTAL) sEK 132.4 billion (58% of total sales) sEK 83.9 billion (37% of total sales) sEK 10.6 billion (5% of total sales) MARKET sHARE EsTIMATEs 38% in mobile network equipment. Twice the size of the second largest competitor More than 10%. Larger than any of our competitors Three markets with different dynamics and players MARKET POsITIOn Number 1 in mobile networks Number 1 in telecom services Number 1 in real-time charging & billing Joint ventures Our joint ventures focus on enabling superior user devices. Sony Ericsson’s and ST-Ericsson’s results are reported according to the equity method. In October 2011, we announced that Sony would acquire Ericsson’s 50% share in Sony Ericsson. The transaction took place on February 15, 2012. sOnY ERIcssOn sT-ERIcssOn A 50/50 joint venture with Sony Corporation, Sony Ericsson offers mobile phones, accessories, content and applications. A 50/50 joint venture with STMicroelectronics, ST-Ericsson offers wireless platforms and semiconductors for leading handset manufacturers. nET sALEs EuR 5,212 million usd 1,650 million MARKET POsITIOn 10% market share in the Android smartphone market Number 3 in thin modems OurXBusinessXEN_v72.indd 5 29/02/2012 12:46 Ericsson Annual Report 2011 | OUR OPERATIONS 5 hOW WE STAY AhEAD HOW WE STAY AHEAD Principles We interact with our customers based on the following principles: > A customer-first perspective: we work hard to understand operators’ needs, objectives and constraints. This allows us to function as a partner, sharing our global expertise through the solutions we deliver. Innovation: our solutions are forward-looking and future proof. A scalable portfolio means that we can always offer the right solutions for the customer, based on market and position, helping our customers to create new revenue streams. > > Delivering cost-efficiency: we ensure that the solutions we offer reduce our customers’ operating expenses. Assets Throughout our business, we leverage Ericsson’s key competitive advantages: > Technology leadership: we always strive to lead, innovate and set the agenda for the industry. We drive the creation of interoperable ecosystems. We have 30,000 granted patents and with over 90 license agreements we are a net receiver of royalties. We provide superior-performance networks through a unique combination of hardware and software design. > Services leadership: we have 56,000 services professionals worldwide operating from our ten regional service centers and four global service centers, using the same processes, methods and tools. Combining global scale advantages with local presence is what makes us unique. > Global presence and scale: we have established relationships with every major operator in the world and we are present in more than 180 countries. BUIlDING COvERAGE – TRANSfORMING NETWORkS Extensive mobile network coverage forms the building blocks of operator business. We start by helping customers to build out coverage. When that is in place, we offer additional services and solutions that enable expansions and enhancements of the network. This means that once operators have built a base of subscribers, they can differentiate their services, based both on quality and innovation, to retain competitive positions as markets develop. REPlICATING SUCCESS IN SERvICES We scale our business by replicating successes globally. This entails working closely with customers to develop new solutions. Once a successful case is proven we can roll out the same practice all over the world. Local competence, with intimate knowledge of the business environment, works hand-in-hand with global expertise, sharing common processes, methods and tools. This ensures quality and efficiency. Growth levers We have identified three key levers for growth where we believe we have strong assets to meet market demand: > Portfolio momentum: focusing on the areas where we have the most growth potential. These are mobile broadband, managed services and OSS and BSS. We expect the majority of growth to come from portfolio momentum. > Market share gain: building presence in markets that are investing more and where we see technology shifts. > Mergers, acquisitions and partnering: filling portfolio gaps and entering new growth areas, such as connected devices. PORTfOlIO MOMENTUM MARkET ShARE GAIN MERGERS & ACQUISITIONS AND PARTNERING > Mobile broadband – Strengthened market position in > Increase market share in technology shift mobile networks > Managed services – 70 new contracts in 2011 > OSS and BSS – Another 200 million subscribers served by our charging and billing systems + – LTE and network modernization – New radio base station RBS 6000 in almost all deliveries + > fill portfolio gaps – Telcordia for OSS/BSS (announced 2011) > New growth areas – M2M (Telenor Connexion platform) – Public safety (Motorola partnership) – Mobile cloud accelerator (Akamai partnership) 6 OUR OPERATIONS | Ericsson Annual Report 2011 WHYXinvestXEN_v55.indd 6 29/02/2012 13:11 x10 MOBIlE DATA TRAffIC WIll GROW TENfOlD BY END Of 2016. USEr-DrivEn bUSinESS In some industries, companies have to persuade their users to adopt their innovations. for operators, it’s the other way around. We understand the complexities involved in mobile networks. With that expertise, our customers can continue to satisfy the demands of their users. WHYXinvestXEN_v55.indd 7 29/02/2012 13:11 Ericsson Annual Report 2011 7 OpERATOR pORTfOLiO OPERATOR PORTFOLIO Our offering is divided into seven solution areas, each of which involves one or more of our businesses. Many of our contracts involve several solution areas. For example, services often form an important part of network projects. MObILE bROAdbAnd increasing user demands Mobile broadband now accounts for approximately 15% of all mobile subscriptions. Mobile data traffic is expected to have more than doubled in 2011, mainly due to new smartphone launches and the uptake of apps. PC and tablet users generate even more data traffic, and total mobile data traffic is estimated to grow tenfold by end of 2016, mainly driven by video. Operators need to put certain pre-requisites in place to ensure they can capitalize on mobile broadband. these include enhancing network quality, by increasing speed and capacity, and providing service differentiation. 3G/WCDMA and 4G/LTE We expect 3G/WCdMa to be the predominant mobile broadband technology for many years to come. during the year, we demonstrated a new HsPa world speed record in a commercial network, at 168Mbps downlink. Operators will be able to take a stepped approach towards this from 42Mbps, currently the fastest service offered over commercial networks. the next technology is ltE, which is in its initial phase. ltE covers only a few percent of the world’s population today. in five years’ time, it is expected that ltE will have roughly 35% population coverage. The RBS 6000 family the multi-standard radio base station rBs 6000 supports GsM/EdGE, WCdMa/HsPa, ltE and CdMa in a single unit. it offers cost-effective deployment and a future-proof evolution in capacity and functionality. the rBs 6000 family now accounts for close to 100% of our radio base station deliveries. a typical deployment project, comprising mainly hardware, is followed by an upgrade and Multi-standard RBS 6000 GSM, WCDMA, LTE, CDMA >1,000% more capacity >20% better radio performance 80% lower energy consumption per subscriber 100% better MtBF* 75% less space needed Compared to previous generations. * Mean time Between Failures expansion phase, which involves mostly software and services. during 2011 we launched the antenna integrated radio (air), as part of the rBs 6000 family. this product significantly reduces integration and installation time as well as energy consumption. Smart Services Routers network performance is the key operator differentiator when it comes to user experience. in 2011, we launched the ssr 8000 family, a series of smart services routers. they support delivery of services across fixed and mobile networks and enable faster introduction of new user services. For operators, the ssr 8000 family provides a simple, smart and scalable solution. For users, it means access to advanced services, with telecom-grade quality from any device anywhere. Heterogeneous networks (HetNets) By 2016, densely populated urban areas representing less than 1% of the Earth’s total land area are expected to generate around 60% of total mobile traffic. in order to increase network capacity in these areas, we will build Hetnets. Powerful macro radio base stations are complemented by smaller radio base stations (pico and micro) which provide extra capacity for areas where demand is particularly high. THE EVOLUTiON TO MOBiLE BROADBAND END-TO-END LEADERSHip iN MOBiLE BROADBAND Mobile broadband HSPA, LTE, CDMA2000 EV-DO Mobile internet GPRS, EDGE, WCDMA Mobile telephony GSM, CDMA2000 1990 2000 2010 8 Our OPEratiOns | Ericsson annual report 2011 Transport via microwave, fiber, copper Core network (all-IP) SSR 8000 Internet RBS 6000 Multi-standard radio base station for GSM, WCDMA/HSPA, LTE and CDMA SOLUTIONSXEN_v71.indd 8 29/02/2012 13:04 MAnAgEd sERvIcEs telecom operators look to reduce costs and manage complexity. therefore, they review their business models and look for partners that can take on a broader responsibility. in managed services agreements, Ericsson handles complex issues such as convergence, quality and capacity management, while freeing up operators’ resources to focus more on strategy, marketing and customer care. We can also help operators to scale quickly and cost-effectively. We manage networks with a total of more than 900 million subscribers, of which 500 million are in network operation contracts. Winning this business has involved insourcing employees from operators around the world. this provides us with a unique insight into the operator mindset. the networks we manage are typically complex multi- vendor, multi-technology environments, and over 50% of the equipment involved is non-Ericsson. Managed services contracts normally span five to seven years and often involve operational and process consulting. We provide efficiency by drawing on our global scale. Our four global service centers all house global network operation centers (GnOCs) for remote delivery of network management. these are based in romania, india, Mexico and China. as an example, more than 20 European operator networks are run from the GnOC in romania. Shared networks and shared capacity to drive structural efficiencies in the networks, there is an increasing demand for business models that support shared networks and capacity between two or more operators. Managed services play a decisive role in this evolution. Adjacent sectors We also address sectors with similar requirements to telecom operators where we can reuse our assets and expertise. We constantly look to expand operational synergies by increasing the scope of our managed services business in each country where we operate. OpERATOR pORTfOLiO OPERATIOns And busInEss suPPORT sysTEMs Service differentiation in order to monetize the increasing amount of data traffic in their networks, operators are beginning to adopt new business models with tiered pricing plans. this involves finding more ways to meet user needs than one-size-fits-all monthly subscriptions. Operators introduce ‘buckets’ of data – a fixed quantity that a user can utilize over a certain amount of time – or different speeds and quality guarantees. these new business models often require operators to evolve their Oss and Bss solutions. Operators also seek to manage increasing network complexity, while retaining efficiency and simplicity in operational processes, by consolidating their systems. these Oss and Bss transformation projects are large undertakings which involve consulting and systems integration alongside the provision of our software solutions. Control and monitoring Ericsson’s operations support systems (Oss) include solutions for monitoring network performance and the delivery of services for best user experience. Oss tools are also used in the planning, building and optimization of networks. during 2011, Ericsson announced the acquisition of telcordia, a provider of software and services for Oss and Bss. this allows us to enhance our capabilities to handle multi- vendor systems. provisioning and charging Our business support systems (Bss) include solutions for revenue management and customer care. With our convergent real-time charging solution the user gets one invoice for all services. Over 1.4 billion subscribers are charged and billed through Ericsson’s systems. With our solutions, operators can more efficiently capture and secure revenue streams. users benefit too, gaining the ability to start using a new service or device immediately after signing up, as well as greater control over their spending. MANAGED SERViCES Operate OpERATiONS AND BUSiNESS SUppORT SySTEMS Strategy Design Plan Build Field operations Network operations Business Support System Service network Core network Transmission Radio network Business Intelligence User understanding and insights Customer Relationship Management Customer support t n e m n o r i v n e T I / S I Service Fulfillment Making services available to users Service Assurance Ensuring the quality of services l T e e c o m e n v i r o n m e n t Billing and Revenue Management Charging and billing Operator responsibility Ericsson offering BSS OSS Ericsson annual report 2011 | Our OPEratiOns 9 SOLUTIONSXEN_v71.indd 9 29/02/2012 13:04 OpERATOR pORTfOLiO cOMMunIcATIOn sERvIcEs Communication services are the services people use to interact with each other, such as voice and video calls as well as text and multimedia messaging. these operator-based services are provided globally and are based on industry standards, ensuring interoperability. users expect their communication services to provide a seamless, instantaneous experience across all devices and all subscriptions. this shift requires operators to provide new functionality and richer offerings. Enhancing user experience Voice still accounts for, on average, 65% of operator revenue. Operators now exploit opportunities to enhance user experience while reducing costs for voice communication. Our iP Multimedia subsystem (iMs) makes this possible. services controlled by iMs are voice (including Hd voice), video calls, the rich Communication suite (rCs) and messaging. HD voice Hd voice significantly improves quality of voice communication with more natural sound and improved intelligibility. it is expected to play a key role in ensuring that voice continues to provide revenue streams for operators of both fixed and mobile networks. Voice over LTE Currently in its trial stage, Voice over ltE (VoltE) will enable operators to offer voice services over their all-iP ltE networks. it also brings with it new services such as Hd video and richer multimedia services. FIXEd bROAdbAnd And cOnvERgEncE strong growth in data traffic drives a need for higher capacity solutions, based on iP and Ethernet technologies. Operators compete by evolving their networks to provide fast internet speeds, reliable high-definition iPtV and video on demand. We enable this by providing end-to-end broadband access solutions via high-speed fiber (such as GPOn) and copper (xdsl). Convergence and transformation to reduce cost and enable service bundling, fixed traffic can be provided over a multiservice network converging telephony, internet and tV. Our converged networks are iP-based, providing lower-cost and higher-performance services. TELEvIsIOn And MEdIA MAnAgEMEnT TV is going digital and interactive in the converging media landscape, broadcast and broadband are coming together. the number of iPtV subscriptions worldwide is now more than 50 million. China, France and the us have particularly high iPtV subscription numbers today. We believe that the uneven spread of iPtV subscriptions in different regions is going to continue. the worldwide digital tV market is growing rapidly. With a broad suite of open standards-based products, we offer high-quality solutions for digital tV, HdtV, video on demand, iPtV, mobile tV, connected home and content management. High-performance solutions High-performance video means large amounts of traffic in the networks. this can be handled with our media distribution solution for video delivery over iP, combining a content distribution network with our tV portfolio. Our iPtV network infrastructure offers a verified end-to-end solution from video headend to broadband access, optimized for multi-stream Hd-iPtV and on-demand video services. the solution also offers support for video to mobile handsets over HsPa and ltE networks. Ericsson’s multiscreen tV solution combines the full features of iPtV, mobile tV and web tV with a common user interface. it fully integrates fixed line and wireless media for the first time. Business consulting, systems integration and implementation ensure a smooth launch of new tV infrastructure and services. cOnsuMER And busInEss APPLIcATIOns in today’s environment, basic services come under pressure from competition. to secure differentiation and profitability, we help operators to enhance revenues and subscriber retention. Our solutions include messaging, service exposure, connectivity to social media, location-based services, media, brokering, internet commerce and enterprise applications. interaction and collaboration Our Business Communication suite (BCs) is a software-as-a- service, targeting the enterprise market. it enables the sharing of voice, data and messaging in a collaborative environment. Ericsson Money services offers end-to-end mobile financial services. it enables people to store, transfer and withdraw money, as well as making payments, via their mobile handsets. Our multimedia brokering solution facilitates payment and distribution of content. We act as the interface between enterprises and multiple mobile operators with consumer data and services such as sMs. 10 Our OPEratiOns | Ericsson annual report 2011 SOLUTIONSXEN_v71.indd 10 29/02/2012 13:04 EFFIcIEncy ALwAys wIns Operators are constantly thinking about the competition. Will the big beat the small? The fast beat the slow? Who will prevail? One thing is for sure: efficiency always wins. That’s where we come in. 20% MANAGED SERViCES CAN REDUCE NETWORk OpERATiNG ExpENSES By 20%. SOLUTIONSXEN_v71.indd 11 29/02/2012 13:04 Ericsson annual report 2011 11 2011 HIGHLIGHTS 2011 HIGHLIGHTS JANUARY-MARCH JULY-SEPTEMBER > World speed record on a commercial HSPA network is set, at 168Mbps downlink and 24Mbps in the uplink. > Ericsson is selected by Telefónica O2 UK to perform network modernization in the North of the UK. > Bharti Airtel signs a five-year managed services agreement with Ericsson to manage and optimize its mobile networks in Africa, as well as a separate two-year network coverage and upgrade contract. > du in the UAE signs a five-year managed services contract with Ericsson to deliver application development and maintenance for its IT application landscape. > Ericsson, Verizon Wireless and Samsung demonstrate Voice over LTE (VoLTE), a global, interoperable voice solution for LTE mobile broadband networks. > The new Antenna Integrated Radio (AIR) product is launched. It cuts operational costs substantially and ensures a smooth introduction of new technologies and frequency bands. > Ericsson announces a new generation IP networking portfolio. The first product is the Smart Services Router (SSR 8000) family for fixed and mobile broadband. > Akamai and Ericsson announce a strategic alliance, focused on > A consortium of technology companies, of which Ericsson is a part, wins the bid for all of Nortel’s approximately 6,000 remaining patents and patent applications. > SoftBank Mobile in Japan chooses Ericsson as sole supplier for next-generation packet core network (EPC) based on IP. > Slovak Telekom, part of the Deutsche Telekom Group signs a five-year fixed line managed-services contract with Ericsson for field maintenance and network operations. > MobiFone in Vietnam signs a contract with Ericsson for mobile video optimization, enabling high-quality video. > Ericsson announces a contract with Taiwan’s Chunghwa Telecom to deploy and integrate a new IPTV platform that will deliver multi-screen interactive multimedia services. bringing to market mobile cloud acceleration solutions. > Ericsson announces further investment in competence in the global service center in India, providing operators with support and operations of IT services. > EastLink, Canada selects Ericsson to build a mobile broadband network for HSPA+. APRIL-JUNE OCTOBER-DECEMBER > Ericsson announces the acquisition of Telenor Connexion’s M2M technology platform, a solution which will drive the market for M2M (machine-to-machine). > Augere awards India’s first 4G/TD-LTE contract to Ericsson. The agreement includes an end-to-end TD-LTE solution, managed services and network operations. > Ericsson signs a multi-year agreement with Rogers, Canada to deliver an end-to-end LTE network. > Clearwire in the US selects Ericsson for managed services: network engineering, operations and maintenance for core, transmission and access networks. > Ericsson’s first contract in the gaming industry is awarded by Mindark. The IMS solution enables live, high-quality voice communication between players while gaming. > Ericsson announces the acquisition of Telcordia, a global provider of OSS/BSS software and services. > LG U+, the first LTE service provider in Korea, places a contract with Ericsson to build an ultra-high speed LTE network. > Ericsson and Open Mobile sign Latin America’s first 4G/LTE contract in Puerto Rico. The deal also includes managed services. > Ericsson and Sony announce that Sony will acquire Ericsson’s 50% stake in Sony Ericsson. > Bharti Airtel renews and expands its managed services agreement with Ericsson for its operations in India. Under the five-year agreement, Ericsson will operate, maintain and provide services for 2G and 3G in Bharti Airtel’s multi-vendor network in India. 12 2011 HIGHLIGHTS | Ericsson Annual Report 2011 5YXhighlightsXENX11_v55.indd 12 29/02/2012 12:52 FIvE-YEAR SUMMARY FIVE-YEAR SUMMARY For definitions of the financial terms used, see Glossary, Financial Terminology and Exchange Rates. FIvE-YEAR SUMMARY SEK million Income statement items Net sales Operating income Financial net Net income Year-end position Total assets Working capital Capital employed Gross cash Net cash Property, plant and equipment Stockholders’ equity Non-controlling interest Interest-bearing liabilities and post-employment benefits Other information Earnings per share, basic, SEK Earnings per share, diluted, SEK Earnings per share (non-IFRS), SEK Cash flow from operating activities per share, 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 EBITA 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 2011, as proposed by the Board of Directors. 2011 Change 2010 2009 2008 2007 226,921 17,900 221 12,569 280,349 109,552 186,307 80,542 39,505 10,788 143,105 2,165 12% 9% – 12% –1% 4% 2% –8% –23% 14% –1% 29% 203,348 16,455 –672 11,235 281,815 105,488 182,640 87,150 51,295 9,434 145,106 1,679 206,477 5,918 325 4,127 269,809 99,079 181,680 76,724 36,071 9,606 139,870 1,157 208,930 16,252 974 11,667 285,684 99,951 182,439 75,005 34,651 9,995 140,823 1,261 187,780 30,646 83 22,135 245,117 86,327 168,456 57,716 24,312 9,304 134,112 940 41,037 14% 35,855 40,653 40,354 33,404 3.80 3.77 4.72 3.11 2.50 1) 44.57 3,211 3,206 3,233 4,994 3,546 2,748 5,490 32,638 14.4% 9.6% 7.9% 9.9% 40% 8.5% 11.3% 51.8% 1.2 78 3.6 86,570 38.1% 104,525 17,500 116,507 9% 9% –2% –63% 11% –2% – – – 35% 8% – –18% 3% – – – – – – – – – – – –11% – 16% –2% 16% 3.49 3.46 4.80 8.31 2.25 45.34 3,200 3,197 3,226 3,686 3,296 7,246 6,657 31,558 15.5% 8.7% 8.1% 11.0% 112% 7.8% 9.6% 52.1% 1.1 74 3.2 96,951 47.7% 90,261 17,848 100,070 1.15 1.14 2.87 7.67 2.00 43.79 3,194 3,190 3,212 4,006 3,502 11,413 8,621 33,055 16.0% 6.5% 2.9% 6.7% 117% 2.6% 4.3% 52.3% 1.1 68 2.9 88,960 43.1% 82,493 18,217 94,829 3.54 3.52 4.24 7.54 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% 9.4% 92% 8.2% 11.3% 49.7% 1.2 68 3.1 84,917 40.6% 6.87 6.84 7.53 6.04 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% 18.0% 66% 17.2% 20.9% 55.1% 1.2 70 3.4 64,678 34.4% 78,740 20,155 109,254 74,011 19,781 102,486 5YXhighlightsXENX11_v55.indd 13 29/02/2012 12:52 Ericsson Annual Report 2011 | FIVE-YEAR SUMMARY 13 STOCK EXCHANGE TRADING 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 New York 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 2011, approximately 6 (6) billion Ericsson shares were traded, of which about 3.4 billion were traded on NASDAQ OMX Stockholm and about 1.6 billion were traded on NASDAQ New York. Trading volume in Ericsson shares decreased by approximately 2% on NASDAQ OMX Stockholm and decreased by approximately 2% on NASDAQ New York compared to 2010. (Note: The approximate total volumes include trading on alternative trading venues such as BATS Europe, Burgundy, Chi-X Europe.) THE ERICSSON SHARE Share listings NASDAQ OMX Stockholm NASDAQ New York Share data Total number of shares in issue of which Class A shares of which Class B shares Ericsson treasury shares, Class B Quotient value Market capitalization, December 31, 2011 GICs (Global Industry Classification) Ticker codes NASDAQ OMX Stockholm NASDAQ New York Bloomberg NASDAQ OMX Stockholm Bloomberg NASDAQ Reuters NASDAQ OMX Stockholm Reuters NASDAQ ISIN ERIC A ERIC B ERIC CUSIP 3,273,351,735 261,755,983 3,011,595,752 62,846,503 SEK 5.00 approx. SEK 230 b. 45201020 ERIC A ERIC B ERIC ERICA SS ERICB SS ERIC US ERICa.ST ERICb.ST ERIC.O SE0000108649 SE0000108656 US2948216088 294821608 CHANGES IN NumbER Of SHARES AND CApITAl STOCK 2007–2011 2007 2008 2008 2008 2009 2009 2010 2011 December 31 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 December 31 December 31 SHARE pERfORmANCE INDICATORS Earnings per share, diluted (SEK) 2) Earnings per share, diluted non-IFRS (SEK) 3) Operating income per share (SEK) 4) 5) Cash flow from operating activities per share (SEK) 4) Stockholders’ equity per share, basic, end of period (SEK) 6) P/E ratio Total shareholder return (%) Dividend per share (SEK) 7) 1) 2007 restated for reverse split 1:5 in 2008. 2) Calculated on average number of shares outstanding, diluted. 3) EPS, diluted, excluding amortizations and write-downs of acquired intangible assets, SEK. 4) Calculated on average number of shares outstanding, basic. 5) For 2010, 2009 and 2008 excluding restructuring charges. 6) Calculated on number of shares, end of period. 7) For 2011 as proposed by the Board of Directors. For definitions of the financial terms used, see Glossary, Financial Terminology and Exchange Rates. Number of shares Share capital 16,132,258,678 3,226,451,735 19,900,000 3,246,351,735 27,000,000 3,273,351,735 3,273,351,735 3,273,351,735 16,132,258,678 16,132,258,678 99,500,000 16,231,758,678 135,000,000 16,366,758,678 16,366,758,678 16,366,758,678 2011 2010 3.77 4.72 5.58 3.11 44.57 19 –7 2.50 3.46 4.80 7.42 8.31 45.34 22 22 2.25 2009 1.14 2.87 5.80 7.67 43.79 57 15 2.00 2008 3.52 4.24 7.50 7.54 44.21 17 –20 1.85 2007 1) 6.84 7.53 9.64 6.04 42.17 11 –43 2.50 14 SHARE INFORMATION | Ericsson Annual Report 2011 SHAREXINFOXENX11_v49.indd 14 2012-03-06 11.20 150 75 125 SEK 50 150 100 25 125 75 0 100 50 SEK 25 150 100 SEK 1,000 SEK m. 400 1,200 800 200 1,000 600 0 800 400 600 200 400 0 SEK m. 200 120,000 0 100,000 80,000 SEK m. 120,000 60,000 100,000 SEK m. 40,000 120,000 80,000 20,000 100,000 60,000 0 80,000 40,000 60,000 20,000 40,000 0 20,000 0 SHARE TRENd 1,200 Class A shares SEK m. In 2011, Ericsson’s total market capitalization decreased by about 10% to SEK 230 billion, compared to an increase by 18% reaching SEK 255 billion in 2010. The OMX Stockholm Index on NASDAQ OMX Stockholm decreased by 17% and the NASDAQ 125 composite index decreased by 2%. The S&P 500 Index remained at the same level as in 2010. 800 SEK m. Class A shares 100 SEK 1,000 150 SEK 1,200 600 SHARE TuRNOvER AND pRICE TREND, NASDAQ OmX STOCKHOlm Class A shares Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 SHARE TREND 2.50 2.25 DIvIDEND pER SHARE SEK 2.50 2.00 1.851.85 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 20111) 1) For 2011 as proposed by the Board of Directors. Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) 75 25 50 0 EARNINGS pER SHARE, DIluTED Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Class B shares Jan-Dec, 2010 Jan-Dec, 2011 Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 0 125 Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) Class B shares Class B shares Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 150 75 125 SEK 50 150 100 25 125 75 0 100 50 Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) 75 25 Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) 50 0 25 0 Volumes reflect trading on NASDAQ OMX Stockholm only. Jan-Dec, 2008 Jan-Dec, 2007 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 SHARE TuRNOvER AND pRICE TREND, uS mARKET Turnover, SEK million Price, SEK OMX Stockholm (indexed to share price) USD m. 4,200 3,500 2,800 USD m. 4,200 2,100 3,500 USD m. 1,400 4,200 2,800 700 3,500 2,100 0 2,800 1,400 2,100 700 1,400 0 700 0 ADS ADS ADS Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 Turnover, USD million Price, USD S&P 500 (indexed to ADS price) Volumes reflect trading on NASDAQ New York only. Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 Turnover, USD million Price, USD S&P 500 (indexed to ADS price) USD 24 20 16 USD 24 12 20 USD 8 24 16 4 20 12 0 16 8 12 4 8 0 4 0 SEK 8 3 5 . 4 7 8 . 6 6 4 2 0 0 8 . 4 2 7 . 4 7 7 . 3 4 2 . 2 4 5 . 3 6 4 . 7 3 8 . 2 4 1 . 1 2007 2008 2009 2010 2011 Earnings per share, diluted Earnings per share, diluted (non-IFRS) 1) 1) EPS, diluted, excl. amortizations and write-downs of acquired intangible assets, SEK. STOCKHOlDERS’ EQuITy pER SHARE, bASIC SEK 50 40 30 20 10 0 42.17 44.21 43.79 45.34 44.57 2007 2008 2009 2010 2011 Ericsson Annual Report 2011 | SHARE INFORMATION 15 SHAREXINFOXENX11_v49.indd 15 Jan-Dec, 2007 Jan-Dec, 2008 Jan-Dec, 2009 Jan-Dec, 2010 Jan-Dec, 2011 2012-03-06 11.20 Turnover, USD million Price, USD S&P 500 (indexed to ADS price) OffER AND lISTING DETAIlS OFFER ANd lISTINg dETAIlS SHARE pRICES ON NASDAQ OmX STOCKHOlm (SEK) 2011 2010 2009 2008 2007 1) Class A at last day of trading Class A high (May 16, 2011) Class A low (October 4, 2011) Class B at last day of trading Class B high (May 12, 2011) Class B low (October 4, 2011) 69.55 74.00 65.00 59.30 76.80 93.60 88.40 78.80 83.60 148.50 59.05 65.20 55.40 40.60 73.00 70.40 78.15 65.90 58.80 75.90 96.65 90.45 79.60 83.70 149.50 61.70 65.90 55.50 40.60 72.65 1) 2007 restated for reverse split 1:5 in 2008. SHARE pRICES ON NASDAQ NEw yORK (uSD) 2011 2010 2009 2008 2007 1) ADS at last day of trading ADS high (May 10, 2011) ADS low (October 4, 2011) 10.13 11.53 9.19 7.81 11.68 15.44 12.39 10.92 14.00 21.71 8.83 9.40 6.60 5.49 11.12 1) 2007 restated for reverse split 1:5 in 2008. principal trading market – NASDAQ OmX Stockholm – share prices The table below states the high and low share prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to trading on the exchange there is also trading off the exchange and on alternative venues during trading hours and also after 5:30 p.m. (CET). 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. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 259 companies. Host market NASDAQ New york – ADS prices The table below states the high and low share prices quoted for our ADSs on NASDAQ New York for the last five years. The NASDAQ New York quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions. SHARE pRICES ON NASDAQ OmX STOCKHOlm AND NASDAQ NEw yORK NASDAQ OmX Stockholm SEK per Class A share low High NASDAQ New york SEK per Class b share uSD per ADS 1) High High low low 148.50 83.60 78.80 88.40 93.60 78.70 88.40 86.55 77.05 80.05 93.60 91.80 71.50 78.50 70.10 69.95 71.25 71.50 72.00 73.00 40.60 55.40 65.20 59.05 65.20 73.00 69.00 66.95 70.50 73.00 60.50 59.05 60.80 60.50 59.05 62.00 65.60 59.25 149.50 83.70 79.60 90.45 96.65 80.00 90.45 89.35 79.95 83.00 96.65 93.80 72.55 81.40 73.30 72.20 72.55 71.85 71.90 72.65 40.60 55.50 65.90 61.70 65.90 74.15 70.85 68.85 73.25 75.30 63.15 61.70 63.15 63.65 61.70 64.35 64.75 58.15 21.71 14.00 10.92 12.39 15.44 11.33 12.39 12.20 11.71 13.06 15.44 14.82 11.25 12.75 11.51 11.25 10.88 10.54 10.53 11.12 5.49 6.60 9.40 8.83 9.40 9.51 9.62 9.96 10.99 12.06 9.33 8.83 10.08 9.33 8.83 9.16 9.27 8.58 period Annual high and low 2007 2) 2008 2009 2010 2011 Quarterly high and low 2010 First Quarter 2010 Second Quarter 2010 Third Quarter 2010 Fourth Quarter 2011 First Quarter 2011 Second Quarter 2011 Third Quarter 2011 Fourth Quarter monthly high and low August 2011 September 2011 October 2011 November 2011 December 2011 January 2012 1) One ADS = 1 Class B share. 2) 2007 restated for reverse split 1:5 in 2008. 16 SHARE INFORMATION | Ericsson Annual Report 2011 SHAREXINFOXENX11_v49.indd 16 2012-03-06 11.20 SHAREHOldERS As of December 31, 2011, the Parent Company had 592,542 shareholders registered at Euroclear Sweden AB (the Central Securities Depository – CSD), of which 1,320 holders had a US address. According to information provided by Citibank, there were 211,822,341 ADSs outstanding as of December 31, 2011, and 4,702 registered holders of such ADSs. A significant number of Ericsson ADSs are held by banks, broker and/or nominees for the accounts of their customer. As of January 12, 2012, the total number of bank, broker and/or nominee accounts holding Ericsson ADSs was 168,430. According to information known at year-end 2011, approximately 80% 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. SHAREHOlDERS GEOGRApHIC OwNERSHIp bREAKDOwN Percent of capital % Sweden: 45.51% (45.85%) United States: 21.40% (24.94%) United Kingdom: 8.92% (8.17%) Norway: 3.42% (2.45%) France 1.34% (1.33%) Other countries 19.41% (17.26%) Geographical breakdown of share capital including retail shareholders and treasury shares. Source: Capital Precision THE EXECuTIvE lEADERSHIp TEAm AND bOARD mEmbERS, OwNERSHIp Number of Class A shares Number of Class b shares voting rights, percent The Executive Leadership Team and Board members as a group (32 persons) 750 3,712,484 0.07 For individual holdings, see Corporate Governance Report. The table shows the total number of shares in the Parent Company owned by the Executive Leadership Team and Board members (including Deputy employee representatives) as a group as of December 31, 2011. The following table shows share information, as of December 31, 2011, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2011, 2010 and 2009. lARGEST SHAREHOlDERS, DECEmbER 31, 2011 AND pERCENTAGE Of vOTING RIGHTS, DECEmbER 31, 2011, 2010 AND 2009 Identity of person or group 1) Investor AB AB Industrivärden Handelsbankens Pensionsstiftelse Swedbank Robur Fonder AB AFA Försäkring AB Blackrock Fund Advisors Pensionskassan SHB Försäkringsförening Skandia Liv AMF Pensionsförsäkring AB Norges Bank Investment Management OppenheimerFunds, Inc. Aberdeen Asset Managers Ltd. Dodge & Cox, Inc. Handelsbanken Fonder AB SEB Investment Management AB Others Total 1) Source: Capital Precision. Number of Class A shares 115,018,707 80,708,520 23,648,790 1,501,376 11,423,000 26,316 7,798,000 6,327,567 0 0 0 0 0 0 119,860 15,183,847 261,755,983 Of total Class A shares, percent 43.94 30.83 9.03 0.57 4.36 0.01 2.98 2.42 0.00 0.00 0.00 0.00 0.00 0.00 0.05 5.80 100.00 Number of Class b shares 58,709,995 0 0 141,913,401 15,779,975 82,156,094 0 13,372,958 75,600,000 69,572,027 67,628,249 58,953,636 54,067,771 54,063,621 48,162,614 2,271,615,411 3,011,595,752 Of total Class b shares, percent 1.95 0.00 0.00 4.71 0.52 2.73 0.00 0.44 2.51 2.31 2.25 1.96 1.80 1.80 1.60 75.43 100.00 2011 voting rights, percent 21.48 14.34 4.20 2.79 2.31 1.46 1.39 1.36 1.34 1.24 1.20 1.05 0.96 0.96 0.88 43.05 100.00 2010 voting rights, percent 19.33 13.80 3.52 2.73 0.45 1.44 2.07 2.98 1.34 0.89 1.29 1.01 1.43 1.05 0.99 45.68 100.00 2009 voting rights, percent 19.33 13.62 3.52 3.07 0.47 1.81 2.25 3.02 1.30 0.89 1.29 0.71 1.05 0.94 0.89 45.84 100.00 SHAREXINFOXENX11_v49.indd 17 2012-03-06 11.20 Ericsson Annual Report 2011 | SHARE INFORMATION 17 LETTER FROM THE CHAIRMAN Letter from Leif Johansson Dear shareholders, Thank you for electing me Chairman of the Board of Ericsson. I have spent my first year here improving my understanding of Ericsson’s competitive advantages. With my engineering background and passion for the field, I thought I had a reasonably good understanding of how a mobile network operates. Over the past year, I have been fascinated to realize that the architecture of a mobile system is much deeper and more complex than I imagined. This is especially true in areas where mobile systems connect with the internet. Ericsson has managed to strengthen its leading position in this industry which proves the Company’s unique technology leadership. Ericsson is not only a high-tech, skilled software and engineering company. The Company also has genuine skills in broader communication systems, processes and of course services operations. The Board is pleased that Ericsson emerged from 2011 as a stronger competitor and with its clear vision on how to be part of and where to take the industry, Ericsson is positioned to continue to be its global thought leader. Close to the customer Over the past year, the Board of Directors has spent time reviewing Ericsson’s strategy as well as the development of the industry. Key topics have included how telecom operators’ business models are transforming, with new traffic patterns, driven by devices such as smartphones and tablets. Another important topic has been how our organizational structure can secure that Ericsson always stays close to the customer. A key competitive advantage for Ericsson is its ability to really understand and support telecom operators in developing their business models and optimizing their assets. The economic environment, and its potential impact on Ericsson and its customers, has of course also been a part of our meetings. It is important for the Board of Directors to follow the contingency plans that the management team has prepared to be able to adapt quickly to tougher times when needed. We are confident that such plans are in place and operating where appropriate. Divestment of Sony Ericsson In 2011, we took the decision to divest our 50% share in Sony Ericsson to Sony Corporation. The transaction is a logical strategic step that makes it possible for Ericsson to focus on enabling connectivity for all devices. The Board of Directors continued to monitor the Company’s remuneration principles during the year. We believe that Ericsson has a well-balanced and competitive compensation structure which rewards performance. At the Annual General Meeting 2011 the incentive targets for the Executive Performance Stock Plan were changed. They now relate to top-line growth as well as operating income and cash flow performance. This Performance Plan runs for three years, so it is too early to evaluate it. However, our impression is that the Plan targets are clear, relevant and have the desired effect of focusing everyone on the same key goals for Ericsson. Strong financial position An essential part of the Board’s responsibilities is to manage the Company’s financial position. The Company has a strong balance sheet today and we believe it is appropriate to be fairly conservative under the present economic conditions. We want to use cash on hand to further develop the Company, making investments in own product and business development. In addition, we will, as before, consider selective acquisitions. The Company’s dividend policy takes into account last year’s earnings and balance sheet structure, as well as coming years’ business plans and economic development. I have greatly enjoyed my first year at Ericsson. I have been kindly welcomed and I have liked interacting with everyone at Ericsson. It is never by chance that companies become successful. I am impressed with the professionalism and perseverance I have found among Ericsson people and want to thank all of them for their dedication and hard work. Leif Johansson Chairman of the Board 18 LETTER FROM THE CHAIRMAN | Ericsson Annual Report 2011 CHAIRMANXEN_v43.indd 18 29/02/2012 13:15 BOARD OF DIRECTORS’ REPORT TARGETS AND PERFORMANCE COnTEnTS TARGETS AND PERFORMANCE VISION AND MISSION CORE VALUES TRENDS AND DRIVERS STRATEGY BUSINESS FOCUS 2011 COMPETITIVE ASSETS BUSINESS MIX DYNAMICS FINANCIAL RESULTS OF OPERATIONS FINANCIAL POSITION CASH FLOW BUSINESS RESULTS – REGIONS BUSINESS RESULTS – SEGMENTS SUSTAINABILITY AND CORPORATE RESPONSIBILITY CORPORATE GOVERNANCE RISk MANAGEMENT LEGAL AND TAX PROCEEDINGS SOURCING AND SUPPLY MATERIAL CONTRACTS PARENT COMPANY POST-CLOSING EVENTS BOARD ASSURANCE 19 21 21 21 22 23 24 25 26 28 30 32 34 38 40 40 41 41 41 42 43 43 The non-IFRS financial measures presented herein are not recognized measures of financial performance under IFRS, but rather are measures reported to facilitate analysis by indicating Ericsson’s underlying performance excluding impact from restructuring. Non- IFRS measures have limitations as analytical tools and 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 26. TARgETS AnD PERFORmAnCE Ericsson’s overall goal is to create shareholder value. Management uses four metrics to evaluate the Company’s long-term ambitions: sales growth faster than the market, a best-in-class operating margin, growth in joint ventures’ earnings and a strong cash conversion. The Board of Directors has translated these metrics into three performance criteria in the Executive Performance Stock Plan, included in the Company’s Long-Term Variable (LTV) remuneration program. These performance criteria have also been approved by the Annual General Meeting. Long-term ambitions GROW FASTER THAN THE MARkET Early internal market data indicates that Ericsson increased its market share in mobile network equipment by 6 percentage points to 38% in 2011, reaching twice the market size of the second largest supplier in this market. This includes the technologies GSM/EDGE, WCDMA/HSPA, CDMA and LTE. LTE technology is in an early build-out phase. Ericsson estimates its market share in LTE at more than 60%. This makes Ericsson the largest supplier of LTE. With its CDMA offering, Ericsson has a strong position in North America, where the Company increased its market share in 2011. In telecom services, internal market data indicates that the Company at least kept its market share of more than 10% and is larger than any of its competitors in this fragmented market. BEST-IN-CLASS OPERATING MARGIN The Company’s operating margin before share in JV earnings was 9.6% (12.0%). The 2010 number excludes restructuring charges. In 2010, operating margin was 8.7% before share in JV REVENUE GROWTH PROFITABILITY CAPITAL EFFICIENCY Percent 12 10 8 6 4 2 0 –2 –4 4% 11% 11% 12% –1% –1% –2% SEK billion Percent Percent 30.6 16.3% 23.9 23.7 18.5 11.4% 11.7% 9.0% 17.9 7.9% 35 30 25 20 15 10 5 0 20 16 12 8 4 0 140 120 100 80 60 40 20 0 92% 92% 66% 117% 112% 112% 112% 40% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Operating income including JVs Operating margin including JVs 2008–2010, excluding restructuring charges 2007 and 2011 including restructuring charges Cash conversion Target Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 19 BODX1XEN_v127.indd 19 29/02/2012 15:56 TARGETS AND PERFORMANCE earnings and including restructuring charges. Based on reported results for 2011, the operating margin remains the highest among the Company’s traditional publicly listed telecom competitors. GROWTH IN JV EARNINGS Joint ventures’ earnings decreased to SEK –3.8 (–0.7) billion. The figure for 2011 includes restructuring charges of SEK 0.6 billion, while 2010 excludes restructuring charges of SEK 0.5 billion. Ericsson’s share in earnings from Sony Ericsson was SEK –1.2 (0.9) billion, including restructuring charges in 2011 and excluding restructuring charges in 2010. The share in earnings in ST-Ericsson was SEK –2.7 (–1.5) billion, including restructuring charges in 2011 and excluding restructuring charges in 2010. Sony Ericsson’s loss related to intense competition, price erosion, restructuring charges and supply chain issues following the earthquake and tsunami in Japan. In October 2011, Ericsson announced the divestment of its 50% share in Sony Ericsson to Sony Corporation. ST-Ericsson is in a transitional phase, moving from legacy products to new products. STRONG CASH CONVERSION The cash conversion rate was 40% (112%), negatively impacted by higher working capital. Cash conversion is defined as cash flow from operating activities divided by net income reconciled to cash. Executive Performance Stock Plan The Company has a Long-Term Variable (LTV) remuneration program. The program builds on a common platform, but consists of three separate plans, targeting all employees, key contributors and senior managers respectively. The LTV program is designed to encourage long-term value creation in alignment with shareholders’ interests. The aim of the plan for senior managers is to attract, retain and motivate executives in a competitive market through performance-based share related incentives and to encourage the build-up of significant equity stakes. The performance criteria for senior management, i.e. the Executive Performance Stock Plan, are revised yearly and approved by the Annual General Meeting. Performance criteria for the 2012 Executive Performance Stock Plan will be communicated in the notice to the Annual General Meeting. In the 2011 Executive Performance Stock Plan the performance criteria are: 1. Up to one third of the award will vest if the compound annual growth rate of consolidated net sales is 4–10% from 2010 to 2013. 2. Up to one third of the award will vest if the compound annual growth rate of consolidated operating income, including earnings in joint ventures and restructuring, is 5–15% from 2010 to 2013. Base year 2010 is calculated excluding restructuring of SEK 6.8 billion. 3. Up to one third of the award will vest if cash conversion is at or above 70% during each of the years 2011–2013, vesting one ninth of the total award for each year if the target is achieved. The target was not reached in 2011. The Board of Directors will consider the impact of larger acquisitions, divestments, the creation of joint ventures and any other significant capital event on the three targets on a case-by-case basis. This consideration will be made in the evaluation of the program after it closes. Working capital targets Ericsson’s working capital targets are described on pages 28–29. The targets remain for 2012. SHAREHOLDER VALUE CREATION Long-term ambition Executive Performance Stock Plan targets for 2010–2013 GROW FASTER THAN THE MARKET Net sales growth 4–10% CAGR BEST-IN-CLASS MARGINS GROWTH IN JV EARNINGS Operating income growth 5–15% CAGR including JVs and restructuring* * base year 2010 excl. restructuring STRONG CASH CONVERSION Cash conversion >70% annually 20 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX1XEN_v127.indd 20 29/02/2012 15:56 Other performance indicators Ericsson believes that satisfied customers and motivated employees are key to success. CUSTOMER SATISFACTION Every year, an independent customer satisfaction survey is performed. In 2011 approximately 10,000 representatives of Ericsson customers, in different positions around the world, were polled to assess their satisfaction with Ericsson, compared to its main competitors. Over the past five years, Ericsson has maintained a level of excellence. The goal is to increase this level further. EMPLOYEE ENGAGEMENT In order to measure employee engagement, an annual survey is conducted by an independent company. In 2011, 90% (87%) of all employees across the world responded to the survey. In the Employee Engagement Index, Ericsson scored 77, which is 10% higher than the worldwide average. This is a globally-recognized benchmark which is used by more than 190 companies with over 7 million respondents. It incorporates measurements of motivation, satisfaction and commitment. VISIOn AnD mISSIOn Ericsson’s vision and mission are the motivation behind everything the Company does. Vision The Company’s vision is to be the prime driver in an all- communicating world. Ericsson envisions a continued evolution, from having connected 6 billion people to connecting 50 billion ‘things’. The Company envisions that anything that can benefit from being connected will be connected, mainly via mobile broadband. Mission The Company’s mission is “Innovating to empower people, business and society”. TRENDS AND DRIVERS CORE VAluES Respect, professionalism and perseverance are the values that are the foundation of the Ericsson culture. They guide all employees in their daily work, how they relate to people and how they do business. TREnDS AnD DRIVERS The general industry trend in 2011 was the focus on high performance broadband networks. This includes the mobile broadband business case for customers, meeting increased user demands and the strong uptake of mobile devices such as tablets and smartphones. Prices of smartphones continued to decline and in high growth markets, smartphones at a retail price of less than USD 100 were introduced. Operators started to look into tiered pricing and new business models for mobile broadband, as well as the introduction of cloud-based services. In Europe, operators started to modernize their mobile networks, while it became an increasing interest among operators globally to transform their Operations Support Systems (OSS) and Business Support Systems (BSS). When forecasting the market and developing internal plans, Ericsson looks at a number of parameters. These include: > High-traffic smartphone subscriptions, as percentage of total subscriptions > Average data traffic, measured in Mbytes per subscription per month > Mobile broadband subscriptions as percentage of total mobile subscriptions. Out of the installed base of subscriptions worldwide only around 10% use smartphones. With cheaper smartphones being introduced, this number is expected to grow. Ericsson estimates that overall mobile data traffic more than doubled in 2011. Mobile data traffic is expected to grow tenfold by end of 2016, mainly driven by video. Traffic per subscriber partly relates to the screen size of the device. On average, a mobile PC user generates about 2 MOBILE BROADBAND SUBSCRIPTIONS TO REACH ALMOST 5 BILLION BY END OF 2016 VOICE AND DATA TRAFFIC TO INCREASE 10 TIMES BY END OF 2016 ) n o i l l i m ( s n o i t p i r c s b u S 5,000 4,000 3,000 2,000 1,000 0 ) B 5 1 0 1 ( s e t y B a t e P y h t n o M l 5,000 4,000 3,000 2,000 1,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mobile PCs/tablets Handheld devices * Mobile broadband is defined as CDMA2000 EV-DO, HSPA, LTE, Mobile WiMAX and TD-SCDMA. M2M subscriptions not included. Data: mobile PCs/tablets Data: mobile handheld Voice Source: Ericsson estimate, April 2011 Source: Ericsson estimate, April 2011 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 21 BODX1XEN_v127.indd 21 29/02/2012 15:56 TRENDS AND DRIVERS Gbytes of data per month, while a high-traffic smartphone user generates approximately 500 Mbytes per month. STRATEgY The coverage of the world’s mobile networks is constantly increasing as more radio base stations are being deployed. GSM/EDGE is the technology that by far has the widest reach, and today covers more than 85% of the world’s population. WCDMA/HSPA covered about 35% of the population in 2010 and now covers more than 45% of the world’s population. Further build out of WCDMA/HSPA coverage will be driven by the availability of affordable smartphones, the surge in mobile broadband services and faster speeds, as well as regulators’ requirements to connect unconnected people. By end of 2016, the Company estimates that 80% of the world’s population will have WCDMA/HSPA coverage. The combined 2G and 3G population coverage for CDMA is estimated to be above 50%. CDMA coverage is expected to grow slightly, and most large CDMA operators have announced a migration plan to LTE. Several major operators have started LTE deployments but in terms of population coverage LTE has a long way to go. In five years’ time, it is expected that LTE will have a population coverage of about 35%. In terms of global operator investments, WCDMA/HSPA is expected to remain the leading mobile access technology for many years. From a geographical perspective, GSM only lacks coverage in certain rural areas, while there are still large densely populated areas lacking WCDMA/HSPA coverage. GSM/EDGE, WCDMA/HSPA and LTE are all expected to increase both in terms of population and land coverage. LTE is expected to have an even faster adoption rate than previous technologies. By capitalizing on, investing in, developing and combining the Company’s key competitive assets of technology leadership, services leadership and global presence and scale, Ericsson aims to continue to be the prime driver in the evolving telecom industry and a leading player in the ICT industry. The installed base of radio access is the foundation for Ericsson’s business. From the installed base, the Company believes it can expand the product base to other domains such as IP, core, OSS and BSS. Over the past ten years, the Company has built a significant services business, representing 37% of total revenues in 2011. The services strategy starts with the product base and product-near services. By being successful in areas such as managed services (i.e. operators outsourcing network operations to the Company), consulting and systems integration, the Company gets yet another entry point to the market, which is an opportunity to generate more business. Cost awareness is an everyday component in the Company. Keeping up with competition from low cost countries has required Ericsson to focus on operational efficiency in every part of the business. Global presence and scale With business in more than 180 countries, the Company has a strong global presence. Ericsson does business with all major operators. Ericsson’s customers have, to a large extent, multi-country presence. All this, in combination with its leading market position, gives Ericsson important scale advantages. The Company has secured a mobile network market share of 43% in the world’s 100 largest cities. This is important for future business, since close to 60% of the world’s traffic in mobile networks is estimated to be generated in metro and urban areas by 2016. Ericsson has established common ways of working across the Company. These include global IT tools, one sales channel across all segments and global knowledge sharing, which creates efficiencies and enable quick responses to customer requests. COVERAGE GROWTH IN WCDMA/HSPA AND LTE GROWING BY LEVERAGING INSTALLED BASE 100% 80% Rural 60% 40% Sub urban 20% Urban e g a r e v o c n o i t a u p o p d l r o W l 0% Metro World population distribution ~92% >85% ~80% >45% ~53%~55% ~35% ~5% SCOPE Transformation Managed Services Product-near services Product Network driven Services driven 2011 2016 2011 2016 2011 2016 2011 2016 GSM/EDGE WCDMA/HSPA LTE CDMA Source: Ericsson estimate, December 2011 Radio Access TX IP Core OSS BSS DOMAIN 22 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX1XEN_v127.indd 22 29/02/2012 15:56 BUSINESS FOCUS 2011 Technology leadership Services leadership Key for success in the telecom industry is the delivery of future- proof, high-quality networks and solutions. The consumer experience is crucial for any operator. In addition, telecom operators want suppliers who can guarantee the entire eco- system, from applications, solutions and networks to handsets and mobile broadband modules. To keep its technology leadership, Ericsson invested SEK 32.6 billion, including restructuring charges, in R&D in 2011. This compares with SEK 29.9 billion in 2010, excluding restructuring charges. The Company took a strategic decision to increase R&D spending in 2011 in order to develop its new family of Smart Services Router (SSR 8000) products, TD-LTE and a CDMA unit for the radio base station RBS 6000. Ericsson focuses on optimizing networks and making them function well under high traffic loads. Every product and device from any supplier must be optimized for best network performance. Most of the Company’s R&D investment is in software development. With smarter software, algorithms, processes and designs, Ericsson secures that its networks and solutions have the industry’s best performance. By investing in R&D, the Company maintains its position as the key contributor in the development of open telecom standards. Ericsson believes it is the strongest holder of essential patents in the wireless industry. Since these standards are developed in industry-wide collaboration to ensure multi-vendor interoperability, patent holders waive their monopolies and commit to licensing their part of the technology to others wanting to use it. The Company complies with fair, reasonable and non-discriminatory licensing (FRAND). This fair return licensing provides incentive to make further investments in R&D, while also allowing for new entrants to commercialize the technology at a reasonable cost. International standards and FRAND licensing are fundamental for the telecom ecosystem and are a prerequisite for the global success of mobile communications. In R&D as well as in other areas, Ericsson has high cost awareness. Over several years, the Company has developed common software and hardware stacks as well as common components and platforms, all of which reduce cost. Local services competence and highly skilled project leaders are both prerequisites for success in telecom services. Ericsson has invested USD 1 billion in processes, methods and tools in order to secure common global frameworks and ways of working. Standardization of services, tools harmonization, centralization of deliveries and high competence in the delivery organization are all essential in order to drive quality and profitability. Employees Ericsson strives to have the best talent base in the industry. To achieve this, the Company has four objectives: > To attract the best talent Ericsson is strengthening its employer brand, to ensure fast, effective recruitment processes. > To have the right talent in the right place The Company is developing a holistic career and competence model to help employees understand available career paths. Ericsson encourages more rotation to allow employees to take on new challenges. > To ensure high performance at all times Ericsson has clear goals and objectives and conveys an understanding of how each individual can contribute to reach these goals. Managers and employees alike should give and receive feedback. > To maintain a strong leadership bench Ericsson has clear processes in place to identify talent. Today’s managers have a responsibility to cultivate tomorrow’s leaders, and are encouraged to do so. BuSInESS FOCuS 2011 Portfolio momentum MEETING DEMAND FOR MOBILE BROADBAND In 2011, there was a high demand for mobile broadband-related equipment including packet core, IP routers and microwave- based backhaul. Ericsson continued its ramp-up of the multi- standard radio base station RBS 6000. At year-end, the CITIES EXPECTED TO GENERATE MOST FUTURE MOBILE TRAFFIC GROWTH EMPLOYEES BY PROFESSION e g a r e v o c l n o i t a u p o p d l r o W 100% 80% 60% 40% Rural Sub urban Rural Sub urban Urban by 20% Urban 0% Metro Metro Estimated 2016 world population distribution % mobile traffic 2016 60% 30% 1% in 3% 7% 7% of traffic of world population 8% TOTAL NUMBER OF EMPLOYEES 104,525 54% of area 21% Services Research and development Supply Sales and marketing General and administration Other BODX1XEN_v127.indd 23 29/02/2012 15:56 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 23 BUSINESS FOCUS 2011 RBS 6000 represented close to 100% of all deliveries of GSM/ WCDMA/LTE radio base stations. This is the quickest product introduction ever in the Company’s history. The introduction has been smooth. In March 2011, Japan was hit by the tragic earthquake and tsunami. To mitigate effects on the business, Ericsson took action immediately such as securing component supply from new sources and re-designing products. By the third quarter, all remaining supply chain effects had been eliminated and lead time was back to normal. MOMENTUM FOR MANAGED SERVICES Recognizing that quality of service is becoming increasingly important, operators saw the need to differentiate themselves from competition by deploying superior, scalable networks emphasizing better user experience and quality. This also drove demand for services which target the operational efficiency of operators, such as managed services. MOMENTUM IN OSS AND BSS Operators focused on transforming their BSS solutions, including customer segmentation models, and ways to handle data growth and tiered pricing. Many operators started looking into the transformation of their OSS solutions, although few have reached the deployment phase. Market share gain Early internal market data indicates that Ericsson gained market share in mobile network equipment by 6 percentage points to 38%, thanks to a combination of winning new customers and growing existing customers. In Europe, network modernization is under way. Ericsson took a strategic decision to increase its market share in Europe when operators started to look into modernizing their networks, despite initial pressure on Group margins. The mobile networks in Europe are the world’s oldest and the reduced power consumption in modern equipment alone makes it a good business case for operators to replace old equipment with new. When operators in Europe deployed 3G some ten years ago, Ericsson could not afford the customer financing requirements and lost market share in 3G versus 2G. In the European network modernization, Ericsson’s strategy in 2011 has been to win back 3G market share. Acquisitions, partnerships and divestments > Telcordia, announced acquisition for USD 1.15 billion in an all cash consideration, filling portfolio gaps in OSS and BSS > Akamai, partnership in mobile cloud accelerator > Sony Ericsson, divestment of the 50% share to Sony > Telenor Connexion, acquisition of machine-to-machine platform > Nortel, acquisition of GDNT in China, of patents in partnership with other companies and acquisition of their Multi-Service Switch (MSS) business. Monetizing on the patent portfolio In the networked society, Ericsson envisions that anything that benefits from being connected will be connected. In this scenario, Ericsson foresees new entrants to the connectivity markets, both from device and equipment manufacturers and from other industries. Since Ericsson is the strongest holder of essential patents in the wireless industry, any company that uses connectivity today requires a license to Ericsson’s patents. Ericsson has over 90 license agreements and is a net receiver of royalties. The Company’s portfolio is well-licensed and gives customers good protection. COmPETITIVE ASSETS Global presence and scale as assets Ericsson has customers in more than 180 countries. Of 104,525 employees across the world, 56,000 are services professionals. This makes Ericsson a true global player. Ericsson’s market share in mobile network equipment makes it twice that of the number two player. This provides scale advantages. The Company has a mobile network equipment market share of 43% in the world’s 100 largest cities. More than 1.4 billion consumers are charged and billed through Ericsson’s solutions. In the OSS and BSS market, the Company is aspiring to a leading position. MULTI-STANDARD RADIO IPR REVENUES (NET) SEK billion Vendor A: GSM, WCDMA, LTE Multi- standard radio Baseband backhaul power Vendor B Vendor A Vendor X M S G A M D C W r e w o p e t i S l u a h k c a B 7 6 5 4 3 2 1 0 6.2 5.0 4.3 4.6 3.2 2007 2008* 2009 2010 2011* * One-off patent sales included Difference between IPR revenues and reported license revenues for 2007–2009 are related to Ericsson Mobile Platforms’ (EMP) revenues 24 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX1XEN_v127.indd 24 29/02/2012 15:56 Technology leadership as an asset BuSInESS mIX DYnAmICS BUSINESS MIX DYNAMICS Ericsson’s gross margin and the amount of capital tied up by projects vary with project type. Typically, there are two types of projects: coverage and capacity/expansions. These are to a high degree related to the mobile networks’ technology cycles, which are long, normally 10 to 20 years. Coverage projects are frequent in the initial phases of a technology cycle whereas capacity/expansion projects typically occur towards the later stages of a cycle. The initial phase of a technology cycle includes a higher degree of coverage buildouts and more rollout services. In many parts of the world, such as in Europe where networks are now being modernized, the projects are often of a turnkey character and civil works are sometimes part of the commitment. There is more hardware involved resulting in lower gross margin and a larger tie-up of capital in equipment. When coverage has been built and traffic in the network increases, the operator moves into the capacity/expansion phase. In this phase, capacity is increased, either by expanding a radio base station with software upgrades to higher speeds or by adding more sites. In capacity/expansion projects, the Company sells a larger share of software and integration services, which yields higher gross margins, and ties up less capital. Ericsson is now in a phase when there is more hardware in the business mix. This is due to the technology cycle where WCDMA/HSPA, i.e. mobile broadband, is being rolled out. To a high degree, operators now deploy the new multi-standard radio base station RBS 6000. This means that a limited amount of hardware installations will be needed when operators upgrade to LTE in the future. Ericsson has more than 22,000 employees in R&D. Measured in software revenues, Ericsson is the world’s fifth largest software company. The Company has 30,000 granted patents covering all generations of mobile technologies. Ericsson believes it has the industry’s strongest wireless IPR portfolio. In LTE, Ericsson expects to hold approximately 25% of all essential patents. IPR revenues were SEK 6.2 (4.6) billion in 2011. The Company’s unique combination of software and hardware provides superior performance in live networks. Measurements in live networks show that Ericsson networks have higher performance than its competitors. Ericsson’s software design targets stability and optimized commercial performance in networks. In radio, The Company’s software is run on proprietary hardware while in OSS and BSS the software is largely independent of hardware. In both areas, the strategy is to make the products configurable and flexible to integrate with a common platform strategy. In 2011, Ericsson introduced its new Smart Services Router (SSR 8000) family. Volume deliveries are expected in 2012. It is the first router ever to be built on a common platform for fixed and mobile applications. Services leadership as an asset Ericsson estimates its market share in telecom services at over 10%, making the Company the leader in this highly fragmented market. Of Ericsson’s 56,000 services professionals, some 12,000 are involved in consulting and systems integration. Many employees have been transferred from telecom operators in managed services deals over the recent years and represent an important experience base. Ericsson provides support to networks that serve more than two billion subscribers 24/7, and has global service centers in China, India, Mexico and Romania. The Company also has ten regional service centers across the world. In 2011, Ericsson participated in 1,200 major deployment projects, of which 100 were large and complex turnkey projects. The Company was also involved in 1,300 consulting and systems integration projects. Ericsson has more than 15 years of experience in managed services and manages networks with 900 million subscribers. SOFTWARE, HARDWARE AND SERVICES: SHARE OF TOTAL SALES BUSINESS MIX IMPACTING GROSS MARGIN 100% 80% l s e a s l a t o T 60% 40% 20% 0% 26% 24% 23% 36% 37% 40% 38% 39% 37% 2009 2010 2011 Software Hardware Services INITIAL PHASE (COVERAGE) EXPANSION PHASE (CAPACITY) > Break-in or green field > Open bidding > More hardware and rollout services > More capital tied up > Lower margins > Longer order cycle and projects > Upgrade, capacity increase and expansion of installed base > Shorter order cycle and projects > More software and integration services > Less capital tied up > Higher margins Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 25 BODX1XEN_v127.indd 25 29/02/2012 15:56 FINANCIAL RESULTS OF OPERATIONS 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) 2011 226.9 –147.2 79.7 35.1% –59.3 26.1% 1.3 IFRS 2010 203.3 –129.1 74.3 36.5% –58.6 28.8% 2.0 2009 206.5 –136.3 70.2 34.0% –60.0 29.0% 3.1 Restructuring charges 2010 2011 2009 –1.2 –1.2 –3.4 –3.4 –4.2 –4.2 –2.0 –3.5 –7.1 – – – Non-IFRS measures 2011 2010 2009 226.9 –146.0 80.9 35.7% –57.3 25.3% 1.3 203.3 –125.7 77.6 38.2% –55.2 27.1% 2.0 206.5 –132.1 74.4 36.0% –52.9 25.6% 3.1 21.7 17.6 13.3 –3.2 –6.8 –11.3 24.9 24.4 24.6 9.6% 8.7% 6.5% 11.0% 12.0% 11.9% –3.8 17.9 7.9% 0.2 –5.6 12.6 3.77 –1.2 16.5 8.1% –0.7 –4.5 11.2 3.46 –7.4 5.9 2.9% 0.3 –2.1 4.1 1.14 –0.6 –3.7 –0.5 –7.3 –1.3 –12.6 –3.2 21.6 9.5% –0.7 23.7 11.7% –6.1 18.5 9.0% 4.72 1) 4.80 1) 2.87 1) 1) EPS, diluted (non-IFRS), excluding amortizations and write-downs of acquired intangible assets, SEK. The non-IFRS financial measures presented herein are not recognized measures of financial performance under IFRS, but rather are measures used as supplemental information to the IFRS results. Since there were restructuring costs during 2009 and 2010 with significant impact on reported results and margins, certain income statement line items excluding restructuring charges, are presented as non-IFRS measures to facilitate analysis by indicating Ericsson’s underlying performance. Non-IFRS measures have limitations as analytical tools and should not be viewed in isolation or as substitutes to the IFRS measures, and do not necessarily indicate whether cash flow will be sufficient or available to meet Ericsson’s requirements, and may not be indicative of our historical operating results, nor are such measures meant to be predictive of future results. Non-IFRS measures for 2011 have also been included to facilitate comparison with previous years. For more details on the restructuring activities and corresponding charges, please see Note C5 – “Expenses by Nature”. Sales 2011 was a year with strong sales growth of 12%, driven by strong demand for mobile broadband along with network rollout services. Sales were negatively impacted by the strong SEK. Sales for comparable units, adjusted for currency exchange rate effects and hedging, increased 19%. NET SALES, OPERATING INCOmE ANd OPERATING mARGIN INCLUdING JvS SEK billion 250 16.3% 200 187.8 150 100 50 0 208.9 206.5 203.3 11.4% 11.7% 226.9 9.0% 7.9% 30.6 23.9 18.5 23.7 17.9 2007 2008 2009 2010 2011 Net sales Operating income* Operating margin* * 2008–2010, excluding restructuring charges. 2007 and 2011 including restructuring charges. In 2011, the Company executed on its strategy to leverage its strengths in the growth areas mobile broadband, managed services, OSS and BSS. Due to the technology cycle where mobile broadband is being rolled out, the business mix shifted to more coverage projects. Ericsson also implemented its strategy to capture new market share in the network modernization projects in Europe, despite their initial lower margins. In 2011, seven out of ten regions grew. In the year, there was an impact from slower operator spending after a period of high investments in capacity, especially in North America and Russia, as well as political unrest in certain countries. In the last quarter of the year, the Company also noticed some increased operator cautiousness due to uncertainties such as economic development and continued political unrest in certain countries. In 2011, the share of software sales declined to 23% (24%) of sales while the portion of hardware increased to 40% (37%). The increase in hardware is a result of demand for mobile broadband products. In the short term, the software share might continue to decrease due to a higher portion of projects with a lot of hardware. Longer term, the software part should increase following more expansions and upgrades of networks. Services sales amounted to 37% (39%) in 2011. Percent 18 16 14 12 10 8 6 4 2 0 26 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX2XEN_v97.indd 26 29/02/2012 16:01 FINANCIAL RESULTS OF OPERATIONS Seasonality The Company’s quarterly sales, income and cash flow from operations are seasonal in nature, 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. ST-Ericsson reported a loss also in 2011. ST-Ericsson is currently in a shift from legacy to new products. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was SEK –2.7 (–1.5) billion. In 2010, the loss amounted to SEK –1.8 billion including restructuring charges. mOST RECENT FIvE-yEAR AvERAGE SEASONALITy Operating income Sequential change Share of annual sales First quarter Second quarter –21% 23% 8% 24% Third quarter –4% 23% Fourth quarter 27% 30% Operating income was SEK 17.9 (23.7) billion. However, in 2010, operating income including restructuring charges amounted to SEK 16.5 billion. Financial numbers in this section are reported: for 2011, including restructuring charges for 2010, excluding restructuring charges. > > Gross margin Gross margin declined to 35.1% (38.2%) due to higher share of coverage projects, network modernization projects in Europe and 3G rollouts in India. Gross margin in 2010, including restructuring charges, amounted to 36.5%. Operating expenses To secure continued technology leadership, focus is on innovation and R&D. R&D expenses amounted to SEK 32.6 (29.9) billion. Spending on R&D as a percentage of sales was 14.4% (14.7%). In 2010, R&D spend including restructuring charges was SEK 31.6 billion or 15.5% of sales. The increase in absolute number is a result of planned higher investments in radio, such as TD-LTE, IP and the acquired LG-Ericsson operations. In 2012, R&D expenses of SEK 29–31 billion is estimated. The estimate includes amortizations/write-downs of intangible assets related to major acquisitions previously made. However, currency effects may cause this to change. Selling and administrative expenses represented 11.8% of sales compared to 12.4% in 2010. The amount was SEK 26.7 (25.3) billion. In 2010, the amount including restructuring charges was SEK 27.1 billion, representing 13.3% of sales. In the year, there were positive effects from efficiency work along with the strong SEK. Operating margin before Jvs Operating margin before share in JV earnings decreased to 9.6% (12.0%). However, in 2010, operating margin before share in JV earnings and including restructuring charges amounted to 8.7%. Share in earnings of Jvs In 2011, Sony Ericsson reported a loss. The loss reflects intense competition, price erosion, restructuring charges and supply chain issues following the earthquake and tsunami in Japan. Ericsson’s share in Sony Ericsson’s income before tax was SEK –1.2 (0.9) billion. In 2010, Ericsson’s share amounted to SEK 0.7 billion including restructuring charges. Financial net The financial net was SEK 0.2 (–0.7) billion. The difference is mainly attributable to a higher interest net of SEK 0.8 billion compared to 2010. Taxes The tax expense for the year was SEK 5.6 (4.5) billion or 30.6% (28.8%) of income after financial items. The tax rate may vary between years depending on business and geographic mix. The tax rate excluding joint ventures and associated companies was 26.4% (25.7%) due to lower tax rates from the loss-making joint ventures. Net income Net income increased 12% to SEK 12.6 (11.2) billion driven by higher sales and lower restructuring charges. Earnings per share, diluted Earnings per share increased 9% to SEK 3.77 (3.46). Earnings per share, non-IFRS, decreased –2% to SEK 4.72 (4.80). The Board of Directors proposes a dividend of SEK 2.50 (2.25). This represents an increase of 11%. Restructuring charges Total restructuring charges were SEK 3.2 (6.8) billion, excluding joint ventures. Cash outlays that have been provided for were SEK 3.2 (3.3) billion. At the end of the year, cash outlays of SEK 1.3 billion remain to be made. In 2012, restructuring charges of approximately SEK 4 billion are estimated. Ericsson’s share in Sony Ericsson’s restructuring charges amounted to SEK 0.4 (0.2) billion. Ericsson’s share in ST-Ericsson’s restructuring charges was SEK 0.1 (0.3) billion. RESEARCh ANd dEvELOPmENT PROGRAm 2011 2010 2009 Expenses (SEK billion) 1) As percent of Net sales Employees within R&D as of December 31 2) 22,400 Patents 2) 30,000 27.0 29.9 14.4% 14.7% 13.1% 18,300 20,800 25,000 27,000 32.6 1) Excluding restructuring charges for 2009 and 2010. 2) The number of employees and patents are approximate. BODX2XEN_v97.indd 27 29/02/2012 16:01 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 27 FINANCIAL POSITION Financial position CONSOLIdATEd bALANCE ShEET (AbbREvIATEd) december 31, SEK billion 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 2011 2010 2009 2011 2010 2009 81.5 44.0 10.8 13.7 13.0 83.4 46.8 9.4 14.5 12.7 33.1 64.5 20.7 2) 80.5 280.3 29.9 61.1 20.2 87.2 281.8 EQUITy ANd LIAbILITIES 87.4 Equity 145.3 146.8 141.0 48.2 Non-current liabilities 9.6 15.3 14.3 of which post-employment benefits of which borrowings of which other non-current liabilities 22.7 66.4 16.6 76.7 of which provisions of which current borrowings of which trade payables of which other current liabilities 38.1 10.0 23.3 4.8 97.0 6.0 7.8 25.3 58.0 38.3 5.1 27.0 6.2 96.8 9.4 3.8 25.0 58.6 43.3 8.5 30.0 4.8 85.5 12.0 2.1 18.9 52.5 269.8 Total equity and liabilities 1) 280.3 281.8 269.8 198.8 198.4 182.4 Current liabilities 1) Of which interest-bearing liabilities and post-employment benefits SEK 41.0 (35.9) billion. 2) Including loan to ST-Ericsson of SEK 2.8 billion. Ericsson’s strategy is to maintain a strong balance sheet including a sufficiently large cash position to ensure the financial flexibility to operate freely and to capture business opportunities. This has been particularly important during the past years’ difficult macroeconomic and financial market situation. By maintaining a strong cash position, the Company can also maintain an active strategy for strategic mergers and acquisitions. An important focus area is the monitoring of working capital. Major efforts have been made during the year in order to reduce days sales outstanding and inventory turnover days as well as to increase payable days. The target for payable days was met, while the other two targets were not achieved. The efforts to further reduce working capital will continue in 2012 and the working capital targets are the same as previous years. In 2011, the dividend was SEK 2.25 per share. The Board of Directors will propose to the Annual General Meeting 2012 a dividend of SEK 2.50 per share. This represents a total dividend of approximately SEK 8.2 billion. The proposal reflects year 2011’s earnings and balance sheet structure, as well as coming years’ business plans and expected economic development. Non-current assets Intellectual property rights, brands and other intangible assets decreased to SEK 13.1 (16.7) billion due to amortizations. Customer financing, current and non-current, decreased slightly to SEK 4.2 (4.4) billion. Current assets Inventory levels increased during the year by SEK 3.2 billion due to higher sales and increased share of coverage projects. At year end, inventory was SEK 33.1 (29.9) billion. The higher inventory level followed a higher level of work in progress in the regions. The target of inventory turnover days less than 65 days was not reached and improvement efforts will continue in 2012. Trade receivables: Days sales outstanding reached 91 (88) days at year-end. This reflects a higher portion of coverage projects and higher sales volumes. The Company’s nominal credit wORKING CAPITAL TARGETS NET CASh ANd EQUITy RATIO SEK billion Percent 102 70 70 57 106 106 68 68 68 68 55 57 8888 74 62 91 78 62 120 days 90 days 60 days 30 days 0 days 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 60 50 40 30 20 10 0 55.1%55.1% 49.7% 52.3% 52.1% 51.8% 51.3 39.5 34.7 36.1 24.3 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Net cash Equity ratio 28 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX2XEN_v97.indd 28 29/02/2012 16:01 FINANCIAL POSITION losses have historically been low and continued to be so in 2011. Net cash decreased to SEK 39.5 (51.3) billion, mainly due to a negative change in net operating assets, investing and dividend paid to shareholders. Pension liabilities increased due to lower discount rate and this impacted net cash negatively. For a more detailed discussion on changes in cash, see pages 30–31. Equity Equity decreased by SEK –1.5 billion to SEK 145.3 (146.8) billion. Net income was SEK 12.6 (11.2) billion and dividends of SEK 7.5 (6.7) billion was paid during the year. The equity ratio was maintained at a healthy level of 52% (52%). Return on equity increased to 8.5% (7.8%), primarily due to higher sales and lower restructuring charges. Return on capital employed (ROCE) was 11.3% (9.6%). In 2010, ROCE excluding restructuring charges was 13.6%. Non-current liabilities Post-employment benefits related to defined benefit plans increased to SEK 10.0 (5.1) billion. In 2011 there was a decrease in discount rates, and plan assets yielded lower than expected. Consequently, the Company experienced an increase in the net pension liability and the funded ratio (plan assets as percentage of defined benefit obligations) decreased to 77% (89%). CUSTOmER FINANCE SEK billion 4.4 4.2 3.1 2.8 3.4 2.8 2.4 2.3 2.0 1.4 5 4 3 2 1 0 2007 2008 2009 2010 2011 Customer finance net Of which short-term profile during 2011. Debt of SEK 3.4 billion is maturing in 2012 and SEK 5.4 billion in 2013. The Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014. Credit ratings at “solid investment grade” On June 10, 2011, Moody’s upgraded Ericsson’s rating to A3 from Baa1, with a stable outlook. Standard & Poor’s rating at BBB+ with stable outlook was unchanged. Current liabilities 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. Provisions declined to SEK 6.0 (9.4) billion. SEK 1.3 (3.2) billion were related to restructuring. The cash outlays of provisions were SEK 6.0 (7.2) billion. The lower amount of provisions is mainly due to lower restructuring. In addition, the business mix with more coverage projects as well as good performance in both hardware and software for new products introduced decreased the need for warranty provisions. There is also an effect of improved project management as well as geographical mix. Provisions will fluctuate over time, depending on business mix, market mix and technology shifts. Payable days was unchanged at 62 (62) days. The target of payable days of above 60 days was met. Non-current borrowings decreased to SEK 23.3 (27.0) billion. No major changes were made in the debt maturity dEbT mATURITy PROFILE SEK billion 6 5 4 3 2 1 0 5.4 3.4 3.4 4.0 1.2 4.5 2.0 1.2 2012 2013 2014 2015 2016 2017 2020 Notes and bonds Financial leases Loan from the European Investment Bank Loan from the Swedish Export Credit Corporation Loan from the Swedish Export Credit Corporation, guaranteed by the Swedish Export Credit Guarantee Board RETURN ON CAPITAL EmPLOyEd Percent 25 20 15 10 5 0 20.9% 11.3% 11.3% 9.6% 4.3% 2007 2008 2009 2010 2011 BODX2XEN_v97.indd 29 29/02/2012 16:01 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 29 CASh FLOw 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 Adjusted operating cash flow 1) 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) 1) Cash flow from operations excl. restructuring cash outlays that have been provided for. 2) Including loan to ST-Ericsson of SEK 2.8 billion. 2011 12.6 25.2 –15.2 10.0 13.2 4.5 –6.1 –3.1 13.8 14.5 –6.5 40% 80.5 2) 39.5 2010 11.2 23.7 2.9 26.6 29.8 –12.5 –5.2 –2.8 –4.5 14.0 –5.7 112% 87.2 51.3 2009 4.1 21.0 3.5 24.5 28.7 –37.5 –4.9 –18.1 –14.5 –13.0 –1.7 117% 76.7 36.1 In 2011, gross cash decreased by SEK 6.6 billion to SEK 80.5 (87.2) billion. The net income reconciled to cash of SEK 25.2 billion was offset by a change in net operating assets of SEK –15.2 billion and investing activities of SEK –9.9 billion. Dividends to shareholders amounted to SEK –7.5 (–6.7) billion. Net cash decreased to SEK 39.5 (51.3) billion. (MSS). The Nortel patent portfolio was acquired in partnership with other industry players. Cash flow for short-term investments for cash management purposes and other investing activities was net SEK 13.8 (–4.5) billion, mainly attributable to changes between short-term investments and cash and cash equivalents. Cash flow from operating activities Capital expenditures The adjusted operating cash flow was negatively impacted by higher working capital. During 2011, cash flow was negatively impacted by a significant increase in working capital as a result of higher sales and more projects. Cash flow from investing activities Cash outlays for regular investing activities increased to SEK –6.1 (–5.2) billion. Annual capital expenditures are normally around two percent of sales and are expected to remain at this level. This corresponds to the needs for keeping and maintaining the current capacity level, including the introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units, network operations centers as well as manufacturing and repair operations. The Board of Directors reviews the Company’s investment plans and proposals. Acquisitions and divestments during the year were net SEK –3.1 (–2.8) billion, with the major items Nortel’s GDNT operation in China and Nortel’s Multi-Service Switch business The Company has sufficient cash and cash generation capacity to fund expected capital expenditures without external borrowings in 2012. CASh FLOw FROm OPERATING ACTIvITIES SEK billion 30 25 20 15 10 5 0 24.0 24.5 26.6 19.2 10.0 2007 2008 2009 2010 2011 30 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 We believe that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs in most locations. As of December 31, 2011, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness. CAPITAL EXPENdITURES 2007–2011 SEK billion 2011 2010 2009 2008 2007 Capital expenditures of which in Sweden 5.0 1.7 3.7 1.4 4.0 1.3 4.1 1.6 4.3 1.3 as percent of net sales 2.2% 1.8% 1.9% 2.0% 2.3% BODX2XEN_v97.indd 30 29/02/2012 16:01 CASh FLOw Cash flow from financing activities Restricted cash Cash flow from financing activities was SEK –6.5 billion. Dividends paid were SEK –7.5 (–6.7) billion and other financing activities net amounted to SEK 1.0 billion. Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 13.9 (10.8) billion. Cash conversion Cash conversion was 40% (112%), below the target of 70%. Over the years 2008–2010, cash conversion was above target. The cash conversion in 2011 was negatively impacted by higher working capital. In this context all countries with currency restrictions are included. In most cases the currency is nonconvertible and flow of funds in a foreign currency requires approval by a central bank or similar. Out of the total amount, China, India, Korea, Brazil and Indonesia are the top five countries accounting for SEK 9.6 billion. ChANGE IN GROSS CASh 2011 Operating cash flow 10.0 b Investing activities –9.9 b1) Financing activities –6.5 b FX on cash –0.2 b 25.2 –12.0 –3.2 –5.0 –6.5 –4.9 –7.5 87.2 Adjusted cash flow SEK 13.2 1.0 –0.2 80.5 Change in gross cash SEK –6.6 bILLION SEK billion 120 110 100 90 80 70 60 50 40 Gross cash opening balance Net income reconciled to cash Change net operating assets excl. restructuring Restructuring Capex Acquisitions, divestments and other Dividend Other financing activities FX on cash Gross cash closing balance 1) As disclosed under Financial Terminology, Gross Cash is defined as cash, cash equivalents and short-term investments. Cash as presented in the balance sheet and related notes includes cash, cash equivalents and short-term investments of a maturity less than three months. Due to different treatment of cash in the above table and related foreign currency impact, the amounts differ from those in other presentations of cash flows. BODX2XEN_v97.indd 31 29/02/2012 16:01 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 31 BUSINESS RESULTS – REGIONS BUSINESS RESULTS – REGIONS SALES PER REGION AND SEGMENT 2011 AND 2010 SEK billion North America Latin America Northern Europe and Central Asia Western and Central Europe Mediterranean Middle East Sub-Saharan Africa India China and North East Asia South East Asia and Oceania Other* Total Share of total Networks Global Services Multimedia Percent change –5% 25% 34% –7% 1% 4% 63% 19% 63% –3% 53% 17% 2011 28.9 11.5 9.7 7.8 10.7 7.4 5.9 6.1 27.8 7.6 9.1 132.4 58% Percent change 5% 23% 17% –2% 11% 4% –26% 13% 19% –14% –132% 5% 2011 18.6 9.5 5.0 10.3 11.8 6.8 3.4 3.1 9.9 5.6 –0.2 83.9 37% 2011 1.3 1.0 0.5 1.0 1.3 1.2 0.9 0.5 0.5 0.7 1.7 10.6 5% Percent change Total 2011 Percent change 7% 5% –20% –7% –5% –13% –12% –25% –5% 26% 57% 1% 48.8 22.0 15.2 19.0 23.8 15.5 10.2 9.8 38.2 13.9 10.6 226.9 100% –1% 23% 25% –4% 5% 2% 11% 13% 47% –7% 41% 12% * Other includes sales of e.g. mobile broadband modules, cables, power modules as well as licensing and IPR. Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers. A central IPR unit manages sales of licenses to equipment vendors or others who wish to use Ericsson’s patented technology. TV solutions are sold both through other equipment vendors as resellers and directly by business unit Multimedia to cable TV operators. Regional development LATIN AMERIcA The regions are the Company’s primary sales channels. Ericsson reports ten regions, mirroring the internal geographical organization. NORTh AMERIcA North America is the world’s most developed region in terms of smartphone penetration and mobile data usage. Operators are continuing the implementation of tiered pricing to capitalize on changing user behavior. Half of the net additions of subscriptions in the second half of 2011 came from connected devices or machine to machine communication. Through the year multiple LTE network buildouts have been initiated and launched in both the US and Canada, and Ericsson is a leading supplier to these projects. The networks business developed slower in the second half of 2011 after a period of high operator investments in network capacity. Operators’ focus on cash flow management and operator consolidation also had a negative impact. This was to a large degree offset by a positive uptake in services and multimedia. There is a push for mobile broadband in Latin America, driven by consumer demand for 3G services. Smartphone penetration is still low, but is expected to grow as these handsets become more affordable. Operators show an increasing interest in network performance and Ericsson is taking part in OSS/BSS transformation projects in managed services deals, including network sharing arrangements. NORThERN EUROPE AND cENTRAL ASIA The Nordics are mature and advanced markets with strong 3G coverage and LTE commercially available in all countries. Nordic operators are increasingly shifting their business models towards network sharing and the outsourcing of network operations. Deployment of 3G networks started later in the eastern part of the region. Here, operators are focusing on providing coverage and quality in the networks. Mobile broadband is growing rapidly in the region. Many consolidation activities, of both operators and networks, are taking place. In the latter half of the year, network sales slowed, especially in Russia, following strong operator investments in network capacity and coverage. SALES IN NETwORKS, GLOBAL SERvIcES AND MULTIMEDIA 2011 PER REGION SEK billion NORTh AMERIcA LATIN AMERIcA NORThERN EUROPE AND cENTRAL ASIA wESTERN AND cENTRAL EUROPE MEDITERRANEAN 11.5 9.5 28.9 18.6 30 25 20 15 10 5 0 12 10 8 6 4 2 0 1.3 10.3 7.8 9.7 12 10 8 6 4 2 0 1.0 5.0 0.5 12 10 8 6 4 2 0 12 10 8 6 4 2 0 1.0 11.8 10.7 7.4 6.8 12 10 8 6 4 2 0 12 10 8 6 4 2 0 5.9 3.4 6.1 3.1 12 10 8 6 4 2 0 27.8 9.9 7.6 5.6 12 10 8 6 4 2 0 0.5 0 0.5 0.7 1.3 1.2 0.9 Networks Global Services Multimedia Networks Global Services Multimedia 32 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX3XEN_v92.indd 32 29/02/2012 16:05 wESTERN AND cENTRAL EUROPE Modernization of networks accelerated across the region in 2011. Operator focus is on replacing old 2G/3G equipment with modern, more efficient multi-standard radio base stations. Interest in LTE is limited, with certain countries still to allocate spectrum for this. Penetration of mobile broadband is high, with some operators’ smartphone shipments representing more than half of their totals. Data revenues are growing and represent over 40% with some operators. There is also high interest in managed services and network sharing. MEDITERRANEAN This region has seen an impact from weak economies as well as political unrest in Northern Africa. The uptake of mobile broadband is mixed, with the strongest growth in the south west parts of the region. Here, operators are implementing a range of tiered pricing models. Mobile data usage is high in the Mediterranean area, due to the low availability of fixed broadband. Most operators’ investments are for 3G coverage and in the second half of the year, network modernization projects took off. MIDDLE EAST The Middle East was impacted by political unrest in several countries and by delays in license auctions. As a consequence, some operators have postponed their infrastructure investments and increased their focus on efficiencies. The region has lower penetration rates, mobile broadband adoption and mobile data usage than the world average. The crucial driver for increasing these parameters is the affordability of smartphones. Rollouts of LTE have started in some parts of the region. SUB-SAhARAN AfRIcA Mobile penetration continues to increase rapidly in Africa. Operator focus is still on 2G coverage and capacity buildouts, although some operators are building 3G coverage. With smartphones in the region set to become cheaper, operators are focusing on creating efficiency in their networks to allow them to capitalize on future uptake. BUSINESS RESULTS – REGIONS Inflation and competition are also driving operators’ need for increased efficiency. This leads them to focus on power consumption reductions and managed services solutions. There is also a need for operators to harmonize policy frameworks to increase data take-up. INDIA Initial 3G rollouts reached a temporary peak in 2011. The Indian market is fragmented and in the near future a telecom policy reform is expected which might make operator consolidation easier. Besides the need for affordable smartphones, availability of dual SIM card phones is a key component in driving mobile data uptake. The Indian market is highly competitive, which drives operator interest in managed services and network sharing. chINA AND NORTh EAST ASIA China’s operators have focused on building 2G capacity with GPRS/EDGE to meet the increase in mobile data traffic from smartphones. In 2011, large scale trials for TD-LTE took place with China Mobile. In Korea and Japan, 3G capacity and LTE coverage rollouts are ongoing, driven by high smartphone penetration, mobile broadband adoption and mobile data usage. In Korea, three LTE networks are live, and Ericsson is a supplier to all of them. SOUTh EAST ASIA AND OcEANIA Parts of this region, such as Australia and Singapore, have high penetration rates, adoption and usage. In these areas, LTE is also starting to emerge. Indonesia is moving towards 3G, however take-up is hampered by the affordability of devices. 3G auctions are yet to take place in some markets. Coverage projects, where old equipment is replaced with new, are underway across most markets, as operators build for data growth and seek operating cost efficiencies. The decline in network sales is due to reduced 2G business in Vietnam. The services business declined due to a concluded managed services contract in Australia. SALES IN NETwORKS, GLOBAL SERvIcES AND MULTIMEDIA 2011 PER REGION SEK billion MIDDLE EAST SUB-SAhARAN AfRIcA INDIA chINA AND NORTh-EAST ASIA SOUTh-EAST ASIA AND OcEANIA 7.4 6.8 12 10 8 6 4 2 0 12 10 8 6 4 2 0 1.2 5.9 3.4 0.9 12 10 8 6 4 2 0 6.1 3.1 27.8 9.9 0.5 0.5 0 12 10 8 6 4 2 0 7.6 5.6 0.7 Networks Global Services Multimedia Networks Global Services Multimedia BODX3XEN_v92.indd 33 29/02/2012 16:05 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 33 30 25 20 15 10 5 0 28.9 11.5 9.5 9.7 18.6 10.3 7.8 11.8 10.7 12 10 8 6 4 2 0 5.0 12 10 8 6 4 2 0 12 10 8 6 4 2 0 1.3 1.0 0.5 1.0 1.3 12 10 8 6 4 2 0 BUSINESS RESULTS – SEGMENTS BUSINESS RESULTS – SEGMENTS NETwORKS Sales Networks sales increased 17% to SEK 132.4 billion, negatively impacted by a strong SEK in 2011. The increase was an effect of continued high sales in mobile broadband-related equipment including packet core, IP routers and microwave-based backhaul. Demand was especially strong in regions China and North East Asia and North America. The year was characterized by high volumes of mobile broadband equipment and ramp-up of the multi-standard radio base station RBS 6000. The product introduction of the RBS 6000 has been the quickest and most successful in the Company’s history. At the end of the year, the first RBS 6000 with CDMA functionality was shipped. The RBS 6000 accounts for close to 100% of all deliveries of GSM/WCDMA/LTE radio base stations. In the fourth quarter, shipping of the IP Edge router, the Smart Services Router SSR 8000 family, and the Antenna Integrated Radio unit (AIR) also commenced. In 2010, Ericsson acquired Nortel’s CDMA business in order to strengthen its position in North America. Ericsson is now established as the leader in this market. CDMA sales increased slightly in 2011. At the end of the year the Company saw the expected decline in CDMA sales and subsequent rapid shift to LTE. The CDMA acquisition has created substantial value for the Company. In March, the earthquake and tsunami in Japan caused temporary delays in the supply chain, but by the third quarter lead times were back to normal. Profitability Operating margin decreased to 13% (15%). The margin was negatively impacted by planned R&D investments to accelerate technology leadership. Operating margin in 2010 was 11% including restructuring charges. hIGhLIGhTS IN 2011 > Increased market share in mobile network equipment by 6 percentage points to 38% (estimated) > Market share of more than 60% in LTE > Smart Services Router family introduced. Volume deliveries expected in 2012 NETwORKS SALES ShARE Of TOTAL 2011 Net sales (SEK billion and percent) 132.4 58% Networks Global Services Multimedia 34 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 cost structure In the Networks segment, cost of sales is quite large and to a large part variable. To reduce variable cost, the Company works with product rationalization and product substitution. R&D is a significant cost item and for this reason it is important to focus on R&D effectiveness and efficiency. It is essential to ensure global platforms and common components across the whole portfolio. To maximize the outcome of R&D investment, the Company also seeks to give R&D sites clear accountability and the same IS/IT environment. The networks business Sales to network operators are normally based on multi-year frame agreements after an initial open tender. During the frame agreement, software, equipment, services and spare parts are called off according to price lists. Prior to the introduction of the multi-standard radio base station RBS 6000, operators could have co-siting, with one supplier for GSM and another for WCDMA. Today, a multi- standard approach means that all technologies are supported by one radio base station. Any supplier has to be equally capable of all technologies. R&D investments and scale are therefore essential for a supplier to stay competitive. The footprint of multi-standard radio access network increases opportunities for additional network business, e.g. backhaul and core networks. Following radio and core footprint is a significant software sales opportunity based on capacity, functionality and new features. competitors In the networks segment, Ericsson competes mainly with telecommunication equipment suppliers such as Alcatel-Lucent, Cisco, Huawei, Juniper, Nokia Siemens Networks, Samsung and ZTE. The Company also competes with local and regional manufacturers and providers of telecommunications equipment. NETwORKS PROfITABILITy 20% 15% 10% 5% 0% 18% 16% 16% 15% 14% 13% EBITA margin 3) Operating margin 2009 1) 2010 1) 2011 2) 1) excluding restructuring charges 2) including restructuring charges 3) EBITA: Earnings before interest, tax, amortizations and write-downs of acquired intangibles BODX3XEN_v92.indd 34 29/02/2012 16:05 GLOBAL SERvIcES Sales Global Services sales increased 5% to SEK 83.9 (80.1) billion, driven by network rollout, consulting and systems integration. Professional Services sales were SEK 58.8 billion, up 1% from 2010. Currency adjusted sales of Professional Services increased 7%. The increase is mainly a result of increased sales of consulting and systems integration. Managed Services sales decreased by –1% to SEK 21.0 billion. Currency adjusted sales increased 7%. The growth reflects the 70 (54) signed managed services contracts, of which 32 (26) were extensions or expansions. More than 60% of Professional Services sales were recurring. Network Rollout sales amounted to SEK 25.1 (21.6) billion, an increase of 16%, driven by high volumes of network modernization. Profitability Global Services’ operating margin decreased to 7% (11%).The margin was negatively impacted by a loss in Network Rollout. Operating margin in 2010 was 8% including restructuring charges. Operating margin for Professional Services amounted to 13% (15%). Operating margin in 2010 was 11% including restructuring charges. Operating margin for Network Rollout amounted to –8% (1%), due to high activity levels related to network modernization projects in Europe and 3G rollouts in India. Operating margin in 2010 was 0% including restructuring charges. cost structure In the services segment, almost all cost resides in cost of sales and the majority of the cost is related to employee costs. A few years ago, the cost of sales base was to a higher degree variable. With the increasing share of managed services, the portion of fixed costs has increased, which makes it important to find scale by winning more deals in the same geographical area. Another measure to keep cost down is to establish a one-to-many delivery model. The development of global tools, methods and processes are also crucial in order to secure efficiencies and knowledge sharing. hIGhLIGhTS IN 2011 > More than 2 billion subscribers in networks for which Ericsson provides support > Over 900 million subscriber in networks managed by Ericsson > 500 million subscribers in network operation contracts GLOBAL SERvIcES SALES ShARE Of TOTAL 2011 Net sales (SEK billion and percent) 37% 83.9 Networks Global Services Multimedia BUSINESS RESULTS – SEGMENTS In managed services, Ericsson often insources employees from the customer. In the transition period, restructuring costs are taken, e.g. for replacement of IS/IT systems and migration of employees into new systems and premises. In the transformation phase, following the transition, synergies are carried through. The services business Ericsson’s offering covers all areas within an operator’s operational scope. The Company’s service offering includes consulting, systems integration, managed services, network deployment and integration, education and support services. Ericsson provides services for both mobile and fixed telecom networks as well as for IT and broadcast networks and in some cases for adjacent industries such as the utilities industry. Most often operators turn to Ericsson for support in a certain part of their operations. Contracts for managed services and customer support are typically for five to seven years. Payments with regularity provide a lower rate of working capital. Consulting and systems integration contracts are shorter and paid after fulfillment of contract. In managed services deals the contracts are normally split into fixed and variables, where the variables are a smaller part. The invoicing is based on fulfillment of certain key performance indicators and projects. When an operator explores the possibility of a managed services deal, the financial strength of the supplier is a prerequisite. Network rollout includes coverage and modernization projects with a large part of third-party sourcing, making it a lower-margin business. The Company rolls out its own equipment, but also has high multi-vendor skills in all other parts of the services business. competitors Competition in services includes the traditional telecommunication equipment suppliers. The Company also competes with companies such as Accenture, HP, IBM, Oracle, Tata Consultancy Services and Tech Mahindra. Among the competition is also a large number of smaller but specialized companies operating on a local or regional basis. GLOBAL SERvIcES PROfITABILITy 20% 15% 10% 5% 0% –5% –10% 17 16 14 12 12 7 16 15 13 11 11 7 1 –1 1 –1 Global Services EBITA margin 3) Professional Services –8 Network Rollout Global Services Operating margin Professional Services Network Rollout –8 2009 1) 2010 1) 2011 2) 1) excluding restructuring charges 2) including restructuring charges 3) EBITA: Earnings before interest, tax, amortizations and write-downs of acquired intangibles Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 35 BODX3XEN_v92.indd 35 29/02/2012 16:05 Telcordia acquisition In 2011, Ericsson announced the acquisition of Telcordia, a global leader in the development of software and services for OSS/BSS. The price was USD 1.15 billion in an all cash transaction, on a cash and debt-free basis. The acquisition is expected to be accretive to Ericsson’s earnings per share within twelve months. Telcordia has approximately 2,600 employees. During its last fiscal year, ended January 31, 2011, Telcordia generated revenues of USD 739 million. Telcordia’s revenues will be split between segments Multimedia and Global Services according to portfolio mix. With the acquisition, Ericsson aspires to a leading position in the OSS and BSS market. competitors In the multimedia segment, Ericsson competes in rather fragmented markets with many local players. Competitors vary depending on the solution being offered. In the OSS and BSS market, they include many of the traditional telecommunication equipment suppliers as well as IT suppliers, such as Amdocs, Comverse and Oracle. Competition in the TV business includes Harmonic and Thompson. BUSINESS RESULTS – SEGMENTS MULTIMEDIA Sales Multimedia sales increased 1% to SEK 10.6 (10.5) billion, negatively impacted by political unrest in the Middle East and weak development in India. Profitability Operating margin was –5% (–4%). Restructuring charges had no material impact on profitability. cost structure In the multimedia segment, cost of sales is low and the majority is variable, due to the fact that third party hardware is used, on which the Company implements its software. Multimedia is a software business with a high degree of fixed R&D cost for software development. The OSS and BSS business The OSS/BSS business is divided into two different sales types: TRANSfORMATION SALES Simplification and consolidation of processes, operations, systems and platforms. Key components are software solutions, consulting and systems integration. Typically these projects last for 18–36 months. The software part represents 25–40% of the contract value and the rest is consulting and systems integration. PRODUcT SALES Product sales is mainly expansions and upgrades, e.g. upgrading from Ericsson Charging System version 4 to 5. Key components are software solutions and systems integration. Typically these projects last for 1–12 months. The software part represents 70–90% of the contract value and the rest is systems integration. hIGhLIGhTS IN 2011 > 13 new contracts signed for mobile broadband charging > World’s largest IPTV upgrade in Taiwan > 11 new customers for convergent charging and billing MULTIMEDIA SALES ShARE Of TOTAL 2011 Net sales (SEK billion and percent) 5% 10.6 Networks Global Services Multimedia MULTIMEDIA PROfITABILITy 15% 12% 9% 6% 3% 0% –3% –6% 14% 8% 3% 2% EBITA margin 3) –4% –5% Operating margin 2009 1) 2010 1) 2011 2) 1) excluding restructuring charges 2) including restructuring charges 3) EBITA: Earnings before interest, tax, amortizations and write-downs of acquired intangibles 36 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX3XEN_v92.indd 36 29/02/2012 16:05 SONy ERIcSSON ST-ERIcSSON BUSINESS RESULTS – SEGMENTS Sony Ericsson is a 50/50 joint venture between Sony Corporation and Ericsson, established in 2001. Sony Ericsson is accounted for according to the equity method. In October 2011, it was announced that Sony Corporation would acquire Ericsson’s 50% share in Sony Ericsson. As part of the deal, Sony and Ericsson will also enter into a broad IP cross-licensing agreement and create a wireless connectivity initiative to drive connectivity across multiple platforms. The transaction is a logical strategic step that makes it possible for Ericsson to focus on enabling connectivity for all devices. Sony Ericsson will become a wholly-owned subsidiary of Sony and integrated into Sony’s broad platform of network-connected consumer electronics products. The agreed cash consideration for the transaction is a EUR 1.05 billion cash payment. Sony Ericsson’s units shipped in 2011 decreased by –20% to 34.4 (43.1) million while the average selling price increased by 4% to EUR 152 (146). Sales decreased by –17% to EUR 5.2 (6.3) billion. In 2011, Sony Ericsson had a market share of 10% in the smartphone market, measured in units, and 10% measured in value. Gross margin decreased during the year to 28% (29%) attributed to product and geographic mix. Income before taxes, including restructuring charges, was EUR –0.24 (0.15) billion. Income decreased during the year due to declining gross margin and increased operating expenses. The result includes restructuring charges of EUR 93 million. Ericsson’s share in Sony Ericsson’s income before taxes was SEK –1.2 (0.7) billion. Sony Ericsson’s primary competitors include Apple, HTC, LG, Motorola, Nokia, RIM and Samsung. ST-Ericsson is a 50/50 joint venture between STMicroelectronics and Ericsson, established in February, 2009. ST-Ericsson is accounted for according to the equity method. At the end of 2011, ST-Ericsson was still in a shift from legacy to new products. Though its path to success is challenging, ST-Ericsson is, when entering 2012, continuing to focus on securing the successful execution and delivery of its new products to customers while lowering its break-even point. The changes in the business environment at a large customer during 2011 reduced demand for legacy products and delayed the ramp-up of new products with that customer. In the light of the business environment at the end of 2011, ST-Ericsson’s CEO is reviewing the company’s strategic plan and financial prospects. Ericsson, together with its partner STMicroelectronics, is firmly committed to supporting ST-Ericsson in the transition to turn-over to sustainable profitability and cash generation. As a result of the strategic review, Ericsson may consider additional actions to solidify and accelerate ST-Ericsson’s path to profitability. In such an event, or in case of a significant worsening of business prospects, the value of ST-Ericsson for Ericsson could decrease to a value significantly lower than the current carrying amount of ST-Ericsson on Ericsson’s books and Ericsson might be required to take an impairment charge. Sales in 2011 declined –28% to USD 1.7 (2.3) billion. The operating loss for the year, adjusted for restructuring costs, was USD –0.7 (–0.4) billion. ST-Ericsson reports in US-GAAP. Ericsson’s share in ST-Ericsson’s income before taxes, adjusted to IFRS, was SEK –2.7 (–1.8) billion. Adjustments for IFRS compliance mainly consist of capitalization of R&D expenses for hardware development. The Company’s net financial position was USD –798 (–82) million at year-end. At the end of the year, ST-Ericsson had utilized USD 800 million of a short-term credit facility granted on a 50/50 basis by the parent companies. In December 2011, a new President and CEO of ST-Ericsson was appointed. ST-Ericsson’s major competitor is Qualcomm. The market is growing in complexity as several new operating systems for handsets and other devices have been launched, e.g. Google’s Android, Microsoft’s Windows phone and Samsung’s Bada. SONy ERIcSSON NET SALES AND ADjUSTED INcOME BEfORE TAXES ST-ERIcSSON NET SALES AND ADjUSTED OPERATING INcOME Euro million 14,000 12,916 12,000 10,000 8,000 6,000 4,000 2,000 0 –2,000 11,244 6,788 6,294 5,212 1,574 92 –878 189 –150 2007 2008 2009 2010 2011 Net sales Income before taxes excl. restructuring charges USD million 3,000 2,500 2,000 1,500 1,000 500 0 –500 –1,000 2,524 2,293 1,650 –369 –436 –732 Net sales Operating income adjusted for amortization of acquired intangibles and restructuring charges 2009 2010 2011 All figures in accordance with reported adjusted US GAAP figures Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 37 BODX3XEN_v92.indd 37 29/02/2012 16:05 SUSTAINABILITY AND CORPORATE RESPONSIBILITY 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, which in turn benefit society. Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations and in its relationship 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 Corporate Responsibility Report which provides additional information. Responsible business practices Since 2000, Ericsson has actively supported 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 where CR criteria represent some 20% of areas assessed. Supply chain Suppliers must comply with Ericsson’s CoC. Approximately 170 employees, covering all regions, are trained as supplier CoC auditors. The Company performs regular audits and works with suppliers to ensure measurable and continuous improvements. Findings are followed up to ensure that improvements are made. Training for suppliers is available in 13 languages. To effectively address the issue of conflict minerals, Ericsson participates in the Global e-Sustainability Initiative (GeSI) work on conflict minerals, and takes other active measures in its sourcing and product management processes. Reducing environmental impact Energy use for products in operation remains the Company’s most significant environmental impact. Ericsson works proactively with its customers to encourage network and site energy optimization, through innovative products, software, solutions and advisory services. Processes and controls are in place to ensure compliance with relevant product-related environmental, customer and regulatory requirements. The Company works actively to reduce its own environmental impact, with a focus on Design for Environment, which includes product energy efficiency and materials management, as well as facilities management, travel reduction and logistics. Product take-back and recycling Ericsson Ecology Management is a program to take responsibility for products at the end of their life and is offered to all customers globally free of charge, not only in markets where legislated. During 2011, Ericsson worked actively to help build up e-waste capabilities in Africa, through a public private partnership in Ghana. This was done with the Raw Materials Group and the Ghana Environmental Protection Agency and was financed by the Nordic Development Fund. The goal is to establish local recycling capabilities and transform the current informal e-waste recycling yards into a formal business. This will help to reduce negative environmental and health impacts while also alleviating poverty. 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 has co-sponsored over 90 studies related to electromagnetic fields, radio waves and health since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and have consistently concluded that the balance of evidence does not demonstrate SUPPLIER CODE OF CONDUCT AUDITS AND ASSESSMENTS ERICSSON LIFE-CYCLE ASSESSMENT CARBON FOOTPRINT 2011 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 Auditors Number of audits Number of assessments 38 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 e 2 O C s e n n o t M 25 20 15 10 5 0 –5 ~24 ~3 0.84 ~4 ~–0.3 Supply Chain Ericsson own Activities Operator activities Products in Operation End-of-Life Treatment Activities in 2011 Future (lifetime) operation of products delivered in 2011 Direct emissions (Ericsson own Activities) Indirect emissions (all other life-cycle emissions) ~ = approximately BODX4XEN_v96.indd 38 29/02/2012 16:11 any health effects associated with radio wave exposure from either mobile phones or radio base stations. Ericsson is co-sponsoring the Swedish part of the COSMOS study, which is conducted in five countries. The study aims to carry out long term health monitoring of more than 200,000 people to identify if there are any health issues linked to long term mobile phone use. To assure scientific independence there is a firewall in place between the industrial sponsors and the researchers. Climate change ICT represents about 2% of global CO2 emissions, but can potentially offset a significant portion of the remaining 98% from other industries. Ericsson takes active measures to ensure that its own carbon footprint intensity will be continuously reduced. A five year target which aims to reduce the carbon emission intensities by 40% was set in 2008. The target comprises two focus areas: Ericsson’s own activities and the life-cycle impacts of products in operation (see graph). > A 6% reduction in direct emission intensity from own activities was achieved during 2011. Despite delivering higher volumes, Ericsson still achieved the target of 70% surface transport by weight. Business travel is roughly the same per employee. > A 3% reduction was achieved in indirect emission intensity from products in operation. While the reduction was lower this year compared to last, Ericsson is well on track to meet its five year target. > Ericsson has increased 3G/4G energy efficiency by 85% over the last decade, while continuing to meet the bandwidth demands of the networked society, and without increasing energy consumption per subscriber. Ericsson’s sustainability strategy focuses on the role broadband can play in helping to offset global CO2 emissions, 70% of which are attributed to cities. Ericsson works on sustainable city solutions and is engaged in global climate policy. Ericsson’s CEO leads the Climate Change Working Group of the Broadband Commission. Ericsson also co-chairs the Policy Group in GeSI, and helped launch its Low Carbon Cities benchmark. SUSTAINABILITY AND CORPORATE RESPONSIBILITY Meeting the UN Millennium Development Goals Mobile connectivity fuels economic growth, which is vital for billions of people living at the base of the economic pyramid. Ericsson is committed to using its technology and competence to help achieve the Millennium Development Goals (MDGs). Ericsson launched the Technology for Good program in 2011. It focuses on applying the Company’s expertise, global presence and scale to find market-based solutions that empower people, business and society to help shape a more sustainable world. Connect to Learn In 2011, Ericsson and its partners, The Earth Institute at Columbia University and Millennium Promise, celebrated one year of progress for Connect To Learn, a global initiative focused on improving quality of and access to secondary education. Some 5,000 students now have access to education in schools throughout Millennium Villages and cities in Africa. An innovative cloud computing solution, PC as a Service, dramatically reduces the cost of access. The initiative has been extended to Latin America. Ericsson Response™ Ericsson Response is a global Ericsson employee volunteer initiative which rapidly deploys communication solutions and provides telecommunications experts to assist disaster relief operations. Ericsson Response partners with many UN and humanitarian organizations. In 2011, Ericsson Response missions included the ‘One UN’ initiative in Tanzania, in collaboration with the World Food Programme. A partnership with operator SingTel was also announced to provide emergency communications services to support disaster relief efforts in South and Southeast Asia through Ericsson Response. Reporting according to GRI 3.0 Full key performance data is available at www.ericsson.com and has achieved an A+ rating according to the Global Reporting Initiative (GRI). The performance data has been externally assured, and the application level has been checked by a third party. CARBON FOOTPRINT INTENSITY TARGET POwER CONSUMPTION PER UNIT OUTPUT POwER 100% 80% 60% 40% 20% 0% ) E T L / G 4 – A M D C W G 3 / ( t t a W F R r e p s t t a W 40 35 30 25 20 15 10 5 0 % 6 – 1 1 0 2 T L U S E R % 3 – 1 1 0 2 T L U S E R % 0 4 – T E G R A T % 0 4 – T E G R A T 2008 Baseline 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ericsson own Activities Products in Operation 3G/WCDMA (RBS 3000 and RBS 6000) 4G/LTE (RBS 6000) Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 39 BODX4XEN_v96.indd 39 29/02/2012 16:11 CORPORATE GOVERNANCE CORPORATE gOvERNANCE In accordance with the Annual Accounts Act (1995:1554 Chapter 6, Section 6 and 8), a separate Corporate Governance Report, including an Internal Control section, has been prepared. Continued compliance with the Swedish Corporate Governance Code Ericsson applies the Swedish Corporate Governance Code and 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, without deviations. 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 ethical 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 2011/2012 The Annual General Meeting on April 13, 2011, elected Leif Johansson new Chairman of the Board, replacing Michael Treschow. Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, Hans Vestberg and Michelangelo Volpi were re-elected and Jacob Wallenberg was elected new member of the Board. Pehr Claesson, Jan Hedlund and Karin Åberg were appointed employee representatives with Kristina Davidsson, Karin Lennartsson and Roger Svensson as deputies. Management Hans Vestberg is President and CEO of the Group since January 1, 2010. The President and CEO is supported by the Group management, consisting of the Executive Leadership Team (ELT). The ELT, in addition to the President and CEO, consists of heads of Group functions, heads of business units and two of the heads of Ericsson’s regions. Up until December 21, 2011, the Chief Brand Officer was part of ELT. A management system is in place to ensure that the business is well-controlled and has the ability 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 to Group management (the Executive Leadership Team, ELT), as well as the 2011 guidelines for remuneration to Group management, are reported in Notes to the Consolidated Financial Statements – Note C28, “Information Regarding Members of the Board of Directors, the Group management and Employees”. As of December 31, 2011, 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. The Board of Directors’ proposal for guidelines for remuneration to Group management The Board of Directors proposes that the current guidelines for remuneration to the Group management (ELT) remain unchanged for the period up to the 2013 Annual General Meeting. Details of how Ericsson delivers on these guidelines and policy, including information on previously decided long- term variable remuneration that has not yet become due for payment, can be found in Note C28, “Information regarding Members of the Board of Directors, the Group management and Employees”. 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 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, the continuous monitoring through monthly and quarterly steering group meetings and during operational processes by transaction (customer bid/ contract, acquisition, investment and product development projects). They are subject to various controls such as decision tollgates and approvals. A central security unit coordinates management of certain risks, such as business interruption, information security and physical security. The Crisis Management Council deals with events of serious nature. For information on risks that could impact the fulfillment of the targets and form the basis for mitigating activities, see the other sections of the Board of Directors’ Report, Notes C2, “Critical Accounting Estimates and Judgments”, C14, “Trade receivables and customer finance”, C19, “Interest-bearing liabilities”, C20, “Financial risk management and financial instruments” and the chapter Risk Factors. 40 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX4XEN_v96.indd 40 29/02/2012 16:11 MATERIAL CONTRACTS LEgAL AND TAx PROCEEDINgS SOURCINg AND SUPPLY Together with most of the mobile communications industry, Ericsson was sued in two class action lawsuits in the US in which plaintiffs alleged that adverse health effects could be associated with mobile phone usage. The cases were pending in federal court in Pennsylvania and the Superior Court of the District of Columbia. In the Pennsylvania case, the federal district court dismissed the plaintiffs’ claims as preempted by federal law. The Third Circuit Court of Appeals subsequently affirmed this ruling, and in October 2011, the Supreme Court declined to consider the case. The plaintiff has no further right of appeal, and as a result, the Pennsylvania case is officially closed. In the District of Columbia case, the plaintiff dismissed Ericsson from the case with prejudice in February 2011 shortly after an opinion by the D.C. Court of Appeals made it clear that the plaintiff did not have standing to sue Ericsson under the D.C. consumer protection statute. In January 2011, a US company SynQor filed a patent infringement lawsuit against Ericsson Inc. alleging that Ericsson infringes five US patents related to bus converters. In February 2011, SynQor filed a motion for preliminary injunction seeking to prevent Ericsson from manufacturing, using, selling, and offering for sale in the US and/or importing into the US certain unregulated and semi-regulated bus converters and any Ericsson products that contain those bus converters. In May 2011, Ericsson and SynQor entered into a confidential settlement agreement that resulted in mutual releases and a dismissal with prejudice of all claims asserted by the parties against each other in the litigation. Ericsson’s hardware, accounting for approximately 40% of total sales, largely consists of electronics, such as circuit boards, radio frequency (RF) modules and antennas. For manufacturing, the Company purchases customized and standardized components and services from several global providers as well as from local and regional suppliers. Certain types of components, such as power modules and cables, are produced in-house. The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies, of which the vast majority is in low-cost countries. Production of radio base stations is largely done in-house and on-demand. This consists of assembling and testing modules and integrating them into units such as complete radio base stations and mobile switching centers. Final assembly and testing are concentrated to a few sites. Ericsson has 17 manufacturing sites in Brazil, China, Estonia, Italy, India and Sweden. A number of suppliers design and manufacture highly specialized and customized components. The Company generally attempts to negotiate global supply agreements with its primary suppliers. All Ericsson suppliers are required to comply with the Code of Conduct. Where possible, Ericsson relies on alternative supply sources and seeks to avoid single source supply situations. A need to switch to an alternative supplier may require allocation of additional resources to ensure that technical standards and other requirements are met. This process could take some time to complete. In May 2011, Ericsson settled a US patent infringement Variations in market prices for raw materials generally have a limited effect on total cost of goods sold. MATERIAL CONTRACTS Material contractual obligations are outlined in Note C31 “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. lawsuit brought by an Australian company, QPSX Developments PTY Ltd. The lawsuit had been pending since April 2007 and involved Asynchronous Transfer Mode (ATM) technology. Ericsson considers this matter closed. In July 2011, a US company TruePosition sued Ericsson, Qualcomm, Alcatel-Lucent (ALU), the European Telecommunications Standards Institute (ETSI) and the Third Generation Partnership Project (3GPP) for purported federal antitrust violations. The complaint alleges that Ericsson, Qualcomm and ALU illegally conspired to block the adoption of TruePosition’s proprietary technology into the new mobile positioning standards for LTE, while at the same time ensuring that their own technology was included into the new standards. In October 2011, the defendants filed motions to dismiss the case. The Swedish fiscal authorities disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. 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 was appealed to the Administrative Supreme Court. In February 2011 the Administrative Supreme Court revoked the County Administrative Court’s judgment and ruled in Ericsson’s favor, thus allowing deductions for sales commission payments. BODX4XEN_v96.indd 41 29/02/2012 16:11 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 41 PARENT COMPANY PARENT COMPANY Proposed disposition of earnings The Board of Directors proposes that a dividend of SEK 2.50 (2.25) per share be paid to shareholders duly registered on the record date May 8, 2012, and that the Parent Company 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 SEK 8,183,379,338 Amount to be retained by the Parent Company SEK 32,536,021,737 Total non-restricted equity of the Parent Company SEK 40,719,401,075 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% (52%) and a net cash amount of SEK 39.5 (51.3) 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 the Board of Directors’ 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 as well as coming years’ business plans and economic development. The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities. It also handles customer credit management, performed on a commission basis by Ericsson Credit AB. The Parent Company has 6 (6) branch offices. In total, the Group has 70 (68) branch and representative offices. Financial information Income after financial items was SEK 4.4 (7.8) billion. The Parent Company had no sales in 2011 or 2010 to subsidiaries, while 31% (45%) of total purchases of goods and services were from such companies. Major changes in the Parent Company’s financial position for the year included: > Increased current and non-current receivables from subsidiaries of SEK 2.7 billion > Decreased other current receivables of SEK 1.7 billion > Decreased cash, cash equivalents and short-term investments of SEK 14.5 billion > Decreased current and non-current liabilities to subsidiaries of SEK 7.8 billion Increased other current liabilities of SEK 2.4 billion. > At year end, cash, cash equivalents and short-term investments amounted to SEK 56.1 (70.6) billion. Share information As per December 31, 2011, the total number of shares in issue was 3,273,351,735, of which 261,755,983 were 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 21.48% and 14.34% respectively of the voting rights in the Parent Company. Both classes of shares have the same rights of participation in the net assets and earnings. In accordance with the conditions of the Long-Term Variable Remuneration Program (LTV) for Ericsson employees, 10,242,012 treasury shares were sold or distributed to employees in 2011. The quotient value of these shares was SEK 51.2 million, representing less than 1% of capital stock, and compensation received amounted to SEK 122.9 million. The holding of treasury stock at December 31, 2011 was 62,846,503 Class B shares. The quotient value of these shares is SEK 314.2 million, representing 1.9% of capital stock, and the related acquisition cost amounts to SEK 535.0 million. 42 BOARD OF DIRECTORS’ REPORT | Ericsson Annual Report 2011 BODX4XEN_v96.indd 42 29/02/2012 16:11 POST-CLOSINg EvENTS On January 12, 2012, Ericsson announced the closing of the acquisition of all the shares in Telcordia, a global leader in the development of software and services for OSS/BSS, for USD 1.15 billion in an all cash transaction, on a cash and debt- free basis. Balances to facilitate a Purchase Price Allocation have not yet been established. Approximately 2,600 skilled employees have joined Ericsson. This acquisition consolidates Ericsson’s position as a leading player in the operations support systems and business support systems (OSS/BSS) market with a key position in service fulfillment, assurance, network optimization and real-time charging. On January 14, 2012, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 900 million to the Swedish pension trust fund. On January 20, 2012, Ulf Ewaldsson was appointed Senior Vice President, Chief Technology Officer, Head of Group function Technology and Portfolio Management, effective as of February 1. In February 2012, Airvana Networks Solutions Inc., a State of Delaware, US corporation (“Airvana”), filed a complaint against Ericsson Inc. and Ericsson AB in the Supreme Court of the State of New York, US, alleging that Ericsson has violated key contract terms and misappropriated Airvana trade secrets and proprietary information. Airvana is seeking damages of USD 330 million and to enjoin Ericsson from developing, deploying or commercializing Ericsson products allegedly based on Airvana’s proprietary technology. BOARD ASSURANCE On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. The deal includes a broad IP cross-licensing agreement. Sony Ericsson is now a wholly-owned subsidiary of Sony. The agreed cash consideration for the transaction is EUR 1.05 billion. The divestment has resulted in a gain of approximately SEK 7.5 billion, to be recognized in the first quarter of 2012 and reported under Other operating income and expenses. 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 24, 2012 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Sverker Martin-Löf Deputy Chairman Roxanne S. Austin Member of the Board Ulf J. Johansson Member of the Board Leif Johansson Chairman Sir Peter L. Bonfield Member of the Board Nancy McKinstry Member of the Board Jacob wallenberg Deputy Chairman Börje Ekholm Member of the Board Anders Nyrén Member of the Board Carl-Henric Svanberg Member of the Board Hans Vestberg President, CEO and member of the Board Michelangelo Volpi Member of the Board Pehr Claesson Member of the Board Jan Hedlund Member of the Board Karin Åberg Member of the Board BODX4XEN_v96.indd 43 29/02/2012 16:11 Ericsson Annual Report 2011 | BOARD OF DIRECTORS’ REPORT 43 50 billion connecTed deVices by 2020. 50BILLION EXTENDING OUR REACH To build the networked society, our innovations need to be offered more widely than to operators alone. We are finding new ways to extend our reach. Today we also address sectors like utilities and TV & media. 44 Ericsson Annual Report 2011 ToCXBRAND_v33.indd 44 2012-03-01 09.07 conTenTs CONsOLIDATED FINANCIAL sTATEmENTs AND NOTEs TO THE CONsOLIDATED FINANCIAL sTATEmENTs CONTENTs consolidated Financial statements Consolidated Income Statement and Statement of Comprehensive Income ....................................................46 Consolidated Balance Sheet .................................................47 Consolidated Statement of Cash Flows ................................48 Consolidated Statement of Changes in Equity .....................49 notes to the consolidated Financial statements C1 Significant Accounting Policies .....................................50 C2 Critical Accounting Estimates and Judgments .............57 C3 Segment Information .....................................................59 C4 Net Sales .......................................................................62 C5 Expenses by Nature ......................................................62 C6 Other Operating Income and Expenses ........................62 C7 Financial Income and Expenses ...................................63 C8 Taxes .............................................................................63 C9 Earnings per Share ........................................................64 C10 Intangible Assets ...........................................................65 C11 Property, Plant and Equipment .....................................67 C12 Financial Assets, Non-Current ......................................68 C13 Inventories .....................................................................69 C14 Trade Receivables and Customer Finance ...................70 C15 Other Current Receivables ............................................71 C16 Equity and Other Comprehensive Income ....................72 C17 Post-Employment Benefits ...........................................76 C18 Provisions ......................................................................81 C19 Interest-Bearing Liabilities ............................................82 C20 Financial Risk Management and Financial Instruments ...................................................................83 C21 Other Current Liabilities ................................................86 C22 Trade Payables ..............................................................86 C23 Assets Pledged as Collateral ........................................86 C24 Contingent Liabilities.....................................................86 C25 Statement of Cash Flows ..............................................87 C26 Business Combinations ................................................87 C27 Leasing ..........................................................................89 C28 Information Regarding Members of the Board of Directors, the Group Management and Employees ......90 C29 Related Party Transactions ...........................................95 C30 Fees to Auditors ............................................................96 C31 Contractual Obligations ................................................96 C32 Events after the Balance Sheet Date ............................96 Ericsson Annual Report 2011 | CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45 ToCXBRAND_v33.indd 45 2012-03-01 09.07 CONSOLIDATED INCOME STATEMENT AND STATEMENT Of COMprEhENSIvE INCOME Consolidated inCome statement and statement of Comprehensive inCome CONSOLIDATED INCOME STATEMENT January–December, 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 Non-controlling interest Other information Average number of shares, basic (million) Earnings per share attributable to stockholders of the Parent Company, basic (SEK) 1) Earnings per share attributable to stockholders of the Parent Company, diluted (SEK) 1) 1) Based on Net income attributable to stockholders of the Parent Company. CONSOLIDATED STATEMENT Of COMprEhENSIvE INCOME January–December, 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 Share of other comprehensive income of joint ventures and associated companies Tax on items relating to components of Other comprehensive income Total other comprehensive income Total comprehensive income Total Comprehensive Income attributable to: Stockholders of the Parent Company Non-controlling interest 46 CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 Notes C3, C4 2011 2010 2009 226,921 –147,200 79,721 35.1% –32,638 –26,683 –59,321 203,348 –129,094 74,254 36.5% –31,558 –27,072 –58,630 206,477 –136,278 70,199 34.0% –33,055 –26,908 –59,963 C6 1,278 2,003 3,082 21,678 17,627 13,318 9.6% –3,778 17,900 2,882 –2,661 18,121 –5,552 12,569 12,194 375 3,206 3.80 3.77 8.7% –1,172 16,455 1,047 –1,719 15,783 –4,548 11,235 11,146 89 3,197 3.49 3.46 6.5% –7,400 5,918 1,874 –1,549 6,243 –2,116 4,127 3,672 455 3,190 1.15 1.14 C12 C7 C7 C8 C9 C9 C9 Notes 2011 12,569 2010 11,235 2009 4,127 C16 C16 C16 C16 C16 C16 C16 C16 –6,963 3,892 –633 – 7 –2 996 –2,028 – –964 –262 2,158 –7,063 5,506 5,081 425 966 –238 –136 –3,259 –434 –1,120 –322 10,913 10,814 99 665 3,850 –1,029 –1,067 –259 –1,040 485 4,612 4,211 401 CONSXISXENX11_v14.indd 46 2012-02-28 13.17 CoNSolIDAtED BAlANCE SHEEt 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 2011 2010 C10 3,523 27,438 13,083 3,010 27,151 16,658 Property, plant and equipment C11, C26, C27 10,788 9,434 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 Non-controlling 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 5,965 2,199 1,400 4,117 13,020 81,533 9,803 219 1,281 3,079 12,737 83,372 33,070 29,897 64,522 2,845 17,837 41,866 38,676 198,816 61,127 3,123 17,146 56,286 30,864 198,443 280,349 281,815 C16 C16 143,105 2,165 145,270 145,106 1,679 146,785 C17 C18 C8 C19, C20 C18 C19, C20 C22 C21 10,016 280 2,250 23,256 2,248 38,050 5,985 7,765 25,309 57,970 97,029 5,092 353 2,571 26,955 3,296 38,267 9,391 3,808 24,959 58,605 96,763 totAl EQUItY AND lIABIlItIES 1) 1) Of which interest-bearing liabilities and post-employment benefits SEK 41,037 (35,855) million. 280,349 281,815 CONSXBSXENX11_v11.indd 47 2012-02-28 13.21 Ericsson Annual Report 2011 | CONSOLIDATED FINANCIAL STATEMENTS 47 CONSOlIDatED StatEMENt OF CaSH FlOWS 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 2011 2010 2009 C25 12,569 12,613 25,182 –3,243 74 –1,700 –1,648 –5,695 –2,988 –15,200 11,235 12,490 23,725 –7,917 –2,125 4,406 5,964 –2,739 5,269 2,858 4,127 16,856 20,983 5,207 598 7,668 –3,522 –2,950 –3,508 3,493 Cash flow from operating activities 9,982 26,583 24,476 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 –4,994 386 –3,181 53 –1,515 –900 14,692 4,541 –3,686 124 –3,286 454 –1,644 –1,487 –3,016 –12,541 –4,006 534 –19,321 1,239 –1,443 2,606 –17,071 –37,462 Cash flow before financing activities 14,523 14,042 –12,986 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 Effect of exchange rate changes on cash Net change in cash 2,076 –1,259 92 –7,455 52 –6,494 2,580 –1,449 51 –6,677 –175 –5,670 14,153 –9,804 69 –6,318 199 –1,701 –217 –306 –328 7,812 8,066 –15,015 Cash and cash equivalents, beginning of period 30,864 22,798 37,813 Cash and cash equivalents, end of period C25 38,676 30,864 22,798 48 CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 CONSXCFXENX11_v16.indd 48 2012-02-28 13.23 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Consolidated statement of Changes in equity Notes C16 C16 C16 January 1, 2011 Total comprehensive income Transactions with owners Sale of own shares Stock Purchase Plans Dividends paid Transactions with non-controlling interest December 31, 2011 January 1, 2010 Total comprehensive income Transactions with owners Sale of own shares Stock Purchase Plans Dividends paid Transactions with non-controlling interest December 31, 2010 January 1, 2009 Total comprehensive income Transactions with owners Stock issue Sale of own shares Repurchase of own shares Stock Purchase and Stock Option Plans Dividends paid Transactions with non-controlling interest December 31, 2009 Capital stock Additional paid in capital Retained earnings Stockholders’ equity Non-controlling interest (NCI) 16,367 – – – – – 16,367 16,367 – – – – – 16,367 16,232 – 135 – – – – – 16,367 24,731 – – – – – 24,731 24,731 – – – – – 24,731 24,731 – – – – – – – 24,731 104,008 5,081 92 413 –7,207 –380 102,007 98,772 10,814 52 762 –6,391 – 104,008 99,860 4,211 – 75 –135 658 –5,897 – 98,772 145,106 5,081 92 413 –7,207 –380 143,105 139,870 10,814 52 762 –6,391 – 145,106 140,823 4,211 135 75 –135 658 –5,897 – 139,870 1,679 425 – – –248 309 2,165 1,157 99 – – –286 708 1,679 1,261 401 – – – – –421 –84 1,157 Total equity 146,785 5,506 92 413 –7,455 –71 145,270 141,027 10,913 52 762 –6,677 708 146,785 142,084 4,612 135 75 –135 658 –6,318 –84 141,027 CONSXEQUITYXENX11_v18.indd 49 2012-02-28 13.24 Ericsson Annual Report 2011 | CONSOLIDATED FINANCIAL STATEMENTS 49 Note c1 C1 SignifiCant aCCounting PoliCieS Introduction 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, 2011, have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and RFR 1 “Additional rules for Group Accounting”, related interpretations issued by the Swedish Financial Reporting Board (Rådet för finansiell rapportering), and the Swedish Annual Accounts Act. For the financial reporting of 2011, the Company has applied IFRS as issued by the IASB (IFRS effective as per December 31, 2011) and without any early application. There is no difference between IFRS effective as per December 31, 2011, and IFRS as endorsed by the EU, nor is RFR 1 related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering) or the Swedish Annual Accounts Act in conflict with IFRS. The financial statements were approved by the Board of Directors on February 24, 2012. 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, 2011: Improvements to IFRSs (Issued by the IASB in May 2010). > > Amendment to IFRIC 14,‘IAS 19 – The limit on a defined benefit assets, minimum funding requirements and their interaction’. Removes unintended consequences arising from the treatment of pre-payments where there is a minimum funding requirement. Results in pre-payments of contributions in certain circumstances being recognized as an asset rather than an expense. IFRIC 19, ‘Extinguishing financial liabilities with equity instruments’. Clarifies the requirements of IFRSs when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity’s shares or other equity instruments to settle the financial liability fully or partially. IAS 24, ‘Related party disclosures’ (revised 2009). Amends the definition of a related party and modifies certain related-party disclosure requirements for government-related entities. > > > Amendment to IAS 32, ‘Financial instruments: Presentation – Classification of rights issues’. Amended to allow rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency to be classified as equity instruments provided the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non- derivative equity instruments. None of the new or amended standards and interpretations have had any significant impact on the financial result or position of the Company. For information on “New standards and interpretations not yet adopted” please see page 56. 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 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, including any cost related to contingent consideration. Transaction costs attributable to the acquisition are expensed as incurred. The acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets and liabilities that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands, patents and financial liabilities. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. In acquisitions with non-controlling interest full or partial goodwill can be recognized. Final amounts are established within one year after the transaction date at the latest. In case there is a put option for non-controlling interest in a subsidiary a corresponding financial liability is recognized. Non-controlling interest The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non- controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. When the Company ceases to have control, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest in an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss. At acquisition, 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. Joint ventures and associated companies Both joint ventures and associated companies are accounted for in accordance with the equity method. Under the equity method, the investment in an associate or joint venture 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. JVs are ownership interests where a joint influence is obtained through agreement. Investments in associated companies, i.e. when the Company has 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 50 2012-03-06 11.23 significant influence and the power to participate in the financial and operating policy decisions of the associated company, but is not control or joint control over those policies. Normally this is the case when voting stock interest, including effective potential voting rights, is at least 20% but not more than 50%. 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. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. 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. 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 Other Comprehensive Income (OCI) under the hedge accounting practices as described below. Changes in the fair value of monetary securities denominated in foreign Note c1 > 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 BackGrouNd The Company offers a comprehensive portfolio of telecommunication and data communication systems, professional services, and multimedia solutions. Products, both hardware and software as well as services are in general standardized. The impact of this is that any acceptance terms are normally only formal requirements. In Note C3, ”Segment information”, the Company offer is disclosed more in detail as per operating segment. The Company’s products and services are generally sold under delivery- type or multi-year recurring services contracts. The delivery type contracts often have content from more than one segment. accouNtING treatmeNt Sales are based on fair values of consideration received and recorded net of value added taxes, goods returned and estimated trade discounts. Revenue is recognized when risks and rewards have been transferred to the customer, with reference to all significant contractual terms when: The product or service has been delivered The revenue amount is fixed or determinable > > > Customer has received and activation has been made of separately sold software > Collection is reasonably assured. 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. Estimation of contractual performance criteria impact the timing and amounts of revenue recognized and may therefore defer revenue recognition until the performance criteria are met. The profitability of contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable. Translation differences on non-monetary financial assets and liabilities Allocation and/or timing criteria specific per type of contract are: are reported as part of the fair value gain or loss. > Delivery-type contracts. These contracts relate to delivery, installation, 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 integration of products and providing of related services, normally under multiple elements contracts. Under multiple elements contracts the accounting is based on that the revenue recognition criteria are applied to the separately identifiable components of the contract. Revenue, including the impact of any discount or rebate, is allocated to each element based on relative fair values. Networks, Global Services and Multimedia have contracts that relate to this type of contracts. > Contracts for services. Relate to multi-year service contracts such as support – and managed service contracts and other types of recurring Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51 C1XC3XENX11_v89.indd 51 2012-03-06 11.23 Note c1 services. Revenue is recognized when the services have been provided, generally pro rata over the contract period. Global Services has contracts that relate to this type of contracts. > Contracts generating license fees from third parties for the use of the Company’s technology or intellectual property rights, not being a part of another product. Revenue is normally recognized based on sales of products sold to the customer/licensee. Networks and Multimedia have contracts that relate to this type of contracts. For sales between consolidated companies, associated companies, joint ventures and segments, the Company applies arm’s length pricing. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. 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 Foreign exchange 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 (excluding 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, including those that relate to customer financing, 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. Collectability 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. 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 evidence 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. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 52 2012-03-06 11.23 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 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 the 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 Other Comprehensive Income”. 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 Note c1 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 the income statement 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 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 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. A significant part of Inventories is Contract work in Progress(CWIP). Recognition and de recognition of CWIP relates to the Company´s revenue recognition principles meaning that costs incurred under a customer contract are recognized as CWIP. When revenue is recognized CWIP is derecognized and is instead recognized as Cost of Sales. C1XC3XENX11_v89.indd 53 2012-03-06 11.23 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 53 Note c1 In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. Intangible assets GoodwIll 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. Amortization of acquired intangible assets, such as patents, customer relations, brands and software, is made according to the straight-line method over their estimated useful lives, not exceeding ten years. However, if the economic benefit related to an item of intangible assets is front-end loaded the amortization method reflects this. Thus, the amortization for such an item is amortized on a digressive curve basis and the asset value decreases with higher amounts in the beginning of the useful life compared to the end. The Company has not recognized any intangible assets with indefinite useful life other than goodwill. Impairment tests are performed whenever there is an indication of possible impairment. However, intangible assets not yet available for use are tested annually. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs to sell. In assessing value in use, the estimated future cash flows after tax are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Application of after tax amounts in calculation, both in relation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component. The after tax discounting, applied by the Company is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates, as required by IFRS. 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. 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 four of them, Networks, Professional Services, Multimedia and ST-Ericsson. 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 consist of real estate, machinery and other technical assets, other equipment, tools and installation and construction in process and advance payment , they 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 real estate and 3–10 years for machinery and equipment. Depreciation and any impairment charges are included in Cost of sales, Research and development or Selling and administrative expenses. The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing a component and derecognizes the residual value of the replaced component. Impairment testing as well as recognition or reversal of impairment of property, plant and equipment is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above. Gains and losses on disposals are determined by comparing the proceeds less cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement. leasing leasING wheN the compaNy Is the lessee Leases on terms in which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the 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. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 54 2012-03-06 11.23 Note c1 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. a contract is anticipated and possible to estimate reliably. These contract loss estimates include any probable penalties to a customer under a loss contract. 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. In the recognition of income taxes, the Company offsets current tax receivables against current tax liabilities and deferred tax assets against deferred tax liabilities in the balance sheet, when the Company has a legal right to offset these items and the intention to do so. 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. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. provisions and contingent liabilities 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 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 Other provisions include provisions for unresolved 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 actual 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”. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. 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 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 C1XC3XENX11_v89.indd 55 2012-03-06 11.23 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 55 Note c1 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. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. share-based compensation to employees and the Board of directors Share-based compensation is related to remuneration to all 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. This value is based on the fair value of, for example free shares at grant date, measured as stock price as per each investment date. The value at grant date is charged to the income statement as any other remuneration over the service period. For example, value at grant date is 90. Given the normal service period of three years within Ericsson, 30 are charged per year during the service period. The amount charged to the income statement is reversed in equity each time of the income statement charge. The reason for this accounting principle of IFRS is that compensation cost is a cost with no direct cash flow impact. The purpose of share- based accounting according to IFRS (IFRS 2) is to present an impact of share-based programs, being part of the total remuneration, in the income statement. compeNsatIoN to employees 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 non-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 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 expensed and 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 C28, “Information Regarding Members of the Board of Directors, the Group 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 Company’s 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. 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, 2011, and have not been applied in preparing these consolidated financial statements. Below is a list of standards/interpretations that have been issued, except for amendments related to IFRS 1, ‘First time adoption of International Financial Reporting Standards’ and are effective for the periods starting as from January 1, 2012. > amendment to Ias 12, ‘Income taxes’, on deferred tax. IAS 12, ‘Income taxes’, currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, ‘Investment property’. This amendment therefore introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, ‘Income taxes – recovery of revalued non-depreciable assets’, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. > amendments to IFrs 7,‘Financial instruments: disclosures on derecognition’, This amendment will promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position, particularly those involving securitization of financial assets. Earlier application subject to EU endorsement is permitted. These amendments effective as from January 1, 2012, are not expected to have a significant impact on the Company’s financial result or position. Below is a list of standards/interpretations that have been issued, except for amendments related to IFRS 1, ‘First time adoption of International Financial Reporting Standards’ and are effective for the periods starting as from January 1, 2013 (except IFRS 9). 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 56 2012-03-06 11.23  > amendment to Ias 1, ‘Financial statement presentation’, regarding other comprehensive income. > amendment to Ias 19,‘employee benefits’, These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. The Company implemented the immediate recognition of remeasurements in the other comprehensive income in 2006, and therefore the transition to the revised IAS19 applicable starting January 1, 2013 will not have a significant effect on the present obligation. The main issues to address will be the implementation of the net interest cost/gain, which integrates the interest cost and expected return on assets to be based on a common discount rate. The Company will also need to address the taxes to be incorporated into the defined benefit obligation and plan assets, as well as the additional disclosure requirements on financial and demographic assumptions, sensitivity analysis, duration and multi-employer plans.” IFrs 9, ‘Financial instruments’, IFRS 9 is the first standard issued as part of a wider project to replace IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortized cost and fair value. IFrs 10, ‘consolidated financial statements’, Builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statement of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. This standard is estimated to have a limited impact on the Company. However, the accounting treatment in relation to any new future business or customer contract models might be impacted by IFRS 10. IFrs 11, ‘Joint arrangements’, IFRS 11 is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangement: joint operations and joint ventures. Proportional consolidation of joint ventures is no longer allowed. The Company does not use the proportionate consolidation method. IFrs 12, ‘disclosures of interests in other entities’, IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. IFrs 13, ‘Fair value measurement’, IFRS 13 does not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. Ias 27 (revised 2011), ‘separate financial statements’, IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. (see IFRS 10) Ias 28 (revised 2011), ‘associates and joint ventures’, IAS 28 (revised 2011) includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. (see IFRS 10). > > > > > > > These amendments effective as from January 1, 2013, are not expected to have a significant impact on the Company’s financial result or position. IFRS 9 is applicable as from January1, 2015. The EU has not endorsed IAS 12, IFRS 9, 10, 11, 12 or 13, IAS 19, IAS 27 (rev), IAS 28 (rev) or IAS 1 (amended). 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. Notes c1–c2 Following are the most important 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 Examples of estimates of total contract revenue and cost that are necessary are the assessing of customer possibility to reach conditional purchase volumes triggering contractual discounts to be given to the customer, the impact on the Company revenue in relation to performance criteria and whether any loss provisions shall be made. 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, 2011, were SEK 1.0 (1.1) billion or 1.4% (1.6%) 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, 2011, amounted to SEK 3.3 (3.1) billion or 9% (10%) of gross inventory. Investments in joint ventures and associated companies Key sources of estimation uncertainty Impairment testing of total carrying value of each item of “Equity in joint ventures and associated companies” is performed after initial recognition, whenever there is an indication of impairment. Information regarding information used for impairment tests is provided by respective joint venture and associated company. 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. An impairment in a JV or associated company may not always affect the Company in the same way depending on accounting standard used, initial recognition of assets and liabilities or other differences. At December 31, 2011, the amount of joint ventures and associated companies amounted to SEK 6.0 (9.8) billion. C1XC3XENX11_v89.indd 57 2012-03-06 11.23 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57 Note c2 assets held for sale Judgments made in relation to accounting policies applied Whether an asset is held for sale requires management´s judgments. If an asset is held for sale it must also be evaluated as from which date. On February 15, 2012 the sale of Sony Ericsson Mobile to Sony was closed. The sale was announced on October 27, 2011. This investment was accounted for under the equity method. Under this method the Company’s share of the profit or loss of an investee is recognized by the Company. It has been determined that the use of the quarterly financial statements issued by Sony Ericsson Mobile results in the most relevant and reliable share of the profit or losses of the investee. Subsequent to the date of the announcement Sony Ericsson Mobile issued financial statements as of Dec 31, 2011. Consequently, the equity method has been applied for the full year, including the period subsequent to the announcement. The Company’s share of the losses of Sony Ericsson Mobile for the 12 months period ended December 31, 2011 amounts to SEK –1.1 billion. This has resulted in a carrying value of the investment amounting to SEK 1.4 billion as of December 31, 2011. The divestment has resulted in a gain of approximately SEK 7.5 billion, to be recognized in the first quarter of 2012 and reported under Other operating income and expenses. deferred taxes Key sources of estimation uncertainty Deferred tax assets and liabilities, are recognized for temporary differences and for tax loss carry-forwards. Deferred tax is recognized net of valuation allowances. The valuation of temporary differences and tax loss carry- forwards, is based on management’s estimates of future taxable profits in different tax jurisdictions against which the temporary differences and loss carry-forwards may be utilized. At December 31, 2011, the amount of acquired intellectual property rights and other intangible assets amounted to SEK 40.5 (43.8) billion, including goodwill of SEK 27.4 (27.2) billion. An impairment charge of SEK 0.0 (0.9) billion was recognized as a part of the restructuring program. Under this program decisions were taken to phase out certain products. The impairment charge relates to balances for these products. The Company has also recognized goodwill in ST-Ericsson of SEK 1.3 (1.3) billion, as disclosed in Note C12, “Financial Assets, Non-Current”. 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, 2011, amounted to SEK 1.8 (2.5) billion. The largest amounts of tax loss carry-forwards are reported in Sweden, provIsIoNs other thaN warraNty provIsIoNs with an indefinite period of utilization (i.e. with no expiry date). For further detailed information, please refer to Note C8, “Taxes”. At December 31, 2011, the value of deferred tax assets amounted to SEK 13.0 (12.7) billion. The deferred tax assets related to loss carry- forwards 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. 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. For further discussion on goodwill, see Note C1, “Significant Accounting Policies” and Note C10, “Intangible Assets”. Estimates related to acquired intangible assets are based on similar assumptions and risks as for goodwill. 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, 2011, provisions other than warranty commitments amounted to SEK 4.4 (7.3) 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. contingent liabilities Key sources of estimation uncertainty As disclosed under ‘Provisions other than warranty provisions’ there are uncertainties in the estimated amounts. The same type of uncertainty exists for contingent liabilities. Judgments made in relation to accounting policies As disclosed under Note C1, “Significant Accounting Policies” a potential obligation that is not probable to result in an economic outflow is classified as a contingent liability, with no impact on the Company’s financial statements. Should, however, an obligation in a later period be deemed to be probable, then a provision shall be recognized, impacting the financial statements. 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 58 2012-03-06 11.23 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, 2011, defined benefit obligations for pensions and other post-employment benefits amounted to SEK 36.4 (28.7) billion and fair value of plan assets to SEK 28.0 (25.4) 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 and purchases volumes involve 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”. C3 Segment information operating segments When determining Ericsson’s operating segments, consideration has been given to which markets and what type of customers the products and services aim to attract as well as the distribution channels they are sold through. Commonality regarding technology, research and development has also been taken into account. To best reflect the business focus and to facilitate comparability with peers, five operating segments are reported: > Networks > Global Services > Multimedia > Sony Ericsson > ST-Ericsson > Networks delivers products and solutions for mobile and fixed broadband access, core networks, and transmission. The offering includes: > Radio access solutions that interconnect with devices such as mobile phones, tablets and PCs, supporting all major standardized mobile technologies. Fixed access solutions for both fiber and copper, such as GPON and xDSL, increasing customers’ ability to modernize fixed networks to enable IP-based services with high bandwidth. IP core network solutions (switching, routing and control) include softswitches, IP infrastructure for edge and core routing, IP Multimedia Subsystem (IMS) and media gateways. Transmission/backhaul: microwave (MINI-LINK) and optical transmission solutions for mobile and fixed networks. > > > Operations Support Systems (OSS), supporting operators’ management Notes c2–c3 of existing networks as well as introduction of new network architectures, technologies and services. OSS includes tools for configuration, performance monitoring, security management, inventory management and software upgrades. Global services delivers managed services, consulting and systems integration, customer support and network rollout services. The offering includes: > Managed services, comprising solutions for network design and planning, network operations (the management of day-to-day operations of customer networks), field operations and site maintenance, network sharing solutions as well as shared solutions such as hosting of platforms and applications. > Consulting and Systems integration: technology and operational consulting, integration of multi-vendor equipment, design and integration of new solutions and handling of technology change and transformation programs, learning services and optimization services ensuring the best possible user experience. Industry-specific solutions for vertical industries are also included. Product-related Services: network rollout services, customer support and network optimization services (optimization for performance and energy). > multimedia provides enablers and applications for operators. The offering includes: > Operations Support Systems: provisioning, device management and mediation solutions. > Business Support Systems: revenue management (prepaid, post-paid, > convergent charging and billing) and customer care solutions. TV solutions: a suite of open, standards-based products that provide high-quality digital TV including IPTV, HDTV and interactive TV applications: the offering includes a complete IPTV network infrastructure solution optimized for multi-stream HD-IPTV: video compression, on-demand solutions, content management systems, advertising and interactive TV applications for operators, service providers, advertisers and content providers. > Consumer and business applications: solutions include service exposure, messaging, social media connectivity and location-based services. Enterprise market solutions include converged business communication solutions such as the Ericsson Business Communication Suite (BCS). > M-Commerce solutions: including brokering solutions that facilitate payment and distribution of content, and Ericsson Money Services for end-to-end mobile financial services. sony ericsson, the joint venture delivers innovative and feature-rich mobile phones and accessories. In October 2011, Ericsson announced the divestment to Sony Corporation of its share in the 50/50 joint venture. st-ericsson, the joint venture develops semiconductors and wireless platforms for GSM, EDGE, WCDMA, HSPA, TD-SCDMA and LTE to handset manufacturers, as well as to mobile operators and other device manufacturers. Sony Ericsson and 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. 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. regions The Regions are the Company’s primary sales channel. The Company operates worldwide and reports its operations divided into ten regions. C1XC3XENX11_v89.indd 59 2012-03-06 11.23 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59 Note c3 Other includes sales of for example embedded modules, cables, power modules as well as licensing and IPR. > North America Latin America > > Northern Europe & Central Asia > Western and Central Europe > Mediterranean > Middle East > Sub-Saharan Africa > > China & North East Asia > South East Asia & Oceania > Other India major customers The Company does not have any customer for which revenues from transactions have exceeded 10% of the Company’s total revenues for the years 2011, 2010 or 2009. We derive most of the sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of approximately 400, mainly network operators, the 10 largest customers account for 44% (46%) of net sales. The largest customer accounted for approximately 7% (8%) of sales in 2011. For more information, see Risk Factors, “Market, Technology and Business Risks”. Networks 131,596 799 132,395 Global services 83,854 30 83,884 17,295 13% 5,544 7% multi- media sony ericsson st- ericsson total segments unallo- cated elimi- nations 1) 10,629 13 10,642 –504 –5% 46,866 126 46,992 –1,854 –4% 9,232 1,461 10,693 –5,461 –51% 282,177 2,429 284,606 15,020 5% – – – –56,098 –1,587 –57,685 –501 3,381 operatING seGmeNts 2011 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 87 –4,192 –2,783 –50 12 –1,600 –6 28 –481 –532 –23 – –1,363 – 4 –792 –184 –12 1 –143 – –1,199 –1 –647 – – –838 – –2,730 –867 –823 –283 – –280 – –3,810 –6,333 –4,969 –368 13 –4,224 –6 32 – – – – –78 164 – 868 1,470 283 – 1,118 – Group 226,079 842 226,921 17,900 8% 2,882 –2,661 18,121 –5,552 12,569 –3,778 –5,465 –3,499 –85 13 –3,184 158 1) All segment sales are presented, but as Sony Ericsson and ST-Ericsson sales are accounted for in accordance with the equity method, their sales are eliminated in the Eliminations column. operatING seGmeNts 2010 Segment sales Inter-segment sales Net sales operating income Operating margin (%) Financial income Financial expenses Income after financial items Taxes Net income Networks 111,459 1,249 112,708 12,481 11% 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 –64 –4,554 –2,600 –675 9 –3,915 154 Global services multi- media sony ericsson st- ericsson total segments unallo- cated elimi- nations 1) 80,117 6 80,123 6,513 8% –17 –303 –555 –276 2 –2,675 53 10,504 13 10,517 60,118 60 60,178 13,116 3,403 16,519 275,314 4,731 280,045 – – – –73,234 –3,463 –76,697 –643 –6% 1,523 3% –3,527 –21% 16,347 6% –805 – 913 – –2 –806 –144 –52 1 –207 92 664 –25 –731 – – –402 – –1,763 –930 –1,022 –61 – –536 – –1,182 –6,618 –5,052 –1,064 12 –7,735 299 10 – – – – –17 59 – 955 1,753 61 – 938 – Group 202,080 1,268 203,348 16,455 8% 1,047 –1,719 15,783 –4,548 11,235 –1,172 –5,663 –3,299 –1,003 12 –6,814 358 1) All segment sales are presented, but as Sony Ericsson and ST-Ericsson sales are accounted for in accordance with the equity method, their sales are eliminated in the Eliminations column. 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C1XC3XENX11_v89.indd 60 2012-03-06 11.23 Note c3 Group 205,373 1,104 206,477 5,918 3% 1,874 –1,549 6,243 –2,116 4,127 –7,400 –4,209 –3,550 –4,413 49 –11,259 843 operatING seGmeNts 2009 Networks 1) services 1) multi media Global sony ericsson st- ericsson total segments unallo cated elimi- nations 2) Segment sales Inter-segment sales Net sales 113,339 746 114,085 79,038 82 79,120 12,996 276 13,272 71,984 164 72,148 7,598 3) 7% 6,271 4) 8% 655 5% –10,820 –15% 13,535 5,731 19,266 –2,615 –14% 290,892 6,999 297,891 – – – –85,519 –5,895 –91,414 1,089 0% –855 – 5,684 – 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 37 –2,673 –2,768 –4,333 3) 38 –8,358 3) 10 33 –574 –627 – 9 –2,434 777 4) –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 – 2,644 – 1) Amounts for 2009 have been restated to be consistent with the segment allocation method applied as from 2010. 2) All segment sales are presented, but as Sony Ericsson and ST-Ericsson sales are accounted for in accordance with the equity method, their sales are eliminated in the Eliminations column. 3) Including impairment losses related to restructuring activities of SEK 4.3 billion. 4) In Q2 2009, the TEMS business was divested, resulting in a capital gain of SEK 0.8 billion. reGIoNs North America Of which the United States Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean Middle East Sub-Saharan Africa India China & North East Asia Of which China South East Asia & Oceania Other 1) 2) total 1) Of which Sweden 2) Of which EU Net sales Non-current assets 3) 2011 2010 2009 48,785 46,519 21,982 15,225 19,030 23,807 15,461 10,163 9,762 38,209 17,546 13,870 10,627 226,921 3,882 43,960 49,473 46,104 17,882 12,171 19,868 22,628 15,099 9,194 8,626 25,965 14,633 14,902 7,540 203,348 4,237 43,707 23,912 21,538 20,025 11,981 22,459 25,161 18,250 15,341 15,262 25,960 18,455 20,849 7,277 206,477 4,096 49,313 2011 6,296 6,020 2,268 41,008 5,097 1,395 42 79 355 3,939 1,496 318 – 60,797 40,415 44,786 2010 7,251 6,977 1,998 42,112 8,629 1,523 84 51 262 3,795 1,013 351 – 66,056 41,683 46,563 2009 8,359 8,100 2,066 44,091 11,713 1,352 115 49 225 988 903 417 – 69,375 43,574 49,158 3) Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets. For employee information, see Note C28, “Information Regarding Members of the Board of Directors, the Group Management and Employees”. C1XC3XENX11_v89.indd 61 2012-03-06 11.23 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 61 Notes c4–c6 C4 Net SaleS Net sales Sales of products and network rollout services Of which: Delivery-type contracts Construction-type contracts Professional Services sales License revenues Net sales Export sales from Sweden C5 expeNSeS by Nature expeNses by Nature Goods and services Employee remuneration Amortization and depreciation Impairments and obsolescence allowances, net of reversals Financial expenses Taxes expenses incurred Inventory changes 1) Additions to Capitalized development expenses charged to the Income statement 1) The inventory changes are based on changes of gross inventory values prior to obsolescence allowances. Total restructuring charges in 2011 were SEK 3.2 (6.8) b. Restructuring charges are included in the expenses presented above. restructurINg charges by fuNctIoN Cost of sales R&D expenses Selling and administrative expenses total restructuring charges C6 Other OperatiNg iNCOme aNd expeNSeS other operatINg INcome aNd expeNses Gains on sales of intangible assets and PP&E Losses on sales of intangible assets and PP&E Gains on sales of investments and operations Losses on sales of investments and operations Capital gains/losses, net Other operating revenues total other operating income and expenses 2011 2010 2009 161,882 140,222 145,873 161,882 – 58,834 6,205 226,921 116,507 140,156 66 58,529 4,597 203,348 100,070 144,908 965 56,123 4,481 206,477 94,829 2011 2010 2009 142,221 58,905 8,964 1,363 2,661 5,552 219,666 3,417 1,515 214,734 130,725 57,183 8,962 966 1,719 4,548 204,103 8,465 1,647 193,991 124,627 54,877 7,759 5,637 1,549 2,116 196,565 –4,784 1,443 199,906 2011 1,231 561 1,392 3,184 2011 65 –64 210 –52 159 1,119 1,278 2010 3,354 1,682 1,778 6,814 2009 4,180 6,045 1,034 11,259 2010 301 –422 577 –219 237 1,766 2,003 2009 193 –126 962 –119 910 2,172 3,082 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C4XC6XENX11_v28.indd 62 2012-02-28 13.30 Notes c7–c8 C7 FinanCial inCome and expenses FINaNcIaL INcome aNd exPeNses Contractual interest on financial assets Of which on financial assets at fair value through profit or loss Contractual interest on financial liabilities Net gain/loss on: Instruments at fair value through profit or loss 1) Of which included in fair value hedge relationships Loans and receivables Liabilities at amortized cost Other financial income and expenses total Financial income 2011 Financial expenses Financial income 2010 Financial expenses Financial income 2009 Financial expenses 1,940 1,381 – 1,062 – -132 – 12 2,882 – – –1,706 –591 –175 – –105 –259 –2,661 811 304 – 295 – –68 – 9 1,047 – – –1,315 –206 151 – –4 –194 –1,719 1,287 814 – 635 – –53 – 5 1,874 – – –1,616 155 155 – –2 –86 –1,549 1) Excluding net gain from operating assets and liabilities, SEK 51 million (net gain of SEK 1,528 million in 2010, net gain of SEK 2,247 million in 2009), reported as Cost of Sales. C8 Taxes The Company’s tax expense for 2011 was SEK 5,552 (4,548) million or 30.6% (28.8%) of income after financial items. The tax rate may vary between years depending on business and geographical mix. The effective tax rate excluding joint ventures and associated companies was 26.4% (25.7%) mainly due to lower statutory tax rates for the joint ventures and that they reported losses. INcome taxes recogNIzed IN the INcome statemeNt Current income taxes for the year Current income taxes related to prior years Deferred tax income/expense (–) Sub total Share of taxes in joint ventures and associated companies tax expense 2011 2010 2009 –4,642 –4,635 –4,605 283 –1,433 –5,792 240 –5,552 –35 307 –4,363 –185 –4,548 441 661 –3,503 1,387 –2,116 A reconciliation between reported tax expense for the year and the theoretical tax expense that would arise when applying statutory tax rate in Sweden, 26.3%, on the consolidated income before taxes, is shown in the table below. recoNcILIatIoN oF sWedIsh INcome tax rate WIth eFFectIVe tax rate Expected tax expense at Swedish tax rate 26.3% Effect of foreign tax rates Of which joint ventures and associated companies Current income taxes related to prior years Recognition/remeasurement of tax loss carry-forwards Recognition/remeasurement of deductible temporary differences Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of changes in tax rates tax expense 2011 2010 2009 –4,767 –1,126 –4,150 –405 –1,643 –812 –754 283 –467 –35 –550 441 224 –257 8 81 –768 521 – –5,552 172 –830 880 77 –4,548 267 –1,155 630 148 –2,116 33.9% Effective tax rate 30.6% 28.8% deferred tax balances Deferred tax assets and liabilities are derived from the balance sheet items as shown in the table below. tax eFFects oF temPorarY dIFFereNces aNd tax Loss carrY-ForWards deferred tax assets deferred tax liabilities Net balance 2011 Intangible assets and property, plant and equipment Current assets Post-employment benefits Provisions Other Loss carry-forwards Deferred tax assets/liabilities Netting of assets/liabilities deferred tax balances, net 2010 Intangible assets and property, plant and equipment Current assets Post-employment benefits Provisions Other Loss carry-forwards Deferred tax assets/liabilities Netting of assets/liabilities deferred tax balances, net 968 3,193 2,233 1,441 3,423 3,258 14,516 –1,496 13,020 543 3,398 1,163 2,019 3,989 3,537 14,649 –1,912 12,737 2,941 100 618 23 64 – 3,746 –1,496 2,250 3,725 110 636 12 – – 4,483 –1,912 2,571 10,770 10,770 10,166 10,166 C7XC9XENX11_v41.indd 63 2012-02-28 13.32 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 63 Notes c8–c9 chaNges IN deFerred taxes, Net Opening balance, net Recognized in net income Recognized in other comprehensive income Acquisitions/disposals of subsidiaries Currency translation differences closing balance, net 2011 10,166 –1,433 2,158 53 –174 10,770 2010 12,057 307 –1,120 –606 –472 10,166 Tax effects reported directly in Other Comprehensive Income amount to SEK 2,158 (–1,120) million, of which actuarial gains and losses related to pensions SEK 1,809 (–836) million, cash flow hedges SEK 350 (–183) million and deferred tax on gains/losses on hedges on investments in foreign entities SEK –1 (–101) 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 carry-forwards are related to countries with long or indefinite periods of utilization, mainly Sweden and Germany. Of the total SEK 3,258 million recognized deferred tax assets related to tax loss carry-forwards, SEK 2,218 million relates to Sweden with indefinite periods of utilization. Due to the Company’s strong current financial position and taxable income during 2011, Ericsson has been able to utilize part of its tax loss carry-forwards during the year and in addition to this been able to recognize part of earlier not recognized loss carry-forwards. The assessment is that Ericsson will be able to generate sufficient income in the coming years to also utilize the remaining part of the recognized amounts. INVestmeNts IN subsIdIarIes Due to losses in certain subsidiaries, 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 C9 earnings per share earNINgs Per share 2009–2011 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 purchase plans Average number of shares outstanding, diluted (millions) earnings per share, diluted (seK) companies, and due to the uncertainty as to which deductions can be realized in the future, no additional deferred tax assets are reported. tax Loss carrY-ForWards Deferred tax assets regarding tax loss carry-forwards 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. As of December 31, 2011, the recognized tax loss carry-forwards amounted to SEK 12,657 (13,030) million. The tax value of these tax loss carry-forwards is reported as an asset. The final years in which the recognized loss carry-forwards can be utilized are shown in the following table. tax Loss carrY-ForWards Year oF exPIratIoN Year of expiration 2012 2013 2014 2015 2016 2017 or later total tax loss carry-forwards tax value 37 239 372 233 391 11,385 12,657 9 67 105 66 112 2,899 3,258 Tax loss carry-forwards of Sony Ericsson and ST-Ericsson are not included, as they are recognized in accordance with the equity method. In addition to the table above there are loss carry-forwards of SEK 7,375 million at a tax value of SEK 1,502 million that have not been recognized due to judgments of the possibility to be used against future taxable profits in the respective jurisdictions. These loss carry-forwards have an expiration date in excess of five years. 2011 2010 2009 12,194 3,206 3.80 12,194 3,206 27 3,233 3.77 11,146 3,197 3.49 11,146 3,197 29 3,226 3.46 3,672 3,190 1.15 3,672 3,190 22 3,212 1.14 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C7XC9XENX11_v41.indd 64 2012-02-28 13.32 Note c10 C10 IntangIble assets INtANGIBLe ASSetS 2011 capitalized development expenses Goodwill Intellectual property rights (IPR), trade­ marks and other intangible assets For internal use to be marketed Acquired costs Internal costs total total trademarks, customer rel ation ships and similar rights Patents and acquired R&D 6,610 1,515 – – – 8,125 –2,526 –661 – – –3,187 –1,714 –7 –1,721 3,217 2,213 – – – – 2,213 –1,775 –200 – – –1,975 –55 – –55 183 1,478 – – – – 1,478 –1,184 –134 – – –1,318 –37 – –37 123 10,301 1,515 – – – 11,816 –5,485 –995 – – –6,480 –1,806 –7 –1,813 3,523 27,151 – 260 –2 46 27,455 – – 1 – 1 – –18 –18 27,438 13,582 237 382 –20 7 14,188 –3,937 –1,538 15 –42 –5,502 – – – 8,686 25,330 354 – –20 25 25,689 –13,103 –2,932 13 –56 –16,078 –5,214 – –5,214 4,397 total 38,912 591 382 –40 32 39,877 –17,040 –4,470 28 –98 –21,580 –5,214 – –5,214 13,083 cost Opening balance Acquisitions/capitalization Balances regarding acquired businesses 1) Sales/disposals Translation difference closing balance Accumulated amortization Opening balance Amortization Sales/disposals Translation difference closing balance Accumulated impairment losses Opening balance Impairment losses closing balance Net carrying value 1) For more information on acquired businesses, see Note C26, “Business Combinations”. INtANGIBLe ASSetS 2010 capitalized development expenses Goodwill Intellectual property rights (IPR), trade­ marks and other intangible assets For internal use to be marketed Acquired costs Internal costs total total trademarks, customer rel ation ships and similar rights Patents and acquired R&D 5,221 1,389 – – – 6,610 –2,104 –422 – – –2,526 –1,665 –49 –1,714 2,370 2,060 153 – – – 2,213 –1,630 –145 – – –1,775 –55 – –55 383 1,376 102 – – – 1,478 –1,087 –97 – – –1,184 –37 – –37 257 8,657 1,644 – – – 10,301 –4,821 –664 – – –5,485 –1,757 –49 –1,806 3,010 27,375 – 1,256 – –1,480 27,151 – – – – – – – – 27,151 10,624 521 2,800 – –363 13,582 –2,639 –1,450 – 152 –3,937 – – – 9,645 24,898 – 1,025 –55 –538 25,330 –9,875 –3,549 27 294 –13,103 –4,269 –945 –5,214 7,013 total 35,522 521 3,825 –55 –901 38,912 –12,514 –4,999 27 446 –17,040 –4,269 –945 –5,214 16,658 cost Opening balance Acquisitions/capitalization Balances regarding acquired businesses 1) Sales/disposals 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 1) For more information on acquired businesses, see Note C26, “Business Combinations”. 2) The write-down (impairment charge) of SEK 0.9 billion is a consequence of the restructuring program decision to phase out certain products. C10XENX11_v27.indd 65 2012-02-28 13.34 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65 Note c10 The goodwill is allocated to the operating segments Networks SEK 16.7 (16.5) billion, Global Services SEK 4.1 (4.1) billion and Multimedia SEK 6.6 (6.6) 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) The demand for multimedia solutions is driven by the opportunities for new types of service offerings enabled by IP technology and high-speed broadband. There is strong IPTV subscriber growth, rapid growth in digital viewing and on-demand services. The development and build out of Mobile Broadband networks and increasing number of mobile broadband subscriptions drives growth in service introduction and traffic. This puts high demand on implementation and systems integration services as well as charging and payment systems. The Business Support Systems’ growth is driven by introduction of new services, new business models and price plans. > Development of working capital and capital expenditure requirements. The demand for professional services is also driven by an increasing The assumptions regarding industry specific market drivers and market growth are approved by group management and each operating segment’s management. These assumptions are based on industry sources as input to the projections made within the Company for the development 2012–2016 for key industry parameters: > > The number of global mobile subscriptions is estimated to grow from around 6.8 billion by the end of 2012 to around 8.4 billion by the end of 2016. Of these, almost 5 billion will be a mobile broadband subscriptions. Some hundred millions of these mobile broadband subscriptions (approximately 600 million 2016) will use mobile PC/ tablets, but the vast majority, around 4.1 billion, will use mobile phones to access the internet. Fixed broadband subscriptions will grow from around 600 million by the end of 2012 to around 740 million in 2016. Fixed broadband includes Fiber, Cable and xDSL > Mobile traffic volume is estimated to increase (around 10 times 2011–2016, around 6 times 2012–2016), while the fixed Internet traffic is estimated to increase (around 4 times 2011–2016, around 3 times 2012–2016), however from a much larger base. > 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. 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%) 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. An after-tax discount rate of 8% (8%) has for all cash generating units been applied for the discounting of projected after-tax cash flows. The assumptions for 2010 are disclosed in Note C10, “Intangible Assets” in the Annual Report of 2010. The Company’s discounting is based on after-tax future cash flows and after-tax discount rates. This discounting is not materially different from a discounting based on before-tax future cash flows and before-tax discount rates, as required by IFRS. In Note C1, “Significant Accounting Policies”, and Note C2, “Critical Accounting Estimates and Judgments”, further disclosures are given regarding goodwill impairment testing. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C10XENX11_v27.indd 66 2012-02-28 13.34 C11 ProPerty, Plant and equiPment PRoPeRtY, PLANt AND eQUIPMeNt 2011 cost 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 Real estate Machinery and other technical assets other equipment, tools and installations construction in progress and advance payments 4,238 265 146 –147 142 –3 4,641 –1,869 –415 – 74 36 9 –2,165 –43 – – – – –43 2,433 5,004 400 37 –354 169 –21 5,235 –3,377 –571 – 435 –4 32 –3,485 –95 –48 – – –5 –148 1,602 18,576 1,910 75 –952 1,116 –62 20,663 –13,695 –2,513 1 1,085 –32 60 –15,094 –119 –12 13 1 –1 –118 5,451 814 2,419 – –524 –1,427 20 1,302 – – – – – _ – – – – – – – 1,302 Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2011, amounted to SEK 226 (303) million. The reversal of impairment losses have been reported under Cost of sales. PRoPeRtY, PLANt AND eQUIPMeNt 2010 cost 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 Real estate Machinery and other technical assets other equipment, tools and installations construction in progress and advance payments 4,217 283 14 –102 87 –261 4,238 –1,692 –361 –2 60 4 122 –1,869 –45 – – – 2 –43 2,326 5,298 411 4 –543 190 –356 5,004 –3,557 –629 –3 553 9 250 –3,377 –91 –6 – – 2 –95 1,532 18,087 1,480 473 –1,449 817 –832 18,576 –13,058 –2,309 –297 1,384 –13 598 –13,695 –131 –3 12 – 3 –119 4,762 578 1,512 –5 –148 –1,094 –29 814 – – – – – – – – – – – – – 814 Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2010, amounted to SEK 303 (236) million. The reversal of impairment losses have been reported under Cost of sales. Note c11 total 28,632 4,994 258 –1,977 – –66 31,841 –18,941 –3,499 1 1,594 – 101 –20,744 –257 –60 13 1 –6 –309 10,788 total 28,180 3,686 486 –2,242 – –1,478 28,632 –18,307 –3,299 –302 1,997 – 970 –18,941 –267 –9 12 – 7 –257 9,434 C11XENX11_v17.indd 67 2012-02-28 13.53 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 67 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 closing balance 1) Including goodwill for ST-Ericsson of SEK 1.3 (1.3) billion. 2) Goodwill, net, amounts to SEK 13.5 (16.0) million. joint ventures associated companies 2011 8,648 –3,929 241 –126 4 –175 – – – 2010 10,317 –1,099 –181 –391 22 –20 – – – 4,663 1) 8,648 1) 2011 2010 1,155 151 –1 66 – – –177 109 –1 1,302 2) 1,261 –73 –4 –47 – – –119 138 –1 1,155 2) total 2011 9,803 –3,778 240 –60 4 –175 –177 109 –1 5,965 total 2010 11,578 –1,172 –185 –438 22 –20 –119 138 –1 9,803 ericssoN’s share of assets, liabilities aNd iNcome iN joiNt veNture soNy ericssoN mobile commuNicatioNs ab ericssoN’s share of assets, liabilities aNd iNcome iN joiNt veNture st-ericssoN 2011 2010 2009 2011 2010 2009 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 Non-controlling interest Assets pledged as collateral Contingent liabilities 5,040 8,745 285 12,172 1,328 23,496 –1,095 85 –1,010 –1,114 104 1 37 3,622 9,904 592 10,533 2,401 30,089 705 –231 474 433 41 – 16 4,003 12,790 130 14,675 1,988 36,074 –5,540 1,252 –4,288 –4,441 153 182 17 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 Non-controlling interest Assets pledged as collateral Contingent liabilities 6,855 1,514 397 4,695 3,277 5,346 –2,730 156 –2,574 –2,574 – 3 – 6,673 2,249 214 2,519 6,189 8,260 –1,762 50 –1,712 –1,713 1 3 – 7,238 3,856 129 2,691 8,274 9,633 –1,762 136 –1,626 –1,626 – – 6 ericssoN’s share of assets, liabilities aNd iNcome iN associated compaNy ericssoN Nikola tesla d.d. 1) 2011 2010 2009 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 Non-controlling interest Assets pledged as collateral Contingent liabilities 1) Ericsson’s share is 49.07%. 113 574 1 197 489 693 13 3 16 16 – 4 80 92 749 2 209 630 784 17 –1 16 16 – 4 43 311 754 3 240 822 994 90 1 91 91 – 5 151 All three companies apply IFRS in the reporting to Ericsson as issued by IASB. 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C12XC13XENX11_v43.indd 68 2012-02-28 14.00 other fiNaNcial assets, NoN-curreNt cost Opening balance Additions Business combinations Disposals/repayments/deductions Change in value in funded pension plans 1) Revaluation Translation difference closing balance accumulated impairment losses/allowances Opening balance Impairment losses/allowance Disposals/repayments/deductions Translation difference closing balance Net carrying value Notes c12–c13 other investments in shares and participations 2010 2011 customer finance, non-current 2010 2011 derivatives, non-current 2010 2011 other financial assets, non-current 2010 2011 1,607 1,930 – –68 – – 107 3,576 –1,388 –54 63 2 –1,377 2,199 1,660 114 –33 – – – –134 1,607 –1,404 –75 –26 117 –1,388 219 1,474 1,875 – –1,699 – – 11 1,661 –193 –91 19 4 –261 1,400 1,232 3,562 – –3,322 – – 2 1,474 –402 2 206 1 –193 1,281 – – – – – 816 – 816 – – – – – 816 843 – – – – –843 – – – – – – – – 4,382 422 – –97 42 – –116 4,633 –1,303 –47 – 18 –1,332 3,301 3,197 683 – –35 726 – –189 4,382 –1,463 –7 – 167 –1,303 3,079 1) This amount includes asset ceiling. For further information, see Note C17, “Post-employment benefits”. C13 inventories iNveNtories movemeNts iN obsolesceNce allowaNces Raw materials, components, consumables and manufacturing work in progress Finished products and goods for resale Contract work in progress inventories, net 2011 2010 8,772 13,525 10,773 33,070 8,509 11,894 9,494 29,897 Contract work in progress includes amounts related to delivery-type contracts, service contracts and construction-type contracts with ongoing work in progress. Reported amounts are net of obsolescence allowances of SEK 3,343 (3,090) million. The increase in inventories during 2011 is related to increased sales and increased share of coverage projects. Opening balance Additions, net Utilization Translation difference Balances regarding acquired/ divested businesses closing balance 2011 3,090 918 –683 18 – 3,343 2010 2,961 250 –165 –46 90 3,090 2009 3,493 562 –1,297 2 201 2,961 The amount of inventories recognized as expense and included in Cost of sales was SEK 60,544 (47,415) million. C12XC13XENX11_v43.indd 69 2012-02-28 14.00 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 69 Note c14 C14 Trade reCeivables and CusTomer FinanCe 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 2011 64,740 –567 64,173 349 64,522 4,671 –426 4,245 2,845 2010 61,609 –766 60,843 284 61,127 4,725 –321 4,404 3,123 Credit commitments for customer finance 8,569 3,282 Days Sales Outstanding (DSO) were 91 (88) in December 2011. 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 2011 Neither impaired nor past due Impaired, not past due Past due in less than 90 days Past due in 90 days or more Past due in less than 90 days and impaired Past due in 90 days or more and impaired total 2010 Neither impaired nor past due Impaired, not past due Past due in less than 90 days Past due in 90 days or more Past due in less than 90 days and impaired Past due in 90 days or more and impaired total credit risk trade receivables 2011 766 198 –266 –43 –69 –19 – 567 2010 924 282 –285 –169 33 –19 – 766 2009 1,471 388 –583 –312 10 –43 –7 924 customer finance 2011 2010 321 162 –31 –27 – 1 – 426 772 25 –87 –359 – –30 – 321 2009 326 595 –67 –37 – –45 – 772 trade receivables excluding associated companies and joint ventures Allowances for impairment of receivables customer finance Allowances for impairment of customer finance 56,480 184 4,126 1,072 850 2,028 64,740 54,510 52 2,227 1,500 418 2,902 61,609 – –16 – – –50 –501 –567 – –16 – – –90 –660 –766 3,369 763 238 45 41 215 4,671 3,804 528 62 85 18 228 4,725 – –176 – – –35 –215 –426 – –75 – – –18 –228 –321 Credit risk is divided into three categories: credit risk in trade receivables, customer finance risk and financial credit risk (see Note 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 the Company. The purpose of the policy is to: > Avoid credit losses through establishing internal standard credit approval routines in all the Company’s 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. 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C14XC15XENX11_v41.indd 70 2012-02-28 14.02 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 the Company are mitigated. Trade receivables amounted to SEK 64,740 (61,609) million as of December 31, 2011. Provisions for expected losses are regularly assessed and amounted to SEK 567 (766) million as of December 31, 2011. The Company’s nominal credit losses have, however, historically been low. The amounts of trade receivables closely follow the distribution of the Company’s sales and do not include any major concentrations of credit risk by customer or by geography. The five largest customers represent 30% (29%) 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 commercial, e.g. a borrower’s deteriorated creditworthiness. As of December 31, 2011, the Company’s total outstanding exposure related to customer finance was SEK 4,671 (4,725) million. As of December 31, 2011, the Company also had unutilized customer finance commitments of SEK 8,569 (3,282) million. During 2011 the 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 194 (3,808) million, the amount of the assets that the Company continues to recognize is SEK 10 (190) million, and the carrying amount of the associated liabilities is SEK 0 (190) million. Customer finance is arranged for infrastructure projects in different geographic markets and for a large number of customers. As of December 31, 2011, there were a total of 80 (74) customer finance arrangements originated by or guaranteed by the Company. The five largest facilities represented 41% (44%) of the total credit exposure. NoteS c14–c15 totAL oUtStANDINg cUStoMeR FINANce exPoSURe PeR RegIoN AS oF DeceMbeR 31 Percent 2011 2010 North America Latin America Northern Europe & Central Asia Western & Central Europe Mediterranean Middle East Sub-Saharan Africa India China & North East Asia South East Asia and Oceania Other total 1 4 8 1 11 24 29 14 7 1 – 100 2 9 3 1 5 30 36 – 13 1 – 100 The effect of risk provisions and reversals for customer finance affecting the income statement amounted to a net negative impact of SEK 114 million compared to a positive impact of SEK 331 million in 2010. Credit losses amounted to SEK 62 (87) 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 2011, the Company 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, “Contingent Liabilities”, and information about leasing is included in Note C27, “Leasing”. The table below summarizes the Company’s outstanding customer finance as of December 31, 2011 and 2010. oUtStANDINg cUStoMeR FINANce Total customer finance Accrued interest Less third-party risk coverage Ericsson’s risk exposure C15 oTher CurrenT reCeivables otHeR cURReNt ReceIVAbLeS Prepaid expenses Accrued revenues Advance payments to suppliers Derivatives with a positive value 1) Taxes Other total 2011 4,671 68 –480 4,259 2010 4,725 69 –1,409 3,385 2011 2,056 2,486 1,697 2,003 5,633 3,962 17,837 2010 2,369 1,850 881 3,042 5,439 3,565 17,146 1) See also Note C20, “Financial Risk Management and Financial Instruments”. C14XC15XENX11_v41.indd 71 2012-02-28 14.02 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 71 Note c16 C16 Equity and OthEr COmprEhEnsivE inCOmE capital stock 2011 Additional paid in capital Capital stock at December 31, 2011, consisted of the following: Relates to payments made by owners and includes share premiums paid. cAPItAL StocK Parent company Class A shares Class B shares total Number of shares capital stock (SeK million) 261,755,983 3,011,595,752 3,273,351,735 1,309 15,058 16,367 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. Retained earnings are comprised of: 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, 2011, the total number of treasury shares was 62,846,503 (73,088,516 in 2010 and 78,978,533 in 2009) Class B shares. Ericsson did not repurchase shares in 2011 in relation to the Stock Purchase Plan. RemeASuRemeNtS ReLAteD to PoSt-emPLoYmeNt beNefItS Actuarial gains and losses resulting from experience-based events and changes in actuarial assumptions, fluctuations of the effect of the asset ceiling, and adjustments related to the Swedish special payroll taxes. RevALuAtIoN of otheR INveStmeNtS IN ShAReS AND PARtIcIPAtIoNS RecoNcILIAtIoN of NumbeR of ShAReS Number of shares capital stock (SeK million The fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets. Number of shares Jan 1, 2011 Number of shares Dec 31, 2011 3,273,351,735 3,273,351,735 16,367 16,367 For further information about number of shares, see chapter Share Information. 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. Dividend proposal The Board of Directors will propose to the Annual General Meeting 2012 a dividend of SEK 2.50 per share (SEK 2.25 in 2011 and SEK 2.00 in 2010). cumuLAtIve tRANSLAtIoN ADjuStmeNtS The cumulative translation adjustments comprises all foreign currency differences arising from the translation of the financial statements of foreign operations and changes regarding revaluation of excess value in local currency as well as from the translation of liabilities that hedge the Company’s net investment in foreign subsidiaries. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C16XENX11_v37.indd 72 2012-02-28 14.03 Note c16 eQuItY AND otheR comPReheNSIve INcome 2011 2011 january 1, 2011 Net income Group Joint ventures and associated companies other comprehensive income Remeasurements related to post-employment benefits 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 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 Sale of own shares Stock Purchase Plan Group Joint ventures and associated companies Dividends paid Transactions with non-controlling interest December 31, 2011 capital stock Addi tional paid in capital Retained earnings Stock holders’ equity Non-control- ling interest (NcI) total equity 16,367 24,731 104,008 145,106 1,679 146,785 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,367 – – – – 24,731 15,727 –3,533 –6,963 –212 996 11 15,727 –3,533 –6,963 –212 996 11 –2,028 1) –2,028 –1,014 2) –61 2,158 4) –7,113 5,081 92 413 – –7,207 –380 102,007 –1,014 –61 2,158 –7,113 5,081 92 413 – –7,207 5) –380 143,105 375 – 16,102 –3,533 – – – – – 50 – – 50 425 – – – –248 309 2,165 –6,963 –212 996 11 –2,028 –964 –61 2,158 –7,063 5,506 92 413 – –7,455 –71 145,270 1) SEK –1,663 million is recognized in Net Sales, SEK –742 million is recognized in Cost of Sales and SEK 376 million is recognized in R&D expenses. 2) Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK 46 million (SEK –1,480 million in 2010, SEK –1,015 million in 2009), gain/loss from hedging activities of foreign entities, SEK 9 million (SEK 385 in 2010, SEK 586 million in 2009), and realized gain/losses net from sold/liquidated companies SEK 192 million (SEK 140 million in 2010, SEK 10 million in 2009). 3) For further disclosures, see Note C8, “Taxes”. 4) Deferred tax on gains/losses on hedges on investments in foreign entities and post-employment benefits. 5) Dividends paid per share amounted to SEK 2.25 (SEK 2.00 in 2010 and SEK 1.85 in 2009). C16XENX11_v37.indd 73 2012-02-28 14.03 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 73 Note c16 eQuItY AND otheR comPReheNSIve INcome 2010 2010 january 1, 2010 Net income Group Joint ventures and associated companies other comprehensive income Remeasurements related to post-employment benefits 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 Plan Group Joint ventures and associated companies Dividends paid Transactions with non-controlling interest December 31, 2010 capital stock Addi tional paid in capital Retained earnings Stock holders’ equity Non-control- ling interest (NcI) total equity 16,367 24,731 98,772 139,870 1,157 141,027 12,503 –1,357 12,503 –1,357 89 – 12,592 –1,357 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3,892 –27 3,892 –27 7 – 966 31 -238 –136 –3,269 –438 –1,120 –332 10,814 7 – 966 31 –238 –136 –3,269 –438 –1,120 –332 10,814 52 52 – – – – – – – – 10 – – 10 99 – – – – – 16,367 – – – – 24,731 762 – –6,391 – 104,008 762 – –6,391 – 145,106 – – –286 708 1,679 3,892 –27 7 – 966 31 –238 –136 –3,259 –438 –1,120 –322 10,913 52 762 – –6,677 708 146,785 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C16XENX11_v37.indd 74 2012-02-28 14.03 Note c16 eQuItY AND otheR comPReheNSIve INcome 2009 2009 january 1, 2009 Net income Group Joint ventures and associated companies other comprehensive income Remeasurements related to post-employment benefits 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 Transactions with non-controlling interest December 31, 2009 capital stock Addi tional paid in capital Retained earnings Stock holders’ equity Non- controlling interest (NcI) total equity 16,232 24,731 99,860 140,823 1,261 142,084 – – – – – – – – – – – – – – – 135 – – – – – – 16,367 – – – – – – – – – – – – – – – – – – – – – – 24,731 9,685 –6,013 9,685 –6,013 455 – 10,140 –6,013 –633 28 –633 28 –2 – 665 7 –2 – 665 7 3,850 3,850 –1,029 –1,029 –1,013 –294 –1,040 539 4,211 – 75 –135 658 – –5,897 – 98,772 –1,013 –294 –1,040 539 4,211 135 75 –135 658 – –5,897 – 139,870 – – – – – – – – –54 – – –54 401 – – – – – –421 –84 1,157 –633 28 –2 – 665 7 3,850 –1,029 –1,067 –294 –1,040 485 4,612 135 75 –135 658 – –6,318 –84 141,027 C16XENX11_v37.indd 75 2012-02-28 14.03 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 75 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 2011 was characterized by the overall decrease in discount rates and an increase in life expectancy. Consequently, the Company experienced an overall increase in the net pension liability, and an actuarial loss. Amount recognized in the consolidated balance sheet AMoUNt RecoGNIZeD IN tHe coNSoLIDAteD BALANce SHeet 2011 Defined benefit obligation (DBO) 1) Fair value of plan assets 2) Deficit/Surplus (+/–) Unrecognized past service costs Closing balance Plans with net surplus excluding asset ceiling 3) Provision for post-employment benefits 4) 2010 Defined benefit obligation (DBO) 1) Fair value of plan assets 2) Deficit/Surplus (+/–) Unrecognized past service costs Closing balance Plans with net surplus excluding asset ceiling 3) Provision for post-employment benefits 4) ContEnts AMoUNt RecoGNIZeD IN tHe coNSoLIDAteD BALANce SHeet totAL PeNSIoN exPeNSeS RecoGNIZeD IN tHe INcoMe StAteMeNt cHANGe IN tHe DefINeD BeNefIt oBLIGAtIoN (DBo) cHANGe IN tHe PLAN ASSetS ActUARIAL GAINS AND LoSSeS RePoRteD DIRectLy IN otHeR coMPReHeNSIve INcoMe ActUARIAL ASSUMPtIoNS INfoRMAtIoN oN ISSUeS AffectING tHe Net PeNSIoN LIABILIty foR tHe yeAR 76 77 78 79 80 80 80 Sweden UK eurozone US other total 20,643 13,490 7,153 – 7,153 – 7,153 14,980 12,389 2,591 – 2,591 – 2,591 6,307 6,750 –443 – –443 584 141 5,437 5,691 –254 – –254 290 36 3,687 2,665 1,022 – 1,022 369 1,391 3,163 2,514 649 5 654 643 1,297 3,133 2,337 796 – 796 – 796 2,693 2,048 645 – 645 – 645 2,605 2,777 –172 –47 –219 754 535 2,437 2,793 –356 –60 –416 939 523 36,375 28,019 8,356 –47 8,309 1,707 10,016 28,710 25,435 3,275 –55 3,220 1,872 5,092 1) For details on DBO, please refer to section “Change in the Defined Benefit Obligation, DBO” of this note. 2) For details on plan assets, please refer to section “Change in the Plan Assets” of this note. 3) Plans with a net surplus, i.e. where plan assets exceed DBO, are reported as Other financial assets, non-current, see Note C12, “Financial Assets”. Asset ceiling amounted to SEK 483 (691) million. 4) Plans with net liabilities are reported in the balance sheet as Post-employment benefits, non-current. 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C17XC18XENX11_v56.indd 76 2012-03-06 11.26 Note c17 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. PeNSIoN coStS foR DefINeD coNtRIBUtIoN PLANS AND DefINeD BeNefIt PLANS 2011 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 2010 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 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 1) See cost details in table below. Sweden UK eurozone US other total 2,039 621 2,660 1,037 762 1,799 1,686 674 2,360 72 –86 –14 95 153 248 73 66 139 386 124 510 433 159 592 385 202 587 360 42 402 244 30 274 124 49 173 185 146 331 192 –14 178 185 144 329 3,042 847 3,889 8.9% 2,001 1,090 3,091 7.1% 2,453 1,135 3,588 8.7% coSt DetAILS foR DefINeD BeNefIt PLANS RecoGNIZeD IN tHe INcoMe StAteMeNt Sweden UK eurozone US other total 2011 Current service cost Interest cost Expected return on plan assets Past service cost Curtailments, settlements and other total 2010 Current service cost Interest cost Expected return on plan assets Past service cost Curtailments, settlements and other total 2009 Current service cost Interest cost Expected return on plan assets Past service cost Curtailments, settlements and other total 547 714 –558 6 –88 621 631 643 –511 – –1 762 594 590 –366 – –144 674 114 293 –339 4 –158 –86 161 314 –322 – – 153 205 284 –270 – –153 66 113 168 –135 6 –28 124 129 182 –141 33 –44 159 138 194 –125 5 –10 202 26 151 –135 – – 42 32 159 –130 – –31 30 35 171 –156 – –1 49 157 169 –243 9 54 146 140 172 –253 9 –82 –14 131 155 –208 25 41 144 957 1,495 –1,410 25 –220 847 1,093 1,470 –1,357 42 –158 1,090 1,103 1,394 –1,125 30 –267 1,135 C17XC18XENX11_v56.indd 77 2012-03-06 11.26 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 77 Note c17 The following sections focus on the defined benefit plans. change in the defined benefit obligation (DBo) The DBO is the gross pension liability. cHANGe IN tHe DefINeD BeNefIt oBLIGAtIoN 2011 Opening balance Current service cost Interest cost Employee contributions Pension payments Actuarial gain/loss (–/+) Curtailments Business combinations Other Translation difference closing balance Of which medical benefit schemes 2010 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 2010 are related to the acquisition of LG-Nortel and Pride Spa. fUNDeD StAtUS The funded ratio, defined as total plan assets in relation to the total DBO, was 77.0% in 2011, compared to 88.6% in 2010. 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. vALUe of tHe DefINeD BeNefIt oBLIGAtIoN 2011 DBO, closing balance Of which partially or fully funded Of which unfunded 2010 DBO, closing balance Of which partially or fully funded Of which unfunded Sweden UK eurozone US other total 14,980 547 714 – –220 4,705 –88 – 5 – 20,643 – 16,150 631 643 – –159 –2,285 – –1 – 1 – 14,980 – 5,437 114 293 11 –141 651 –158 – –10 110 6,307 – 5,688 161 314 11 –99 –157 – – – –20 –461 5,437 – 3,163 113 168 4 –87 379 –25 2 11 –41 3,687 – 3,840 129 182 4 –82 –569 –14 –30 74 95 –466 3,163 – 2,693 26 151 – –149 329 – – 22 61 3,133 658 2,781 32 159 – –169 46 – –38 – 30 –148 2,693 594 2,437 157 169 1 –144 120 – – 15 –150 2,605 – 2,258 140 172 5 –194 104 –104 –93 148 8 –7 2,437 – 28,710 957 1,495 16 –741 6,184 –271 2 43 –20 36,375 658 30,717 1,093 1,470 20 –703 –2,861 –118 –162 222 114 –1,082 28,710 594 Sweden UK eurozone US other total 20,643 20,118 525 14,980 14,527 453 6,307 6,307 – 5,437 5,437 – 3,687 2,540 1,147 3,163 2,086 1,077 3,133 2,447 686 2,693 2,072 621 2,605 2,118 487 2,437 1,998 439 36,375 33,530 2,845 28,710 26,120 2,590 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C17XC18XENX11_v56.indd 78 2012-03-06 11.26 Note c17 Sweden UK eurozone US other total 12,389 558 –358 1,086 – –185 – – 13,490 10,927 511 222 729 – – – – – – 12,389 5,691 339 473 272 11 –141 –14 119 6,750 5,336 322 265 343 11 –119 – – – –467 5,691 2,514 135 –36 125 4 –46 –1 –30 2,665 2,406 141 105 173 3 –43 – – 53 –324 2,514 2,048 135 155 54 – –98 – 43 2,337 1,974 130 103 58 – –103 – – – –114 2,048 2,793 243 –84 125 1 –102 –4 –195 2,777 2,563 253 –42 93 5 –119 –104 164 –4 –16 2,793 25,435 1,410 150 1,662 16 –572 –19 –63 28,019 23,206 1,357 653 1,396 19 –384 –104 164 49 –921 25,435 Sweden UK eurozone 200 733 812 587 99 246 US 289 233 other 160 211 total 1,560 2,010 Sweden UK eurozone US other total 4,503 8,239 748 13,490 – 4,326 7,508 555 12,389 – 1,666 4,245 839 6,750 – 2,028 3,207 456 5,691 – 1,348 1,020 297 2,665 – 1,277 970 267 2,514 – 1,062 1,210 65 2,337 – 1,134 870 44 2,048 – 356 1,846 575 2,777 – 458 1,837 498 2,793 – 8,935 16,560 2,524 28,019 – 9,223 14,392 1,820 25,435 – 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. cHANGe IN tHe PLAN ASSetS 2011 Opening balance Expected return on plan assets Actuarial gain/loss (+/–) Employer contributions Employee contributions Pension payments Other Translation difference closing balance 2010 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 2010 are related to the acquisition of LG-Nortel. Refunds from or reductions in future contributions to plan assets are recognized if they are available and firmly decided. ActUAL RetURN oN PLAN ASSetS 2011 2010 ASSet ALLocAtIoN 2011 Equities Interest-bearing securities Other total Of which Ericsson securities 2010 Equities Interest-bearing securities Other total Of which Ericsson securities Equity instruments amount to 32% (36%) of the total assets, interest bearing instruments amount to 59% (57%) of the total assets, and other instruments amount to 9% (7%) 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. On January 14, 2012, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 900 million to the Swedish pension trust fund. C17XC18XENX11_v56.indd 79 2012-03-06 11.26 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 79 Note c17 Actuarial gains and losses reported directly in other comprehensive income Since January 1, 2006, Ericsson applies immediate recognition of actuarial gains and losses directly in the statement of Other Comprehensive Income. Actuarial gains and losses may arise from either a change in actuarial assumptions or in deviations between estimated and actual outcome. MULtI-yeAR SUMMARy 2011 2010 2009 2008 2007 Plan assets DBO Deficit/Surplus (–/+) 28,019 36,375 –8,356 25,435 28,710 –3,275 23,206 30,717 –7,511 19,037 28,010 –8,973 20,236 25,226 –4,990 Actuarial gains and losses (–/+) Experience-based adjustments of pension obligations Experience-based adjustments of plan assets –463 –150 177 310 57 –76 –653 –1,191 2,952 59 Actuarial assumptions fINANcIAL AND DeMoGRAPHIc ActUARIAL ASSUMPtIoNS 2011 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 2010 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 ActUARIAL GAINS AND LoSSeS RePoRteD DIRectLy IN otHeR coMPReHeNSIve INcoMe Cumulative gain/loss (–/+) at beginning of year Recognized gain/loss (–/+) during the year Translation difference Cumulative gain/loss (–/+) at end of year 2011 2010 1,849 6,034 28 7,911 5,326 –3,514 37 1,849 totAL ReMeASUReMeNtS IN otHeR coMPReHeNSIve INcoMe ReLAteD to PoSt-eMPLoyMeNt BeNefItS Actuarial gains and losses (+/–) The effect of asset ceiling Swedish special payroll taxes total Group Actuarial gains and losses for joint ventures and associated companies 2011 2010 –6,034 208 –1,137 –6,963 3,514 –29 407 3,892 –212 –27 Sweden UK eurozone 1) US 1) other 1) 3.50% 4.55% 3.25% 2.00% n/a 22 24 4.80% 4.55% 3.25% 2.00% n/a 21 24 4.70% 5.90% 4.10% 3.10% n/a 22 25 5.40% 6.00% 4.50% 3.50% n/a 22 24 5.25% 5.32% 2.91% 2.00% n/a 22 24 5.59% 6.27% 2.91% 2.00% n/a 22 25 5.23% 7.00% 4.50% 2.50% 9.00% 19 21 5.73% 7.00% 4.50% 2.50% 9.00% 18 20 8.18% 9.27% 6.07% 3.43% n/a 19 22 8.55% 9.91% 5.70% 3.50% n/a 19 22 1) Weighted average for disclosure purposes only. Land specific assumptions were used for each actuarial calculation. > 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. SeNSItIvIty ANALySIS foR MeDIcAL BeNefIt ScHeMeS The effect (in SEK million) of a one percent change in the assumed trend rate of medical cost would have the following effect: SeNSItIvIty ANALySIS foR MeDIcAL BeNefIt ScHeMeS Net periodic post-employment medical cost Accumulated post-employment benefit obligation for medical costs 3 61 –3 –53 1% increase 1% decrease Information on issues affecting the Net Pension Liability for the year SweDeN The defined benefit obligation has been calculated using a discount rate based on yields of covered bonds, which is higher than a discount rate based on yields of government bonds. The Swedish covered bonds are considered high-quality bonds, mainly AAA-rated, as they are secured with assets, and the market for covered bonds is considered deep and liquid, thereby meeting IAS19 requirements. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C17XC18XENX11_v56.indd 80 2012-03-06 11.26 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 is not possible 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% 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. Alecta’s collective funding ratio was 113% (146%). Contingent liabilities include the Company’s mutual responsibility as a credit insured company of PRI Pensionsgaranti in Sweden. This mutual responsibility can only be imposed in case PRI Pensionsgaranti has consumed all of their assets, and it amounts to a maximum of 2% of the company’s pension liability in Sweden. NoteS c17–c18 C18 Provisions PRovISIoNS 2011 Opening balance Additions Reversal of excess amounts Negative effect on Income Statement Cash out/utilization Balances regarding divested/acquired businesses Reclassification Translation differences closing balance 2010 Opening balance Additions Reversal of excess amounts Negative effect on Income Statement Cash out/utilization Balances regarding divested/acquired businesses Reclassification Translation differences closing balance warranty Restruc turing Project-related other total 2,469 1,433 –440 –1,527 21 – –68 1,888 2,533 1,743 –297 –1,466 182 –182 –44 2,469 3,230 1,806 –407 –3,223 – –48 –31 1,327 4,299 2,640 –335 –3,261 – 176 –289 3,230 1,105 563 –164 –662 – –111 –13 718 1,694 1,285 –353 –1,547 28 62 –64 1,105 2,940 1,005 –908 –575 2 –87 –45 2,332 3,905 1,046 –869 –880 – –200 –62 2,940 9,744 4,807 –1,919 2,888 –5,987 23 –246 –157 6,265 12,431 6,714 –1,854 4,860 –7,154 210 –144 –459 9,744 Provisions will fluctuate over time depending on business mix, market mix and technology shifts. 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 2011, new or additional provisions amounting to SEK 4.8 billion were made, and SEK 1.9 billion were reversed. The actual cash outlays for 2011 was SEK 6.0 billion compared with the estimated SEK 8 billion. The main part of the total cash out for 2011 is restructuring provisions of SEK 3.2 billion. The expected total cash outlays in 2012 is approximately SEK 3.5 billion. Of the total provisions, SEK 280 (353) million are classified as non- current. For more information, see Note C1, “Significant Accounting Policies” and Note C2, “Critical Accounting Estimates and Judgments”. The cash outlays of warranty provisions during year 2012 are estimated to approximately SEK 1 billion. Restructuring provisions In 2011 SEK 1.8 billion (2.6) in provision were made. The cash outlays were 3.2 billion (3.3) for the full year and SEK 1.9 billion were related to restructuring programs before 2011. The cash outlay for 2012 are estimated to approximately SEK 1 billion. Project related provisions Project provisions relate to estimated losses on onerous contracts, including probable contractual penalties. The cash outlays of project related provisions were SEK 0.7 billion and in line with the estimated SEK 1 billion. Provisions amounting to SEK 0.6 billion were made and SEK 0.2 billion were reversed due to a more favorable outcome than expected. The cash outlays for 2012 are estimated to be approximately SEK 0.5 billion. warranty provisions other provisions 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 cash outlays for 2011 were SEK 1.5 billion and in line with the expected SEK 2 billion. Provisions amounting to SEK 1.4 billion were made and due to more favorable outcomes in certain cases reversals of SEK 0.4 billion were made. Other provisions include provisions for tax issues, litigations, supplier claims, and other. The cash outlays were SEK 0.6 billion in 2011 compared to the estimate of SEK 2 billion. During 2011, new provisions amounting to SEK 1.0 billion were made and SEK 0.9 billion were reversed during the year due to a more favorable outcome. For 2012, the estimated cash outlays are approximately SEK 1 billion. C17XC18XENX11_v56.indd 81 2012-03-06 11.26 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 81 Note c19 C19 Interest-BearIng LIaBILItIes As of December 31, 2011, Ericsson’s outstanding interest-bearing liabilities were SEK 31.0 (30.8) 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 1) Including notes and bond loans of SEK 3,461 (0) million. 2011 2010 4,314 3,451 7,765 17,197 6,059 23,256 31,021 760 3,048 3,808 20,646 6,309 26,955 30,763 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 normally swapped to a floating interest rate using interest rate swaps leaving a maximum of 50% of outstanding loans at fixed interest rates. It resulted in weighted average interest rate of 4.21% (2.65%). These bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. In 2008 Ericsson signed a seven-year loan of SEK 4.0 billion with the European Investment Bank (EIB). 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 2010–2020 total Nominal amount 450 1,000 2,000 375 500 600 300 170 coupon currency Book value (SeK m.) 3.305% 5.100% 2.885% 1.704% 5.380% 5.000% 3.62125% 2.96125% SEK SEK SEK EUR EUR EUR USD USD 450 1,011 2,000 3,345 5,161 1) 5,450 1) 2,069 1,172 20,658 Maturity date December 7, 2012 2) June 29, 2012 June 29, 2012 3) June 14, 2014 4) June 27, 2017 June 24, 2013 June 23, 2016 5) December 23, 2020 6) Unrealized hedge gain/loss (included in book value) – –11 – – –719 –109 – – –839 1) Interest rate swaps are designated as fair value hedges. 2) Next contractual repricing date June 7, 2012 (semi-annual). 3) Next contractual repricing date March 29, 2012 (quarterly). 4) Next contractual repricing date March 27, 2012 (quarterly). 5) Next contractual repricing date March 23, 2012 (quarterly). 6) Next contractual repricing date March 23, 2012 (quarterly). 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C19XEN_v24.indd 82 2012-02-28 14.06 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 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 financial flexibility and independence to operate and manage variations in working capital needs as well as to capitalize on business opportunities. Ericsson’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 the Company secure funding of operations at a reasonable cost of capital. Regular borrowings are complemented with committed credit facilities to give additional flexibility to manage unforeseen funding needs. Ericsson strive to finance growth, normal capital expenditures and dividends to shareholders by generating sufficient positive cash flows from operating activities. Ericsson’s capital objectives are: > An equity ratio above 40% > A cash conversion rate above 70% > > 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 2011 2010 145 52 40 39.5 147 52 112 51.3 a3 Baa1 bbb+ 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 > > Market price risk in own and other equity instruments. Liquidity and refinancing risk 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. Note c20 For further information about accounting policies, 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. > > > Reported cash flows. The comparability of our results between periods. The carrying value of assets and liabilities. 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, seK billioN exposure currency translation exposure transaction exposure Net exposure Net expo sure, percent of total Net sales SEK USD EUR CNY JPY INR BRL GBP Other pre-hedge total Hedge total Net sales Net cost SEK USD EUR CNY JPY INR BRL GBP Other pre-hedge total Hedge total Net cost operating income 44.5 46.8 29.3 17.3 13.7 9.4 7.8 6.8 49.6 –40.4 –47.4 –27.5 –15.9 –13.1 –7.5 –7.4 –6.2 –43.9 –42.7 39.8 13.6 –0.3 0.7 – –0.2 –2.0 –8.9 –29.2 –19.3 –0.4 1.7 9.0 3.9 1.3 1.3 31.7 1% 38% 19% 8% 6% 4% 3% 2% 19% 100% 33% 32% 13% 7% 2% 2% 3% 2% 6% 100% 1.8 86.6 42.9 17.0 14.4 9.4 7.6 4.8 40.7 225.2 1.7 226.9 –69.6 –66.7 –27.9 –14.2 –4.1 –3.6 –6.1 –4.9 –12.2 –209.3 0.3 –209.0 17.9 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 (average rate gives a good approximation), 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 customers and are normally denominated in USD or other foreign currency. In order to limit the exposure toward exchange rate C20XC24XENX11_v81.indd 83 2012-03-06 11.29 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 83 Note c20 fluctuations on future revenues and costs, committed and forecasted future sales and purchases in major currencies are hedged with 7% of 12 month forecast monthly. This corresponds to approximately 5–6 months of an average forecast. 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. 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. Foreign exchange exposures in balance sheet items are hedged through offsetting balances or derivatives. As of December 31, 2011, outstanding foreign exchange derivatives hedging transaction exposures had a net market value of SEK –0.5 (0.6) 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. cash flow hedges The purpose of hedging forecasted revenues and costs 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% in selected companies. The translation differences reported in OCI during 2011 were negative, SEK 1.0 billion, including hedging loss of SEK 0.0 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 39.5 (51.3) billion at the end of 2011, consisting of cash, cash equivalents and short-term investments of SEK 80.5 (87.2) billion and interest-bearing liabilities and post-employment benefits of SEK 41.0 (35.9) 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, taking derivative instruments into consideration. Interest-bearing liabilities do not have a duration target as the duration of the fixed rate portion will be determined by markets conditions when liabilities are issued, Group Treasury has a mandate to deviate from the asset management benchmark given by the Board and take FX positions up to an aggregated risk of VaR SEK 45 million given a confidence level of 99% and a 1-day horizon. Previously this was divided into two mandates, one 20, to leave selected transaction exposures in subsidiaries’ balance sheets unhedged, and another 30, to deviate from asset management benchmark and take FX positions. As of December 31, 2011, 86% (97%) of Ericsson’s interest-bearing liabilities and 77% (90%) of Ericsson’s interest-bearing assets had floating interest rates, i.e. interest periods of less than 12 months. 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. outstaNdiNg derivatives 1) fair value currency derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity 1 to 3 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 asset 2011 liability 2010 liability asset 557 881 581 1,086 364 – 921 393 – 1,274 945 2 1,528 505 21 1,613 2) 333 638 662 – – 324 380 416 778 1,898 3) – 5 367 618 815 161 1,966 – 6 76 544 184 705 1,515 – 3 28 61 118 34 87 329 2) 1,002 – 862 – 1) Some of the derivatives hedging non-current liabilities are recognized in the balance sheet as non-current derivatives due to hedge accounting. 2) Of which SEK 902 million is reported as non-current liabilities. 3) Of which SEK 816 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% 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 2011 was SEK 20.6 million for the combined mandates. For 2010, the interest rate mandate was SEK 20.3 million and the transaction exposure mandate was SEK 9.8 million. No VaR- limits were exceeded during 2011. 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, government bonds, 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 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C20XC24XENX11_v81.indd 84 2012-03-06 11.29 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 2011, neither on external investments nor on derivative positions. At December 31, 2011, the credit risk in financial cash instruments was equal to the instruments’ carrying value. Credit exposure in derivative instruments was SEK 2.8 (3.0) billion. liquidity risk Liquidity risk is that Ericsson is unable to meet its short-term payment obligations due to insufficient or illiquid cash reserves. Ericsson minimizes the liquidity risk by maintaining a sufficient net cash position. This is managed 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 C31, “Contractual obligations”. The current cash position is deemed to satisfy all short-term liquidity requirements. During 2011, cash and bank and short-term investments decreased by SEK 6.7 billion to SEK 80.5 billion. cash, cash equivaleNts aNd short-term iNvestmeNts (seK billion) Bank Deposits type of issuer/ counterpart Governments Corporations 1) Mortgage institutes 2011 2010 remaining time to maturity < 3 months 33.7 < 1 year 0.2 1–5 years – >5 years – 6.3 4.7 – 44.7 30.9 3.8 – – 4.0 9.4 13.2 – 16.6 29.8 42.8 1.7 – 0.3 2.0 4.1 total 33.9 25.0 4.7 16.9 80.5 87.2 1) Of which SEK 2.8 billion relates to ST-Ericsson. 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 NoN-curreNt borrowiNgs 1) Nominal amount (seK billion) current maturities of long- term debt Notes and bonds (non-current) liabilities to financial institutions (non-current) 2012 2013 2014 2015 2016 2017 2018 2019 2020 total 3.4 – – – – – – – – 3.4 – 5.4 3.3 – 2.1 4.4 – – 1.2 16.4 – – – 4.0 – – – – – 4.0 total 3.4 5.4 3.3 4.0 2.1 4.4 – – 1.2 23.8 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. Note c20 Bank financing is used for certain subsidiary funding and to obtain committed credit facilities. fuNdiNg programs 1) Euro Medium-Term Note program (USD million) Long-term Committed Credit facility (USD million) Indian Commercial Paper program (INR million) amount utilized unutilized 5,000 2,878 2,122 2,000 5,000 – – 2,000 5,000 1) There are no financial covenants related to these programs. In June 2011 Ericsson was upgraded by Moody’s from Baa1 to A3 (stable). Standard & Poor’s kept the BBB+ credit rating with stable outlook. Both credit ratings are 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 0.7 billion. For further information about valuation principles, please see Note C1, “Significant accounting policies”. fiNaNcial iNstrumeNts carried at other thaN fair value 1) seK billion Current part of non-current borrowings Notes and bonds Other borrowings non-current total book value 2010 2011 fair value 2011 2010 4.3 17.2 4.9 26.4 0.8 20.6 5.1 26.5 4.3 17.1 4.9 26.3 0.8 20.5 5.0 26.3 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 purchase plans for employees and synthetic share-based compensations to the Board of Directors. stock purchase plans for employees The obligation to deliver shares under the stock purchase plan is covered by holding Ericsson Class B shares as treasury stock. A change in the share price will result in a change in social security charges, which represents a risk to the income statement. 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. synthetic share-based compensations to the board of directors For these plans, the Company is exposed to risks in relation to own share price, both in relation to compensation expenses and social security charges. The obligation to pay compensation amounts under the synthetic share-based compensations to the Board of Directors is covered by a liability in the balance sheet. C20XC24XENX11_v81.indd 85 2012-03-06 11.29 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 85 Notes c20–c24 For further information about the stock purchase plan and the synthetic share-based compensations to the Board of Directors, please see note C28, “Information Regarding Members of the Board of Directors, the Group Management and Employees”. fiNaNcial iNstrumeNts, booK value seK billion Note Assets at fair value through profit or loss Loans and receivables Available for sale assets Financial liabilities at amortized cost total customer finance trade receiv- ables C14 C14 short- term invest- ments cash equiva- lents borrow- ings trade payables other financial assets other current receiv- ables other current liabilities other non- current liabilities 2011 2010 C19 C22 C12 C15 C21 – 4.2 – – 4.2 – 64.5 – – 64.5 38.8 3.1 – – 41.9 5.0 4.1 – – 9.1 – – – – – – –31.0 –31.0 –25.3 –25.3 0.8 3.3 – – 4.1 2.0 – – – 2.0 –3.2 – – – –3.2 – – – – – 43.4 79.2 – 58.9 70.3 – –56.3 66.3 –55.8 73.4 C21 otheR CuRRent liabilities C23 assets Pledged as CollateRal other curreNt liabilities assets pledged as collateral Income tax liabilities Advances from customers Liabilities to associated companies and joint ventures Accrued interest Accrued expenses, of which Employee related Supplier related Other 1) Deferred revenues Derivatives with a negative value 2) Other 3) total 2011 2,691 3,942 119 351 32,652 11,314 11,621 9,717 8,722 3,240 6,253 57,970 2010 2,228 5,946 115 349 31,463 10,063 12,273 9,127 11,415 1,039 6,050 58,605 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 and other payroll deductions, and liabilities for goods received where invoice is not yet received. C22 tRade Payables trade payables Payables to associated companies and joint ventures Other total 2011 2010 102 25,207 25,309 157 24,802 24,959 Chattel mortgages Bank deposits total 2011 185 267 452 2010 191 467 658 C24 Contingent liabilities coNtiNgeNt liabilities Contingent liabilities total 2011 609 609 2010 875 875 Contingent liabilities assumed by Ericsson include guarantees of loans to other companies of SEK 25 (25) million. Ericsson has SEK 111 (413) 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. In Note C2, “Critical Accounting Estimates and Judgments”, a further disclosure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. Financial guarantees for third party amounted to SEK 449 (191) million as of December 31, 2011. Maturity date for major part of the issued guarantees occurs in 2021 at latest. On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. As of the date of the sale, Ericsson is no longer a guarantor of term loans or credit facilities related to Sony Ericsson, see Note C29, “Related Party Transactions”. ST-Ericsson has been granted a revolving credit facility which is equally shared by Ericsson and STMicroelectronics. For additional information, see Note C29, “Related Party Transactions”. 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C20XC24XENX11_v81.indd 86 2012-03-06 11.29 Notes c25–c26 C25 statement of Cash flows AcquisitioNs/DivestmeNts of subsiDiAries AND other operAtioNs Acquisitions Divestments Interest paid in 2011 was SEK 1,422 million (SEK 977 in 2010, SEK 772 million in 2009) and interest received was SEK 2,632 million (SEK 1,083 in 2010, SEK 1,900 million in 2009). Taxes paid, including withholding tax, were SEK 4,393 million (SEK 4,808 in 2010, SEK 4,427 million in 2009). Cash and cash equivalents includes cash of SEK 29,471 (27,231) million and temporary investments of SEK 9,205 (3,633) million. 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 13,907 million (SEK 10,836 in 2010, SEK 8,907 million in 2009). ADJustmeNts to recoNciLe Net iNcome to cAsh 2011 Cash flow from business combinations 1) Acquisitions/divestments of other investments total 2010 Cash flow from business combinations 1) total 2009 Cash flow from business combinations 1) Capital contribution to joint venture total 1) See also Note C26, “Business Combinations”. –1,232 –1,949 –3,181 –3,286 –3,286 –9,633 –9,688 –19,321 –28 81 53 454 454 1,239 – 1,239 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 2011 2010 2009 3,499 3,299 3,550 47 3,546 –3 3,296 –48 3,502 995 664 647 4,470 5,465 4,999 5,663 3,562 4,209 7 49 157 18 5,490 945 6,657 4,255 8,621 9,036 1,994 9,953 351 12,123 –1,011 177 119 70 3,533 1,357 6,013 –159 –1,968 –237 947 –910 571 12,613 12,490 16,856 1) See Note C12, “Financial Assets, Non-Current”. 2) See Note C26, “Business Combinations”. 3) Refers mainly to unrealized foreign exchange, gains/losses on financial instruments. C26 Business ComBinations Acquisitions and divestments AcquisitioNs AcquisitioNs 2009–2011 Cash total consideration 2011 1,162 1,162 2010 3,789 3,789 2009 9,633 9,633 Acquisition-related costs 77 1) 67 1) – Net asset acquired Cash and cash equivalents Property, plant and equipment Intangible assets Investments in associates Other assets Provision, including post- employment benefits Other liabilities total identifiable net assets Non-controlling interest Goodwill 7 259 382 120 140 –23 –37 848 54 260 1,162 570 205 3,825 138 2,506 –390 –3,573 3,281 –748 1,256 3,789 5 297 5,832 – 1,235 – –1,270 6,099 – 3,534 9,633 1) Acquisition-related costs are included in Selling and administrative expenses in the consolidated income statement. In 2011, Ericsson made acquisitions with a negative cash flow effect amounting to SEK 1,232 (3,286) million, primarily: > GDNt: On December 1, 2010 the Company announced it acquired certain assets of the Guangdong Nortel Telecommunication Equipment Company Ltd (GDNT). The asset deal was completed on May 12. The acquisition reaffirms our strong commitment to the China market, enhancing the Company’s existing R&D, manufacturing and services capabilities in the region. Approximately 1,000 employees, including 550 R&D engineers, were integrated into the Company. The purchase price was RMB 357 million on a cash and debt free basis. Balances to facilitate the Purchase Price Allocation are preliminary. > Nortel multiservice switch business (mss): On September 25, 2010, the Company announced that it was entering an purchase agreement to acquire certain assets of Nortel’s MSS. The asset deal was completed on March 11, 2011. The purchase price was USD 53 million on a cash and debt free basis. The acquisition has given the Company access to C25XC27XENX11_v58.indd 87 2012-02-28 14.09 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 87 Note c26 a strong product portfolio and installed base in the data segment while ensuring the supply of the platform for the recently acquired CDMA and GSM units. Approximately 160 employees were transferred to the Company. Balances to facilitate the Purchase Price Allocation are preliminary. The preliminary purchase price allocations related to acquired businesses disclosed in 2010 were finalized in 2011 with the following effects: > optimi: Decreased goodwill by SEK 184 million, increased intangible > assets by SEK 249 million, decreased deferred tax assets with SEK 77 million and increased other assets by SEK 12 million. LG-Nortel: Increased goodwill by SEK 64 million, decreased intangible assets by SEK 109 million, decreased deferred tax liabilities by SEK 24 million and decreased non-controlling interest by SEK 21 million. DivestmeNts DivestmeNts 2009–2011 cash Net assets disposed of Property, plant and equipment Investments in associates Other assets Other liabilities Net gains from divestments Less Cash and cash equivalents cash flow effect 2011 –28 1 10 38 –224 –175 158 –11 –28 2010 454 21 – 372 –183 210 357 –113 454 2009 1,239 5 – 586 –38 553 780 –94 1,239 In 2011, the Company made divestments with a cash flow effect amounting to SEK –28 (454) million. Divestments in 2010 mainly refer to Ericsson Federal Inc. (EFI) with a gain amounting to SEK 216 million and a positive cash flow effect of SEK 360 million. Divestments in 2009 refer mainly to TEMS with a gain amounting to SEK 777 million and a positive cash flow effect of SEK 926 million. AcquisitioNs 2009–2011 company GDNT Nortel Multiservice Switch business (MSS) Optimi inCode LG-Nortel Nortel GSM Pride Nortel Elcoteq Bizitek DivestmeNts 2009–2011 Description An asset purchase agreement of certain assets with around 1,000 employees. Enhances the Company’s existing R&D, manufacturing and services capabilities in the China region. An asset purchase agreement to acquire certain assets of Nortel’s MSS. A US-Spanish telecommunications vendor providing products and services within the networks optimization and management sector with around 200 employees. An asset purchase agreement of certain assets with around 45 employees. A premier professional services firm providing strategic business and consulting services. Nortel’s majority shareholding (50% + 1 share) in LG-Nortel with around 1,300 employees. An asset purchase agreement of the Carrier Networks division of Nortel relating to GSM business. Italian consulting and systems integration company with around 1,000 employees. 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. company EFI TEMS Description Sale of Ericsson Federal Inc. (EFI). Tools for air interface monitoring and radio network planning. transaction date May, 2011 Mar, 2011 Dec, 2010 Sep, 2010 Jun, 2010 Mar, 2010 Jan, 2010 Nov, 2009 Jul, 2009 May, 2009 transaction date Dec, 2010 Jun, 2009 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C25XC27XENX11_v58.indd 88 2012-02-28 14.09 Note c27 C27 leasing Leasing with the company as lessee Assets under finance leases, recorded as property, plant and equipment, consist of: fiNANce LeAses cost Real estate Machinery Accumulated depreciation Real estate Machinery Accumulated impairment losses Real estate Net carrying value 2011 2010 1,856 3 1,859 –725 –3 –728 –42 1,089 1,846 3 1,849 –687 –3 –690 –54 1,105 As of December 31, 2011, future minimum lease payment obligations for leases were distributed as follows: Expenses in 2011 for leasing of assets were SEK 3,362 (3,675) million, of which variable expenses were SEK 7 (51) million. The leasing contracts vary in length from 1 to 19 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. Leases with the company as lessor Leasing income relates to subleasing of real estate as well as equipment provided to customers under leasing arrangements. These leasing contracts vary in length from 1 to 11 years. At December 31, 2011, future minimum payment receivables were future miNimum LeAse pAYmeNt obLiGAtioNs for LeAses distributed as follows: finance leases operating leases future miNimum pAYmeNt receivAbLes 2012 2013 2014 2015 2016 2017 and later total Future finance charges 1) Present value of finance lease liabilities 1) Average effective interest rate on lease payables is 5.66%. 158 155 235 133 90 920 1,691 –498 1,193 3,143 2,222 1,506 1,065 784 2,308 11,028 n/a 11,028 2012 2013 2014 2015 2016 2017 and later total Unearned financial income Uncollectible lease payments Net investments in financial leases Leasing income in 2011 was SEK 76 (94) million. finance leases operating leases 36 18 21 23 18 – 116 n/a n/a n/a 178 204 210 173 14 25 804 n/a n/a n/a C25XC27XENX11_v58.indd 89 2012-02-28 14.09 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 89 Note c28 C28 InformatIon regardIng members of the board of dIreCtors, the groUP management and emPloyees Remuneration to the Board of Directors RemuNeRatioN to memBeRs of the BoaRD of DiRectoRs Contents RemuNeRatioN to the BoaRD of DiRectoRs RemuNeRatioN to the GRoup maNaGemeNt LoNG-teRm VaRiaBLe RemuNeRatioN empLoyee NumBeRs, waGes aND saLaRies 90 91 92 94 Number of synthetic shares/portion of Board fee Value at grant date of synthetic shares allocated 2011 Number of previously allocated synthetic shares Net change in value of allocated synthetic shares 1) B committee fees total fees paid total remuneration in cash 2) 2011 c (a+B+c) Board member Leif Johansson Sverker Martin-Löf Jacob Wallenberg Roxanne S. Austin Sir Peter L. Bonfield Börje Ekholm Ulf J. Johansson Nancy McKinstry Anders Nyrén Carl-Henric Svanberg Hans Vestberg Michelangelo Volpi Employee Representatives Pehr Claesson Anna Guldstrand 4) Jan Hedlund Karin Åberg Kristina Davidsson Karin Lennartsson Roger Svensson total Total 6) Board fees 3,750,000 825,000 825,000 825,000 825,000 825,000 825,000 825,000 825,000 825,000 – 825,000 18,000 6,000 16,500 18,000 18,000 18,000 12,000 12,106,500 12,106,500 a – – 206,174 618,705 206,174 618,705 – 412,440 – 412,440 – – – – – – – – – 2,474,638 2,474,638 0/0% 0/0% 2,262/25% 6,788/75% 2,262/25% 6,788/75% 0/0% 4,525/50% 0/0% 4,525/50% – 0/0% – – – – – – – 27,150 27,150 – – – 22,384.60 7,460.80 22,384.60 22,384.60 17,477.60 – 4,380.00 – 4,380.00 – – – – – – – 100,852.20 220,239.80 – – –46,929 –218,139 –72,696 –218,139 –77,309 –149,632 – –117,970 – –24,090 – – – – – – – –924,904 –1,337,226 400,000 250,000 175,000 250,000 250,000 175,000 350,000 175,000 175,000 – – – 5,453,930 3) 1,075,000 793,750 456,250 868,750 381,250 1,294,968 3) 587,500 1,000,000 412,500 – 825,000 – – – – – – – 18,000 6,000 16,500 18,000 18,000 18,000 12,000 2,200,000 13,255,398 2,200,000 13,255,398 5,453,930 1,075,000 952,995 856,816 1,002,228 781,816 1,217,659 850,308 1,000,000 706,970 – 800,910 18,000 6,000 16,500 18,000 18,000 18,000 12,000 14,805,132 5) 14,392,810 5) 1) The difference in value as of December 31, 2011, compared to December 31, 2010 (for synthetic shares allocated 2008, 2009 and 2010), and compared to grant date 2011 (for synthetic shares allocated 2011). The value of synthetic shares allocated in 2008, 2009 and 2010 includes respectively SEK 1.85, SEK 2.00 and SEK 2.25 per share in compensation for dividends resolved by the Annual General Meetings 2009, 2010 and 2011. 2) Committee fee and cash portion of the Board fee. 3) Including an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced through a limited liability company. 4) Resigned as employee representative as of April 13, 2011. 5) Excluding social security charges in the amount of SEK 2,059,523. 6) Including synthetic shares previously allocated to the former Directors Michael Treschow and Marcus Wallenberg. comments to the table > > The Chairman of the Board was entitled to a Board fee of SEK 3,750,000 and a fee of SEK 200,000 for each Board Committee on which he served as Chairman. The other Directors appointed by the Annual General Meeting were entitled to a fee of SEK 825,000 each. In addition, the Chairman of the Audit Committee was entitled to a fee of SEK 350,000 and the other non-employed members of the Audit Committee were entitled to a fee of SEK 250,000 each. The Chairmen of the Finance and Remuneration Committees were entitled to a fee of SEK 200,000 each and the other non-employed members of the Finance and the Remuneration Committees were entitled to a fee of SEK 175,000 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. 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C28XENX11_v83.indd 90 2012-02-28 14.11 Note c28 > > Board members invoicing the amount of the Board and Committee fee through a limited liability company may add to the invoice an amount corresponding to social charges. The social charges thus included in the invoiced amount are not higher than the general payroll tax that would otherwise have been paid by the Company. The entire amount, e.g. the cash portion of the Board fee and the committee fee, including social charges, constitutes the invoiced Board fee The Annual General Meeting 2011 resolved that non-employed Directors may choose to receive the Board fee (i.e. exclusive of committee fee) as follows: i) 25% of the Board fee in cash and 75% in the form of synthetic shares, with a value corresponding to 75% of the Board fee at the time of allocation, ii) 50% in cash and 50% in the form of synthetic shares, or iii) 75% in cash and 25% in the form of synthetic shares. Directors may also choose not to participate in the synthetic share program and receive 100% 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 2011: SEK 91.1469. The number of synthetic shares is rounded down to the nearest whole number of shares. 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 2016. 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 in 2008, on equal terms and conditions as resolved in 2009, 2010 and 2011. Payment based on synthetic shares may thus, under the main rule, occur for the first time in 2013 with respect to the synthetic shares allocated in 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, 2011, the total number of synthetic shares under the programs is 247,389.80, and the total accounted debt is SEK 18,349,153 (including synthetic shares previously allocated to the former Directors Michael Treschow and Marcus Wallenberg). In accordance with the terms and conditions for the synthetic shares, the time for payment to the former Directors Michael Treschow and Marcus Wallenberg has been advanced, to occur after the publication of the year-end financial statement 2012. Remuneration to the Group management The Company’s costs for remuneration to the Group management are the costs recognized in the Income Statement during the fiscal year. These costs are disclosed under “Remuneration Costs” below. Costs recognized during a fiscal year in the Income Statement are not fully paid by the Company at the end of the fiscal year. Such liabilities (unpaid amounts) that the Company has in relation to the Group Management are disclosed under “Outstanding Balances”. RemuNeRatioN costs The total remuneration to the President and CEO and to other members of the Group management, consisting of the Executive Leadership Team (ELT) 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 the ELT as approved at AGM 2011, see the approved guidelines in section “2011 Remuneration Policy”. RemuNeRatioN costs foR the pResiDeNt aND ceo aND otheR memBeRs of executiVe LeaDeRship team (eLt) seK Salary Costs for annual variable remuneration earned 2011 to be paid 2012 Long-term variable remuneration provision Pension costs Other benefits Social charges and taxes total comments to the table the president and ceo 2011 the president and ceo 2010 other members of eLt 2011 other members of eLt 2010 total 2011 total 2010 11,739,341 12,573,789 76,031,733 84,697,698 87,771,074 97,271,487 2,771,134 5,636,050 5,960,566 78,594 7,800,766 33,986,451 6,737,556 1,253,262 5,586,760 80,962 7,842,186 34,074,515 18,460,645 8,916,556 22,154,413 4,944,762 23,529,200 154,037,309 26,592,809 6,467,584 24,994,073 4,142,484 30,246,918 177,141,565 21,231,779 14,552,606 28,114,979 5,023,356 31,329,966 188,023,760 33,330,365 7,720,846 30,580,833 4,223,446 38,089,103 211,216,080 > > During 2011, there were three Executive Vice Presidents appointed by the Board of Directors. None of them has acted as deputy to the President and CEO during the year. The Executive Vice Presidents are included in the group “Other members of ELT”. The group “Other members of ELT” comprises the following persons: Cesare Avenia (up to December 21), Per Borgklint (from June 7), Bina Chaurasia, Håkan Eriksson, Jan Frykhammar, Douglas L. Gilstrap, Nina Macpherson, Magnus Mandersson, Helena Norrman (from May 23), Mats H. Olsson, Rima Qureshi, Angel Ruiz, Henry Sténson (up to May 23), Johan Wibergh and Jan Wäreby. The salary stated in the table for the President and CEO and other members of the ELT includes vacation pay paid during 2011 as well as other contracted compensation which were paid during 2011 or provisioned for 2011. “Long-term variable remuneration provision” refers to the compensation costs during 2011 for all outstanding share-based plans. For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies”, section Share-based > > > > compensation to employees and the Board of Directors. For the President and CEO and other members of ELT employed in Sweden before 2011 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. outstaNDiNG BaLaNces The Company has recognized the following liabilities in the Balance Sheet: > Ericsson’s commitments for benefit based pensions per December 31, 2011 under IAS 19 amounted to SEK 5,083,343 for the President and CEO which includes ITP plan and temporary disability and survivor’s pension. For other members of ELT the Company’s commitments amounted to SEK 32,773,100 of which SEK 26,363,042 refers to the ITP plan and the remaining SEK 6,410,058 to temporary disability and survivor’s pensions. For previous Presidents and CEOs, the Company has made provisions for defined benefit pension plans in connection with their active service periods within the Company. > C28XENX11_v83.indd 91 2012-02-28 14.11 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 91 Note c28 > Deferred salary, earned 2011 or earlier, to be paid 12 months after period end or later, amounts to SEK 10,868,040. outstaNDiNG matchiNG RiGhts as per December 31, 2011 Number of class B shares the president and ceo other members of the eLt Stock Purchase Plans 2008, 2009, 2010 and 2011 and Executive Performance Stock Plans 2009, 2010 and 2011 comments to the table 324,106 492,645 > > For the definition of matching rights, see the description in section “Long-term variable remuneration”. The number of matching rights for members in ELT 2011 is based on performance matching under Executive Performance Stock Plans as follows; – For 2008, only the matching under the Stock Purchase Plan is included in outstanding matching rights. The performance matching lapsed. – For 2009 and 2010, maximum performance matching is included. – For 2011, 89% performance matching is included (cash conversion target for 2011 was not met). > During 2011, the President and CEO received 5,108 matching shares and other members of ELT 25,720 matching shares. 2011 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. > 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. 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 2011 plan employees are able to save up to 7.5% (President and CEO 10%) of gross fixed salary (President and CEO gross fixed salary and annual variable remuneration) for purchase of Class B contribution shares at market price on the NASDAQ OMX Stockholm or American Depositary Shares (ADSs) at NASDAQ New York (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 96 countries participate in the plans. The table below shows the contribution periods and participation details for ongoing plans as of December 31, 2011. > Ensure fairness in reward by delivering total remuneration that is stocK puRchase pLaNs 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 Group 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: > 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 2011 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 150% of the aggregate fixed salary cost, all excluding social security costs. plan Stock Purchase plan 2008 Stock Purchase plan 2009 Stock Purchase plan 2010 Stock Purchase plan 2011 contribution period August 2008 – July 2009 August 2009 – July 2010 August 2010 – July 2011 August 2011 – July 2012 Number of participants at launch take-up rate – percent of eligible employees 19,000 18,000 22,000 24,000 25% 25% 27% 30% 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% of employees (2011: 7,900 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. 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C28XENX11_v83.indd 92 2012-02-28 14.11 Note c28 the executiVe peRfoRmaNce stocK pLaN executiVe peRfoRmaNce stocK pLaNs The Executive Performance Stock Plan is designed to focus management on driving earnings and provide competitive remuneration. Senior executives, including ELT, 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% of employees (2011: 314 executives) are offered to participate in the plan. The President and CEO is allowed to invest up to 10% of fixed salary and Short-Term Variable Remuneration in contribution shares and may obtain up to nine performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance matching for the 2008 to 2010 plans is subject to the fulfillment of a performance target of average annual Earnings per Share (EPS) growth. The performance targets changed from Earnings Per Share (EPS) targets to operational targets linked to the business strategy. The tables to the right shows all Executive Performance Stock Plans as executive performance stock plan 2011 1) 2010 2009 2008 Base year EPS 2) Target average annual EPS growth range 3) Matching share vesting range 4) Maximum opportunity as percentage of fixed salary 5) 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 1.14 5% to 15% 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 2.90 5% to 15% 0.67 to 4 1 to 6 1.33 to 8 30% 45% 72% 4.43 5% to 15% 0.67 to 4 1 to 6 1.33 to 8 30% 45% 72% 1) Targets for Executive Performance Stock Plan 2011 are described in the table below. 2) Sum of four quarters up to June 30 of plan years, up to and including 2009. For 2010 plan the sum of 4 quarters up to December 31, 2010. 3) EPS range found from three-year average EPS of the twelve quarters to the end of the performance period and corresponding growth targets. 4) 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 9 matching shares. 5) At full investment, full vesting and constant share price. Excludes Stock Purchase Plan per December 31, 2011. matching. 2011 executiVe peRfoRmaNce stocK pLaN taRGets Base year value seK billion year 1 year 2 year 3 Growth (Net Sales Growth) Margin (Operating Income Growth) 1) Cash Flow (Cash Conversion) 203.3 Compound annual growth of 4–10% 23.74 Compound annual growth of 5–15% – 70% 70% 70% 1) Consolidated operating margin excluding restructuring for 2010. shaRes foR aLL pLaNs stock purchase plan, Key contributor Retention plan and executive performance stock plans plan (million shares) Originally designated 1) Outstanding beginning of 2011 Awarded during 2011 Exercised/matched during 2011 Forfeited/expired during 2011 Outstanding end of 2011 2) Compensation costs charged during 2011 (MSEK) A B C D E F=B+C–D–E G 2011 19.4 – 3.4 – – 3.4 9 3) 2010 2009 2008 2007 total 19.4 3.0 8.0 0.1 0.3 10.6 115 3) 22.4 9.9 – 0.2 0.6 9.1 145 3) 16.5 11.0 – 2.6 2.3 6.1 116 3) 9.7 7.1 – 5.3 1.8 – 28 3) 87.4 31.0 11.4 8.2 5.0 29.2 413 4) 1) Adjusted for rights offering and reverse split when applicable. 2) Presuming maximum performance matching under the Executive Performance Stock Plans. The 2007 and 2008 plans have lapsed. 3) Fair value is calculated as the share price on the investment date, reduced by the net present value of the dividend expectations during the three-year vesting period. Net present value calculations are based on data from external party. 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 presumes maximum performance matching for all ongoing plans when calculating the compensation cost. The 2007 and 2008 plans have lapsed. Fair value of the Class B share at each investment date during 2011 was: February 15 SEK 73.88, May 15 SEK 87.47, August 15 SEK 65.64 and November 15 SEK 60.76. 4) Total compensation costs charged during 2010: SEK 757 million, 2009: SEK 529 million. 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 matching of shares. During 2011, 1,240,600 shares were sold at an average price of SEK 73.96. Sale of shares is recognized directly in equity. If, as of December 31, 2011, 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 49 million Class B shares would be transferred, corresponding to 1.5% of the total number of shares outstanding, 3,211 million. As of December 31, 2011, 63 million Class B shares were held as treasury stock. The table above shows how shares (representing matching rights but excluding shares for social security expenses) are being used for all outstanding plans. From up to down the table includes (A) the number of shares originally approved by the Annual General Meeting, adjusted for reverse split where applicable; (B) the number of originally designated shares that were outstanding at the beginning of 2011; (C) the number of shares awards that were granted during 2011; (D) the number of shares matched during 2011; (E) the number of shares forfeited by participants or expired under the plan rules during 2011; and (F) the balance left as outstanding at the end of 2011, having added new awards to the shares outstanding at the beginning of the year and deducted the shares related to awards matched, forfeited and expired. The final column (G) shows the compensation costs charged to the accounts during 2011 for each plan, calculated as fair value in SEK. For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies”, section Share-based compensation to employees and the Board of Directors. C28XENX11_v83.indd 93 2012-02-28 14.11 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 93 Note c28 employee numbers, wages and salaries empLoyee moVemeNts empLoyee NumBeRs aVeRaGe NumBeR of empLoyees women men 2011 total women 2010 total men Head count at year-end Employees who have left the Company Employees who have joined the Company Temporary employees 2011 2010 104,525 10,571 24,835 901 90,261 10,066 17,834 978 North America Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India China & North East Asia South East Asia & Oceania total 1) Of which Sweden 2) Of which EU 2,876 12,106 14,982 9,750 7,837 1,913 2,770 11,005 13,775 6,654 5,326 1,328 empLoyee waGes aND saLaRies 5,656 14,927 20,583 5,821 15,227 21,048 waGes aND saLaRies aND sociaL secuRity expeNses 1,663 2,743 634 661 1,613 8,968 10,631 9,077 11,820 4,977 4,343 1,951 1,290 9,912 11,525 1,817 2,670 468 359 835 9,338 9,034 3,544 1,331 5,783 11,155 11,704 4,012 1,690 6,618 3,480 8,839 12,319 2,948 6,867 9,815 1,155 5,354 22,394 80,736 103,130 20,394 71,431 91,825 4,592 3,437 3,976 1,378 Wages and salaries Social security expenses Of which pension costs 2011 2010 43,707 15,198 3,888 43,390 13,793 3,091 Amounts related to the President and CEO and the Executive Leadership Team are included. RemuNeRatioN to BoaRD memBeRs aND pResiDeNts iN suBsiDiaRies 4,188 12,881 17,069 9,575 31,667 41,242 4,355 13,066 17,421 9,843 32,045 41,888 Salary and other remuneration Of which annual variable remuneration Pension costs 2011 2010 BoaRD memBeRs, pResiDeNts aND GRoup maNaGemeNt By GeNDeR at yeaR eND 2011 223 22 20 2010 289 43 29 2010 men 67% 86% women 2011 men women 20% 29% 80% 71% 33% 14% 11% 89% 10% 90% NumBeR of empLoyees at yeaR-eND employees by region North America Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India China & North East Asia South East Asia & Oceania total 1) Of which Sweden 2) Of which EU empLoyees By GeNDeR aND aGe at yeaR-eND 2011 Under 25 years old 25–35 years old 36–45 years old 46–55 years old Over 55 years old percent of total women men 2,162 8,417 7,754 3,553 919 22% 5,942 29,691 28,306 14,127 3,654 78% 14,801 11,191 20,987 10,806 11,645 4,336 2,283 11,535 12,567 4,374 104,525 17,500 41,596 parent company Board members and President Group Management subsidiaries Board members and Presidents 13,498 7,181 21,425 10,818 10,795 3,982 1,626 6,710 9,807 4,419 90,261 17,848 40,743 percent of total 8% 37% 34% 17% 4% 100% NumBeR of empLoyees ReLateD to cost of saLes aND opeRatiNG expeNses Cost of sales Operating expenses total 2011 2010 2009 58,800 45,725 104,525 45,628 44,633 90,261 41,521 40,972 82,493 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C28XENX11_v83.indd 94 2012-02-28 14.11 Note c29 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% 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 5,800 people. Major transactions are as follows: >> Sales: Ericsson provides ST-Ericsson with services in the areas of R&D, HR, IT and facilities. >> Purchases: A major part of Ericsson’s purchases from ST-Ericsson consists of chipsets and R&D services. >> Dividends: Both owners of ST-Ericsson receive dividends, when so decided by the board of directors. During 2011 Ericsson received no dividends from ST-Ericsson. St-eRIcSSoN Related party transactions Sales Purchases Related party balances Receivables Liabilities 2011 2010 2009 182 781 51 24 403 629 53 48 740 624 244 365 Parents extend internal financing to ST-Ericsson on an ongoing basis to bridge their needs until a return to profitability and positive cash flow, based on a 50/50 basis. As of December 31, 2011, the amount drawn was USD 800 million (SEK 5,518 million). Each parent lent USD 400 million (SEK 2,759 million). Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees towards 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% of the shares. Major transactions are as follows: >> Sales: Ericsson sells telecommunication equipment to Ericsson Nikola >> Tesla d.d. License revenues: Ericsson receives license revenues for Ericsson Nikola Tesla d.d.’s usage of trademarks. >> Purchases: Ericsson purchases development resources from Ericsson Nikola Tesla d.d. >> Dividends: Ericsson received dividends from Ericsson Nikola Tesla d.d. during 2011. eRIcSSoN NIKoLA teSLA D.D. Related party transactions Sales License revenues Purchases Ericsson’s share of dividends Related party balances Receivables Liabilities 2011 2010 2009 465 4 595 154 59 76 563 2 566 104 120 75 654 7 569 66 93 70 Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward Ericsson Nikola Tesla d.d. C29>Related>PaRty> tRansaCtions During 2011, 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”. For information regarding transactions with senior management, see Note C28, “Information Regarding Members of the Board of Directors, the Group Management and Employees”. Sony ericsson Mobile communications AB In October 2001, Sony Ericsson Mobile Communications AB was established as a joint venture between Sony Corporation and Ericsson, and a substantial portion of Ericsson’s handset operations was sold to Sony Ericsson Mobile Communications AB. The joint venture is headquartered in Lund, Sweden. On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB including the broad IP cross-licensing agreement. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. This makes Sony Ericsson a wholly-owned subsidiary of Sony. The agreed cash consideration for the transaction is EUR 1.05 billion. As part of the formation of the joint venture, contracts were entered into between Ericsson and Sony Ericsson. Major transactions are as follows: License revenues: Both owners of Sony Ericsson, Sony Corporation and Ericsson, receive license revenues for Sony Ericsson’s usage of trademarks and intellectual property rights. >> >> Purchases: Ericsson purchases mobile phones from Sony Ericsson to support contracts with a number of customers for mobile systems which also include limited quantities of phones. >> Dividends: Both owners of Sony Ericsson receive dividends, when so decided by the board of directors. During 2011 Ericsson received no dividends from Sony Ericsson. SoNY eRIcSSoN MoBILe coMMUNIcAtIoNS AB Related party transactions License revenues Purchases Related party balances Receivables Liabilities 2011 2010 2009 855 126 27 2 1,255 61 258 8 1,746 164 369 14 Sony Ericsson has been granted term loans and credit facilities of SEK 4,014 million, of which SEK 4,014 million were utilized as of December 31, 2011. The parent companies of Ericsson and Sony Corporation have issued guarantees for these term loans and credit facilities on a 50/50 basis, without joint responsibility. Thus Ericsson’s guaranteed amount is maximum SEK 2,007 million excluding interest. As of December 31, 2011, Ericsson’s part of the outstanding amount is SEK 2,017 million including accrued interest of SEK 10 million. Maturity dates for the issued guarantees occurs in 2012. As of the date of the sale, Ericsson is no longer a guarantor of term loans or credit facilities related to Sony Ericsson. See also Note C24, “Contingent Liabilities”. 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 the design, C29XENX11_v37.indd 95 2012-02-28 14.13 Ericsson Annual Report 2011 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 95 C32 events after the balanCe sheet date On January 12, 2012 Ericsson announced the closing of the acquisition of all the shares in Telcordia, a global leader in the development of software and services for OSS/BSS, for USD 1.15 billion in an all cash transaction, on a cash and debt-free basis. Balances to facilitate a Purchase Price Allocation have not yet been established. Approximately 2,600 skilled employees have joined Ericsson. This acquisition consolidates Ericsson’s position as a leading player in the operations support systems/business support systems (OSS/BSS) market with a key position in service fulfillment, assurance, network optimization and real-time charging. On January 14, 2012, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 900 million to the Swedish pension trust fund. In February 2012, Airvana Networks Solutions Inc., a State of Delaware, U.S.A. corporation (“Airvana”), filed a complaint against Ericsson Inc. and Ericsson AB in the Supreme Court of the State of New York, U.S.A., alleging that Ericsson has violated key contract terms and misappropriated Airvana trade secrets and proprietary information. Airvana is seeking damages of USD 330 million and to enjoin Ericsson from developing, deploying or commercializing Ericsson products allegedly based on Airvana’s proprietary technology. On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. The deal includes a broad IP cross-licensing agreement. Sony Ericsson is now a wholly-owned subsidiary of Sony. The agreed cash consideration for the transaction is EUR 1.05 billion. The divestment has resulted in a gain of approximately SEK 7.5 billion, to be recognized in the first quarter of 2012 and reported under Other operating income and expenses. Notes c30–c32 C30 fees to auditors Fees to AUDItoRs 2011 Audit fees Audit related fees Tax services fees Other fees total 2010 Audit fees Audit related fees Tax services fees Other fees total 2009 Audit fees 1) Audit related fees 1) Tax services fees Other fees 1) total Pwc others total 77 10 20 16 123 79 17 16 7 119 88 18 16 3 125 9 – 3 – 12 5 1 2 2 10 3 – 2 2 7 86 10 23 16 135 84 18 18 9 129 91 18 18 5 132 1) Allocation of fees to auditors is based on the requirements in the Swedish Annual Accounts Act. 2009 figures are restated for comparability. During the period 2009–2011, in addition to audit services, PwC provided certain audit related services, tax and other services to the Company. The audit related services include quarterly reviews, ISO audits, SSAE16 reviews and services in connection with issuing of certificates and opinions. The tax services include general expatriate services and corporate tax compliance work. Other services include consultation on financial accounting, services related to acquisitions, operational effectiveness and assessments of internal control. Audit fees to other auditors largely consist of local statutory audits for minor companies. C31 ContraCtual obligations coNtRActUAL oBLIGAtIoNs 2011 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 5.4 0.2 3.1 0.1 7.1 25.3 3.0 44.2 10.0 0.4 3.7 0.2 – – – 14.3 6.7 0.2 1.8 0.1 – – – 8.8 6.0 0.9 2.3 1.8 – – – 11.0 total 28.1 1.7 10.9 2.2 7.1 25.3 3.0 78.3 1) Including interest payments. 2) See Note C20, “Financial Risk Management and Financial Instruments”. 3) See 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. 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | Ericsson Annual Report 2011 C30XC32XENX11_v47.indd 96 2012-02-28 14.15 Contents Parent comPany financial statements and notes to the Parent comPany financial statements contents Parent Company Financial statements Parent Company Income Statement and Statement of Comprehensive Income ............................98 notes to the Parent Company Financial statements P1 Significant Accounting Policies ..................................103 Parent Company Balance Sheet ...........................................99 P2 Segment Information ...................................................103 Parent Company Statement of Cash Flows ........................ 101 P3 Other Operating Income and Expenses ......................103 Parent Company Statement of Changes in Stockholders’ Equity .......................................................102 P4 Financial Income and Expenses .................................104 P5 Taxes ..........................................................................104 P6 Intangible Assets ........................................................104 P7 Property, Plant and Equipment ...................................105 P8 Financial Assets .........................................................106 P9 Investments ................................................................ 107 P10 Inventories ..................................................................108 P11 Trade Receivables and Customer Finance .................108 P12 Receivables and Liabilities – Subsidiary Companies .................................................................109 P13 Other Current Receivables ......................................... 110 P14 Equity and Other Comprehensive Income .................. 110 P15 Untaxed Reserves ....................................................... 111 P16 Post-Employment Benefits ........................................ 111 P17 Other Provisions ......................................................... 112 P18 Interest-Bearing Liabilities .......................................... 112 P19 Financial Risk Management and Financial Instruments ................................................................. 113 P20 Other Current Liabilities ............................................. 114 P21 Trade Payables ............................................................ 114 P22 Assets Pledged as Collateral ..................................... 114 P23 Contingent Liabilities .................................................. 114 P24 Statement of Cash Flows ........................................... 114 P25 Leasing ....................................................................... 115 P26 Information Regarding Employees .............................. 115 P27 Related Party Transactions ......................................... 115 P28 Fees to Auditors ......................................................... 116 P29 Events after the Balance Sheet Date .......................... 116 Ericsson Annual Report 2011 | PARENT COMPANY FINANCIAL STATEMENTS AND NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 97 PCXISXENX2011_v27.indd 97 2012-02-28 14.16 Parent ComPany InCome statement anD statement oF ComPrehensIve InCome Parent comPany income statement and statement of comPrehensive income Parent ComPany InCome statement years ended December 31, seK million Net sales 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 1) Restated for contributions to/from subsidiaries. notes P2 P3 P4 P4 P15 P15 P5 Parent ComPany statement oF ComPrehensIve InCome years ended December 31, seK million notes net income other comprehensive income Cash Flow hedges Gains/losses arising during the period Adjustments for amounts transferred to initial carrying amount of hedged items Tax on items relating to components of Other comprehensive income total other comprehensive income total comprehensive income 2011 2010 1) 2009 1) – – – 33 –29 4 300 –21 279 –609 –1,512 – 2,121 3,184 1,063 8,101 –4,773 4,391 339 – 339 –103 4,627 2011 4,627 203 – – 203 4,830 –1,370 –1,586 –2,956 –1,399 –1,738 –3,137 3,118 166 2,977 119 9,432 –1,758 7,840 10,032 –4,473 5,678 –100 – –100 417 485 902 –388 7,352 –194 6,386 2010 2009 7,352 6,386 136 –136 – – 7,352 612 –1,385 204 –569 5,817 98 PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 PCXISXENX2011_v27.indd 98 2012-02-28 14.16 Parent ComPany BalanCe Sheet December 31, SEK million Notes 2011 2010 PArENT ComPANy bAlANCE ShEET 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 Loans to joint ventures and associated companies Short-term investments Cash and cash equivalents ToTAl ASSETS P6 P7 1,088 491 1,046 527 P8, P9 P8, P9 P8 P8, P12 P8, P11 P5 P8 P10 P11 P11 P12 P13 P19, P27 P19 P19 79,511 13,066 279 8,017 1,337 250 1,203 105,242 77,566 13,066 84 6,666 1,027 302 302 100,586 61 57 51 883 16,733 313 2,588 2,759 38,852 17,288 79,528 36 1,479 15,385 355 4,299 1,030 55,118 15,439 93,198 184,770 193,784 PCXBSXENX2011_v24.indd 99 2012-02-28 14.17 Ericsson Annual Report 2011 | PARENT COMPANY FINANCIAL STATEMENTS 99 PArENT ComPANy bAlANCE ShEET Parent ComPany BalanCe Sheet (Continued) December 31, SEK million Notes 2011 2010 SToCKholDErS’ EQUITy, ProVISIoNS AND lIAbIlITIES Stockholders’ equity Capital stock Revaluation reserve Statutory reserve Restricted equity Retained earnings Net income Other comprehensive income Non-restricted equity Untaxed reserves Provisions Post-employment benefits Other provisions Non-current liabilities Notes and bond loans Liabilities to credit institutions Liabilities to subsidiaries Other non-current liabilities Current liabilities Borrowings, current Trade payables Liabilities to subsidiaries Other current liabilities P14 16,367 20 31,472 47,859 35,890 4,627 203 40,720 88,579 16,367 20 31,472 47,859 35,622 1) 7,352 1) – 42,974 90,833 P15 676 1,015 P16 P17 P18 P18 P12 P18 P21 P12 P20 376 275 651 17,197 4,000 26,896 280 48,373 3,461 706 38,139 4,185 46,491 389 571 960 20,646 4,000 26,862 1,334 52,842 – 399 45,956 1,779 48,134 ToTAl SToCKholDErS’ EQUITy, ProVISIoNS AND lIAbIlITIES 184,770 193,784 Assets pledged as collateral Contingent liabilities 1) Restated for contributions to/from subsidiaries. P22 P23 452 18,518 658 13,783 100 PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 PCXBSXENX2011_v24.indd 100 2012-02-28 14.17 Parent ComPany Statement of CaSh flowS ParENt COmPaNY StatEmENt OF CaSH FLOWS Years ended December 31, SEK million Operating activities Net income Adjustments to reconcile net income to cash Changes in operating net assets Inventories Customer finance, current and non-current Trade receivables Trade payables Provisions and post-employment benefits Other operating assets and liabilities, net Notes 2011 2010 2009 P24 4,627 3,163 7,790 –4 286 35 –133 –309 2,379 2,254 7,352 1) 530 1) 7,882 6,386 1) –2,038 1) 4,348 4 –1,070 283 331 –109 1,954 1,393 20 193 261 –132 –4 –685 –347 Cash flow from operating activities 10,044 9,275 4,001 Investing activities Investments in property, plant and equipment Sales of property, plant and equipment 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 –148 16 –3,718 7 –3,074 –1,730 16,357 7,710 –160 9 –2,178 42 8,973 –1,317 –1,910 3,459 –124 109 –11,015 1,134 6,663 –9 –14,436 –17,678 Cash flow before financing activities 17,754 12,734 –13,677 Financing activities Changes in current liabilities to subsidiaries Proceeds from issuance of borrowings Repayment of borrowings Sale of own shares Dividends paid Settled contributions from/to (–) subsidiaries Other financing activities Cash flow from financing activities Effect from remeasurement in cash Net change in cash –9,361 – – 92 –7,207 409 288 –15,779 3,503 – –1,055 – –6,391 –209 –310 –4,462 4,755 11,532 –8,910 68 –5,897 –1,363 – 185 –126 –1,310 –79 1,849 6,962 –13,571 Cash and cash equivalents, beginning of period 15,439 8,477 22,048 Cash and cash equivalents, end of period 1) Restated for contributions to/from subsidiaries. P19 17,288 15,439 8,477 PCXCFXENX2011_v25.indd 101 2012-02-28 14.18 Ericsson Annual Report 2011 | PARENT COMPANY FINANCIAL STATEMENTS 101 PaReNT COmPaNy STaTemeNT OF CHaNGeS IN STOCKHOLDeRS’ eQUITy Parent ComPany Statement of ChangeS in StoCkholderS’ equity January 1, 2011 Total comprehensive income Transactions with owners Sale of own shares Stock Purchase Plans Dividends paid December 31, 2011 January 1, 2010 Total comprehensive income Transactions with owners Sale of own shares Stock Purchase Plans Dividends paid December 31, 2010 1) Restated for contributions to/from subsidiaries. Capital stock Revaluation reserve Statutory reserve Total restricted equity Disposition reserve Fair value reserves Other retained earnings Non- restricted equity 16,367 – – – – 16,367 16,367 – – – – 16,367 20 – – – – 20 20 – – – – 20 31,472 47,859 – – – – – 31,472 31,472 – – – – 31,472 – – – 47,859 47,859 – – – – 47,859 100 – – – – 100 100 – – – – 100 – 203 – – – 203 – – – – – – 42,874 4,627 92 31 –7,207 40,417 41,853 7,352 52 8 –6,391 42,874 42,974 4,830 92 31 –7,207 40,720 41,953 7,352 52 8 –6,391 42,974 Total 90,833 4,830 92 31 –7,207 88,579 89,812 7,352 1) 52 8 –6,391 90,833 102 PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 PCXEQUITYXENX2011_v16.indd 102 2012-02-28 14.20 P1 Significant accounting PolicieS The financial statements of the Parent Company, Telefonaktiebolaget LM Ericsson, have been prepared in accordance with the Annual Accounts Act and RFR 2 “Reporting in separate financial statements”. RFR 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. The main deviations between accounting policies adopted for the Group and accounting policies for the Parent Company are: Subsidiaries, associated companies and joint ventures The investments are accounted for according to the acquisition cost method. Investments are carried at cost and only dividends are accounted for in the income statement. An impairment test is performed annually and write- downs are made when permanent decline in value is established. UFR 2 has been withdrawn by the Swedish Financial Reporting Board. Contributions to/from subsidiaries and shareholders’ contributions are accounted for according to RFR 2. Contributions from/to Swedish subsidiaries are reported as financial income/expense in the income statement. Comparison years have been restated accordingly. 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 is chosen. Financial guarantees are included in Contingent liabilities. Leasing NOteS P1–P3 Business combinations Transaction costs attributable to the acquisition are included in the cost of acquisition in the parent company statements compared to Group Statements where these costs are expenses as incurred. Critical accounting estimates and judgments See Notes to the Consolidated Financial Statements – Note C2, “Critical Accounting Estimates and Judgments”. Major critical accounting estimates and judgments applicable to the Parent Company include “Trade and customer finance receivables” and “Acquired intellectual property rights and other intangible assets, excluding goodwill”. P2 Segment information Net SaLeS North America Of which the United States Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India China & North East Asia Of which China South East Asia & Oceania Other total 1) Of which Sweden 2) Of which EU 2011 2010 2009 – – – – – – – – – – – – – – – – – – 33 – – – – – – – – – – 33 – – 99 –7 47 –56 12 31 – – – 167 38 – – 300 –56 –13 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. There were no Parent Company net sales during 2011. Parent Company net sales in 2010 related to business segment Networks and 2009 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 OtHeR OPeRatING INCOMe aND eXPeNSeS License revenues and other operating revenues Subsidiary companies Other Net gains/losses (–) on sales of tangible assets total 2011 2010 2009 2,704 479 1 3,184 2,305 815 –2 3,118 2,433 532 12 2,977 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, 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. P1XP7XENX2011_v36.indd 103 2012-02-29 17.29 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 103 NOteS P4–P6 P4 financial income and exPenSeS A reconciliation between actual tax expense for the year and the theoretical tax expense that would arise when applying the statutory tax rate in Sweden, 26.3% (starting from January 1, 2009), on income before taxes is shown in the the table below. FINaNCIaL INCOMe aND eXPeNSeS 2011 2010 2009 ReCONCILIatION OF aCtUaL INCOMe taX Rate tO tHe aCtUaL INCOMe taX Rate 5,198 6 6,369 8 5,732 1,087 29 1,958 674 154 – 104 – 66 1 Tax rate in Sweden (26.3%) 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 actual tax cost (–) Deferred tax balances 2011 2010 2009 –1,244 –2,036 –1,753 74 –14 –15 –91 –47 –77 1,429 1,776 1,828 –348 –103 –22 –388 –145 –194 1 26 – Tax effects of temporary differences have resulted in deferred tax assets as follows: 280 2,433 8,101 221 746 9,432 386 2,086 10,032 DeFeRReD taX aSSetS Deferred tax assets 2011 250 2010 302 –1 – –27 Deferred tax assets refer mainly to costs related to customer finance and provisions for restructuring costs. –1,330 –82 –551 P6 intangible aSSetS – – –1 PateNtS, LICeNSeS, tRaDeMaRkS aND SIMILaR RIGHtS Financial Income Result from participations in subsidiary companies Dividends Net gains on sales Group contributions Group contributions to Parent Company 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 Group contributions Group contributions from Parent Company Interest expenses and similar profit/loss items Subsidiary companies Other Other financial expenses total Financial net –2,008 –929 –3,077 –304 –1,109 –21 –4,773 3,328 –95 –612 –40 –1,758 7,674 –150 –630 –37 –4,473 5,559 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: taXeS Other current income taxes for the year Current income taxes related to prior years Deferred tax income/expense (–) related to temporary differences taxes 2011 –125 2010 –288 2009 –250 74 –15 –47 –52 –103 –85 –388 103 –194 accumulated acquisition costs Opening balance Acquisitions Sales/disposals Closing balance accumulated amortization Opening balance Amortization Sales/disposals Closing balance accumulated impairment losses Opening balance Impairment losses Closing balance Net carrying value 2011 2010 3,888 279 – 4,167 –1,897 –237 – –2,134 –945 – –945 1,088 3,888 – – 3,888 –1,669 –228 – –1,897 – –945 –945 1,046 The balances relate mainly to Marconi and Redback trademarks acquired during 2006 and 2007. During the year there has been an acquisition of intangible assets related to the Nortel license of SEK 279 million. The useful life and amortization period for these trademarks has been set to 10 years. 104 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P1XP7XENX2011_v36.indd 104 2012-02-29 17.29 P7 ProPertY, Plant and eQuiPment PROPeRtY, PLaNt aND eQUIPMeNt 2011 accumulated acquisition costs Opening balance Additions Sales/disposals Reclassifications Closing balance accumulated depreciation Opening balance Depreciation Sales/disposals Closing balance Net carrying value 2010 accumulated acquisition costs Opening balance Additions Sales/disposals Reclassifications Closing balance accumulated depreciation Opening balance Depreciation Sales/disposals Closing balance Net carrying value Land and buildings Other equipment and installations Construction in process and advance payments 13 – –13 – – – – – – – 13 – – – 13 – – – – 13 1,102 32 –71 162 1,225 –714 –168 68 –814 411 1,050 26 –50 76 1,102 –603 –149 38 –714 388 126 116 – –162 80 – – – – 80 67 135 – –76 126 – – – – 126 NOte P7 total 1,241 148 –84 – 1,305 –714 –168 68 –814 491 1,130 161 –50 – 1,241 –603 –149 38 –714 527 P1XP7XENX2011_v36.indd 105 2012-02-29 17.29 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 105 note p8 P8 Financial assets Investments In subsIdIary companIes, joInt ventures and assocIated companIes Opening balance Acquisitions and stock issues Shareholders’ contribution Repayment of shareholders’ contribution Write-downs Disposals closing balance other fInancIal assets subsidiary companies 2010 2011 joint ventures 2010 2011 77,566 3,344 88 –156 –1,330 –1 79,511 75,540 2,083 25 – –82 – 77,566 12,736 – – – – – 12,736 12,736 – – – – – 12,736 associated companies 2010 330 – – – – – 330 2011 330 – – – – – 330 other investments in shares and participations 2010 2011 receivables from subsidiaries, non-current 2010 2011 customer finance, non-current 2010 2011 other financial assets, non-current 2010 2011 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 93 195 – – – 288 –9 – – – –9 279 19 81 –7 – – 93 –9 – – – –9 84 6,666 93 – 1,253 5 8,017 – – – – – 8,017 10,316 651 –55 –4,212 –34 6,666 – – – – – 6,666 1,073 830 –216 –311 3 1,379 –46 – 4 – –42 1,337 1,093 406 –136 –241 –49 1,073 –247 – 197 4 –46 1,027 302 101 –17 817 – 1,203 – – – – – 1,203 1,179 4 –38 –843 – 302 – – – – – 302 106 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P8XP12XENX2011_v36.indd 106 2012-02-29 17.30 note p9 P9 investments The following listing shows certain shareholdings owned directly and indirectly by the Parent Company as of December 31, 2011. 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 subsidiary companies I I I II III Ericsson AB Ericsson Shared Services AB Netwise AB AB Aulis Ericsson Credit AB Other (Sweden) Ericsson Austria GmbH Ericsson Danmark A/S Oy LM Ericsson Ab Ericsson Participations France SAS Ericsson Germany GmbH Ericsson Hungary Ltd. LM Ericsson Holdings Ltd. Ericsson Telecomunicazioni S.p.A. Ericsson Holding International B.V. Ericsson A/S Ericsson Television AS Ericsson Corporatia AO Ericsson AG Ericsson Holding Ltd. Other (Europe, excluding Sweden) Ericsson Holding II Inc. Cía Ericsson S.A.C.I. Ericsson Canada Inc. 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 India Global Services PVT. Ltd LG-Ericsson Ltd. Ericsson (Malaysia) Sdn. Bhd. Ericsson Telecommunications Pte. Ltd. Ericsson South Africa PTY. Ltd Ericsson Taiwan Ltd. Ericsson (Thailand) Ltd. Other countries (the rest of the world) total I I I II I I II I II I II I I II II I I I II I I I I I I I I I I joint ventures and associated companies I II III I Sony Ericsson Mobile Communications AB 556615-6658 ST-Ericsson SA ST-Ericsson AT SA Ericsson Nikola Tesla d.d. total Austria Denmark Finland France Germany Hungary Ireland Italy The Netherlands Norway Norway Russia Switzerland United Kingdom United States Argentina Canada Mexico Australia China China India India Korea Malaysia Singapore South Africa Taiwan Thailand Sweden Switzerland Switzerland Croatia 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 95 1) 100 100 – 100 100 100 100 100 50 70 100 100 80 49 2) – 50 50 51 49 50 361 2 14 5 – 4 90 13 26 – 1,301 2 44 222 75 161 5 – 328 – – 41 – n/a – 20 2 65 725 389 100 2 2 – 240 90 – – 50 137 – 65 – 20,731 2,216 306 6 5 2,160 65 216 196 524 4,232 120 15 5,857 3,200 114 1,788 5 – 4,094 272 29,006 178 51 1,050 66 100 2 475 147 65 1,944 4 1 108 20 17 155 79,511 4,136 8,325 275 330 13,066 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 Cia Ericsson S.A.C.I. 2) Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. P8XP12XENX2011_v36.indd 107 2012-02-29 17.30 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 107 notes p9–p11 shares owned by subsIdIary companIes type company reg. no. domicile percentage of ownership 556044-9489 subsidiary companies II I I I II I I I I I I I I I I I I I I I Ericsson Cables Holding AB Ericsson France SAS Ericsson Telekommunikation GmbH & Co. KG 1) LM Ericsson Ltd. Ericsson Nederland B.V. Ericsson Telecommunicatie B.V. Ericsson España S.A. Ericsson Telekomunikasyon A.S. Ericsson Ltd. Ericsson Inc. Ericsson IP Infrastructure Inc. Drutt Corporation Inc. Optimi Corporation Redback Networks Inc. Ericsson Telecommunicações S.A. Ericsson Australia Pty. Ltd. Ericsson (China) Communications Co. Ltd. Nanjing Ericsson Panda Communication Co. Ltd. Ericsson Japan K.K. Ericsson Communication Solutions Pte Ltd. Sweden France Germany Ireland The Netherlands The Netherlands Spain Turkey United Kingdom United States United States United States United States United States Brazil Australia China China Japan Singapore 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 Key to type of company I Manufacturing, distribution and development companies II Holding companies P10 inventories 1) disclosures pursuant to section 264b of the German commercial code (handelsgesetzbuch – hGb) Applying Section 264b HGB, LHS Holding GmbH & Co. KG, LHS Communication GmbH & Co. KG and LHS Telekommunikation GmbH & Co. KG, all located in Frankfurt am Main/Germany, are exempted from the obligation to prepare, have audited and disclose financial statements and a management report in accordance with the legal requirements being applicable for German corporations. 2011 2010 movements In allowances for ImpaIrment Opening balance Additions Utilization Reversal of excess amounts Translation difference closing balance trade receivables 2010 2011 customer finance 2010 2011 24 1 –2 – – 23 37 – – –10 –3 24 93 14 –31 –11 – 65 393 – –87 –206 –7 93 Finished products and goods for resale Inventories 61 61 57 57 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 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 2011 2010 71 –23 48 3 51 2,285 –65 2,220 57 –24 33 3 36 2,599 –93 2,506 108 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P8XP12XENX2011_v36.indd 108 2012-02-29 17.30 aGInG analysIs as per december 31 2011 Neither impaired nor past due Impaired, not past due Past due in less than 90 days Past due in 90 days or more Past due and impaired in less than 90 days Past due and impaired in 90 days or more total 2010 Neither impaired nor past due Impaired, not past due Past due in less than 90 days Past due in 90 days or more Past due and impaired in less than 90 days Past due and impaired in 90 days or more total outstandInG customer fInance On-balance sheet customer finance Financial guarantees for third parties 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 notes p11–p12 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 44 – 2 1 – 24 71 16 – 4 13 1 23 57 – – – – – –23 –23 – – – – –1 –23 –24 3 – – – – – 3 3 – – – – – 3 1,758 238 238 10 37 4 2,285 2,020 516 24 – 18 21 2,599 - -27 – – –34 –4 –65 – –54 – – –18 –21 –93 2011 2,285 422 2,707 26 –469 2,264 2,220 883 669 2010 2,599 212 2,811 34 –1,353 1,492 2,506 1,479 1,104 P12 receivables and liabilities – subsidiary comPanies receIvables and lIabIlItIes – subsIdIary companIes payment due by period >5 1–5 < 1 years years year total 2011 total 2010 5 710 7,302 8,017 6,666 816 15,917 16,733 – 387 37,752 38,139 – – – – – – – – – – 816 15,917 16,733 882 14,503 15,385 26,896 26,896 26,862 – – – 387 37,752 38,139 828 45,128 45,956 non-current receivables 1) Financial receivables current receivables Trade receivables Financial receivables total non-current liabilities 1) Financial liabilities current liabilities Trade payables Financial liabilities total 1) Including non interest-bearing receivables and liabilities, net, amounting to SEK –19,595 million in 2011 (SEK –20,196 million in 2010). During 2011 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 194 million, the amount of the assets that the Parent Company continues to recognize is SEK 10 million, and the carrying amount of the associated liabilities is SEK 0 million. Maturity date for major part of the issued guarantees occurs in 2021 at the latest. P8XP12XENX2011_v36.indd 109 2012-02-29 17.30 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 109 Notes p13–p14 P13 othEr currEnt rEcEivablEs other CurreNt reCeivables P14 Equity and othEr comPrEhEnsivE incomE Capital stock 2011 2011 2010 Capital stock at December 31, 2011, consisted of the following: Receivables from associated companies and joint ventures Prepaid expenses Accrued revenues Derivatives with a positive value Other total – 425 405 1,517 241 2,588 69 590 246 3,038 356 4,299 Capital stoCk 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). equity aNd other CompreheNsive iNCome 2011 January 1, 2011 Net income other comprehensive income Cash flow hedges Gains/losses arising during the period total other comprehensive income total comprehensive income transactions with owners Sale of own shares Stock Purchase Plans Dividends paid Capital stock 16,367 – revalua- tion reserve statutory reserve total restricted equity disposi- tion reserve Fair value reserves other retained earnings Non- restricted equity 20 – 31,472 – 47,859 – 100 – – – 42,874 4,627 42,974 4,627 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 203 203 203 – – – – – 4,627 92 31 –7,207 203 203 4,830 92 31 –7,207 total 90,833 4,627 203 203 4,830 92 31 –7,207 december 31, 2011 16,367 20 31,472 47,859 100 203 40,417 40,720 88,579 equity aNd other CompreheNsive iNCome 2010 Capital stock 16,367 – revalua- tion reserve statutory reserve total restricted equity disposi- tion reserve Fair value reserves other retained earnings Non- restricted equity 20 – 31,472 – 47,859 – 100 – – – 41,853 7,352 41,953 7,352 total 89,812 7,352 January 1, 2010 Net income other comprehensive income Cash flow hedges Gains/losses arising during the period Amounts transferred to initial carrying amount of hedged items total other comprehensive income total comprehensive income transactions with owners Sale of own shares Stock Purchase Plans Dividends paid – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 136 –136 – – – – – – – 136 136 – – 7,352 52 8 –6,391 42,874 –136 – 7,352 52 8 –6,391 42,974 –136 – 7,352 52 8 –6,391 90,833 december 31, 2010 16,367 20 31,472 47,859 100 110 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P13XP23XENX2011_v70.indd 110 2012-03-06 11.34 Notes p15–p16 2011 2010 167 461 128 756 249 433 32 714 2011 2010 389 –36 98 –50 –25 – 376 372 –31 98 –44 –44 38 389 2011 2010 55 43 –1 97 123 123 –25 195 54 44 –2 96 96 96 –5 187 Equities Interest-bearing securities Other total 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 Return on plan assets not accounted for Closing balance provision for pensions Estimated pension payments for 2012 are SEK 55 million. total peNsioN Cost aNd iNCome reCogNized iN the iNCome statemeNt defined benefit obligations Costs excluding interest and taxes Interest cost Credit insurance premium total cost defined benefit plans excluding taxes defined contribution plans Pension insurance premium total cost defined contribution plans excluding taxes Return on plan assets total pension cost, net excluding taxes Of the total pension cost, SEK 177 million (SEK 149 million in 2010) is included in operating expenses and SEK 18 million (SEK 38 million in 2010) in the financial net. P15 untaxEd rEsErvEs uNtaxed reserves plaN assets alloCatioN 2011 accumulated depreciation in excess of plan Intangible assets Tangible assets Total accumulated depre- ciation in excess of plan total untaxed reserves Jan 1 additions/ withdrawals (–) dec 31 931 84 1,015 1,015 –262 –77 –339 –339 669 7 676 676 Change in depreciation in excess of plan of intangible assets relates mainly to Marconi and Redback trademarks. Deferred tax liability on untaxed reserves, not accounted for in deferred taxes, amounts to SEK 178 million (SEK 267 million in 2010). P16 Post-EmPloymEnt bEnEfits The Parent Company has two types of pension plans: > Defined contribution plans: post-employment benefit plans where the Parent Company pays fixed contributions into separate entities and has no legal or constructive obligation to pay further contributions if the entities do not hold sufficient assets to pay all employee benefits relating to employee service. The expenses for defined contribution plans are recognized during the period when the employee provides service. > Defined benefit plans: post-employment benefit plans where the Parent Company’s undertaking is to provide predetermined benefits that the employee will receive on or after retirement. The FPG/PRI plan for the Parent Company is partly funded. FPG is a Swedish credit insurance company for pension obligations and PRI is a pension registration institute. Pension obligations are calculated annually, on the balance sheet date, based on actuarial assumptions. deFiNed 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 2011 2010 679 –756 –77 376 77 376 618 –714 –96 389 96 389 1) This FPG/PRI obligation is covered by the Swedish law on safeguarding of pension commitments. The defined benefit obligations are calculated based on the actual salary levels at year-end and based on a discount rate of 3.8%. Weighted average life expectancy after the age of 65 is 25 years for women and 23 years for men. In 2005, SEK 524 million was transferred into the Swedish pension trust. From 2009–2011 additional transfers of SEK 94 million have been made. The Parent Company utilizes no assets held by the pension trust. Return on plan assets for 2011 was 0.9% (17.4 %). P13XP23XENX2011_v70.indd 111 2012-03-06 11.34 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 111 restruc turing Customer finance 318 72 –12 –218 – 160 349 70 –9 –92 318 91 1 – –2 –3 87 95 2 –6 – 91 other 162 – –134 – – 28 253 – –13 –78 162 total other provisions 1) 571 73 –146 –220 –3 275 697 72 –28 –170 571 Notes p17–p18 P17 othEr Provisions other provisioNs 2011 Opening balance Additions Reversal of excess amounts Cash out/utilization Reclassifications Closing balance 2010 Opening balance Additions Reversal of excess amounts Cash out/utilization Closing balance 1) Of which SEK 113 million (SEK 203 million in 2010) is expected to be utilized within one year. P18 intErEst-bEaring liabilitiEs As per December 31, 2011, the Parent Company’s outstanding interest- bearing liabilities, excluding liabilities to subsidiaries, were SEK 24.7 billion. iNterest-beariNg liabilities borrowings, current Current part of non-current borrowings 1) total current borrowings borrowings, non-current Notes and bond loans Liabilities to credit institutions total non-current interest-bearing liabilities total interest-bearing liabilities 1) including notes and bond loans of sek 3.461 (0) million. Notes aNd boNd loaNs 2011 2010 3,461 3,461 17,197 4,000 21,197 24,658 – – 20,646 4,000 24,646 24,646 issued-maturing 2004–2012 2007–2012 2007–2012 2007–2014 2007–2017 2009–2013 2009–2016 2010–2020 total Nominal amount 450 1,000 2,000 375 500 600 300 170 Coupon Currency book value (sek million) maturity date (yy-mm-dd) unrealized hedge gain/loss (incl. in book value) 3.305% 5.100% 2.885% 1.704% 5.380% 5.000% 3.62125% 2.96125% SEK SEK SEK EUR EUR EUR USD USD 450 1,011 2,000 3,345 5,161 1) 5,450 1) 2,069 1,172 20,658 December 7, 2012 2) June 29, 2012 June 29, 2012 3) June 27, 2014 4) June 27, 2017 June 24, 2013 June 23, 2016 5) December 23, 2020 6) –11 –719 –109 –839 1) Interest rate swaps are designated as fair value hedges. 2) Next contractual repricing date 2012-06-07 (semi-annual). 3) Next contractual repricing date 2012-03-29 (quarterly). 4) Next contractual repricing date 2012-03-27 (quarterly). 5) Next contractual repricing date 2012-03-23 (quarterly). 6) Next contractual repricing date 2012-03-23 (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 normally swapped to a floating interest rate using interest rate swaps leaving a maximum of 50% of outstanding loans at fixed interest rates. It resulted in weighted average interest rate of 4.21% (2.65%). These bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. 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. 112 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P13XP23XENX2011_v70.indd 112 2012-03-06 11.34 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 1) Fair value asset 2011 liability asset 2010 liability 779 Currency derivatives Maturity within 3 months Maturity between 3 and 12 months 427 Maturity 1 to 3 years 1 total currency derivatives 1,207 773 Of which internal Of which designated in cash flow hedge relations 879 600 1,031 391 – 1,270 19 945 10 1,556 33 1,291 27 2,350 2) 643 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 203 – 324 381 416 778 – 5 367 617 815 161 – 6 76 544 184 705 – 28 61 118 34 87 1,899 3) 1,966 1,515 329 2) Of which designated in fair value hedge relations 1,002 – 862 – 1) Some of the derivatives hedging non-current liabilities are recognized in the balance sheet as non-current due to hedge accounting. 2) Of which SEK 902 million is reported as non-current liabilities for 2010. 3) Of which SEK 816 million is reported as non-current assets. Cash, Cash equivaleNts aNd short-term iNvestmeNts Note p19 sek billion Bank deposits type of issuer/counterpart Governments Corporations Mortgage institutes total remaining time to maturity > 5 years 1–5 years < 1 year < 3 months 2011 12.3 – – – 12.3 6.3 1.9 – 20.5 3.8 – – 3.8 13.2 – 16.6 29.8 1.7 – 0.3 2.0 25.0 1.9 16.9 56.1 The instruments are classified as held for trading and are therefore short- term investments. During 2011, cash, cash equivalents and short-term investments decreased by SEK 14.5 billion to SEK 56.1 billion. repaymeNt sChedule oF NoN-CurreNt borrowiNgs Nominal amount sek billion Current maturities of long-term debt borrowings (non-current) 2012 2013 2014 2015 2016 2017 and later total 3.4 – – – – – 3.4 – 5.4 3.3 4.0 2.1 5.6 20.4 total 3.4 5.4 3.3 4.0 2.1 5.6 23.8 Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets. FuNdiNg programs 1) amount utilized unused Euro Medium-Term Note program (USD million) Long-Term Committed Credit facility (USD million) 5,000 2,878 2,122 2,000 – 2,000 1) There are no financial covenants related to these programs. In June 2011 Ericsson was upgraded by Moody’s from Baa1 to A3. Standard & Poor’s kept the BBB+ credit rating with stable outlook. Both credit ratings are considered to be solid investment grade. Financial instruments carried at other than fair value In the following tables, carrying amounts and fair values of financial instruments that are carried in the financial statements at other than fair values are presented. Assets valued at fair value through profit and loss had a net gain of SEK 0.7 billion. For further information about valuation principles, see Notes to the Consolidated Financial Statements – Note C1, “Significant Accounting Policies”. FiNaNCial iNstrumeNts, book value trade receiv- ables p11 short-term invest- ments receiv- ables and liabili ties subsidia- ries p12 borrow- ings p18 trade payables p21 Cash equivalents other current receiv- ables p13 other current liabilities p20 other non- current assets 2011 2010 – 2.2 – – 2.2 38.9 – – 38.9 – 24.8 – –65.0 –40.2 – – – – – – –24.7 –24.7 –0.7 –0.7 5.0 1.9 – – 6.9 1.5 – – – 1.5 –3.2 – – – –3.2 0.8 – – – 0.8 43.0 28.9 – –90.4 –18.5 58.0 24.6 – –97.0 –14.5 sek billion Assets at fair value through profit or loss Loans and receivables Available for sale assets Financial liabilities at amortized cost total P13XP23XENX2011_v70.indd 113 2012-03-06 11.34 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 113 Notes p19–p24 FiNaNCial iNstrumeNts Carried at other thaN Fair value sek billion Current part of non-current borrowings Borrowings non-current total book value 2010 2011 3.5 21.2 24.7 – 24.6 24.6 Fair value 2010 – 24.5 24.5 2011 3.5 21.1 24.6 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 book value is considered to represent a reasonable estimate of a fair value. P20 othEr currEnt liabilitiEs other CurreNt liabilities Accrued interest Accrued expenses, of which Employee related Other Deferred revenues Derivatives with a negative value Other current liabilities total P21 tradE PayablEs trade payables Trade payables excluding associated companies and joint ventures total All trade payables fall due within 90 days. 2011 329 416 307 109 10 3,216 214 4,185 2010 320 362 294 68 12 960 125 1,779 2011 2010 706 706 399 399 P22 assEts PlEdgEd as collatEral assets pledged as Collateral Bank deposits total 2011 452 452 2010 658 658 The major item in bank deposits is the internal bank’s clearing and settlement commitments of SEK 267 million (SEK 467 million in 2010). P23 contingEnt liabilitiEs CoNtiNgeNt liabilities Total contingent liabilities 2011 2010 18,518 13,783 Contingent liabilities include pension commitments of SEK 14,355 million (SEK 11,004 million in 2010) and guarantees for Sony Ericsson Mobile Communications AB’s borrowing from financial institutions of SEK 2,017 million (SEK 1,053 million in 2010). On February 16, 2012, Ericsson announced that the company on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. As of the date of the sale, Ericsson is no longer a guarantor of term loans or credit facilities related to SEMC, see Note P27, “Related Party Transactions”. 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 2011 was SEK 20,249 million (SEK 19,691 million in 2010). Potential payments due under these bonds are related to Ericsson’s performance under applicable contracts. For information about financial guarantees, see Note P11, “Trade Receivables and Customer Finance”. P24 statEmEnt of cash flows Interest paid in 2011 was SEK 1,258 million (SEK 657 in 2010 and SEK 508 million in 2009) and interest received was SEK 2,532 million (SEK 816 in 2010 and SEK 2,083 million in 2009). Income taxes received were SEK 147 million (income taxes paid were SEK 269 in 2010 and SEK 341 million in 2009). adJustmeNts to reCoNCile Net iNCome to Cash property, plant and equipment Depreciation total intangible assets Amortization Impairment losses 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 group contributions Unsettled dividends Other non-cash items total adjustments to reconcile net income to cash 2011 2010 2009 168 168 237 – 237 405 250 149 149 228 945 1,173 1,322 119 193 193 385 – 385 578 –147 1,326 50 –521 –339 1,979 –70 –388 100 –1,029 – –32 –902 2,403 –1,254 –2,195 3,163 530 –2,038 114 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P13XP23XENX2011_v70.indd 114 2012-03-06 11.34 P25 Leasing Leasing with the parent Company as lessee At December 31, 2011, future payment obligations for leases were distributed as follows: Future paymeNt obLigatioNS For LeaSeS 2012 2013 2014 2015 2016 2017 and later total operating leases 1,047 804 754 430 272 901 4,208 Northern Europe & Central Asia 1) 2) Middle East total 1) Of which Sweden 2) Of which EU remuneration NoteS p25–p27 P26 information regarding emPLoyees average Number oF empLoyeeS men Women 197 202 399 197 197 162 31 193 162 162 2011 total 359 233 592 359 359 men Women 198 121 319 198 198 148 14 162 148 148 2010 total 346 135 481 346 346 Leasing with the parent Company as lessor At December 31, 2011, future minimum payment receivables were distributed as follows: Wages and salaries Social security expenses Of which pension costs Future miNimum paymeNt reCeivabLeS WageS aNd SaLarieS per geographiCaL area WageS aNd SaLarieS aNd SoCiaL SeCurity expeNSeS 2012 2013 2014 2015 2016 2017 and later total operating leases 19 2 1 1 1 1 25 The operating lease income is mainly income from sublease of real estate. See Notes to the Consolidated Financial Statements – Note C27, “Leasing”. 2011 2010 580 403 246 518 384 210 2011 2010 417 163 580 417 417 409 109 518 409 409 Northern Europe & Central Asia 1) 2) Middle East total 1) Of which Sweden 2) Of which EU Remuneration in foreign currency has been translated to SEK at average exchange rates for the year. remuneration policy and remuneration to the board of directors and the president and Ceo See Notes to the Consolidated Financial Statements – Note C28, “Information Regarding Members of the Board of Directors, the Group Management and Employees”. Long-term variable remuneration the StoCk purChaSe pLaN Compensation costs for all employees of the Parent Company amounted to SEK 25.1 million in 2011 (SEK 8.0 million in 2010). P27 reLated Party transactions During 2011, 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 In October 2001, Sony Ericsson Mobile Communications AB was organized as a joint venture between Sony Corporation and Ericsson and a substantial portion of Ericsson’s handset operations was sold to Sony Ericsson Mobile Communications AB. On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. This P24XP29XENX2011_v44.indd 115 2012-02-29 17.34 Ericsson Annual Report 2011 | NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 115 NoteS p27–p29 makes Sony Ericsson a wholly-owned subsidiary of Sony. The agreed cash consideration for the transaction is EUR 1.05 billion. As part of the formation of the joint venture, contracts were entered into between the Parent Company and Sony Ericsson Mobile Communications AB. For the Parent Company, the major transactions are license revenues for Sony Ericsson Mobile Communications AB’s usage of trademarks and patents and received dividends. Sony Ericsson Mobile Communications AB has been granted a long-term loan with a maximum amount of SEK 4,014 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, 2011, the Parent Company´s share of the outstanding principle and accrued interest, in the total amount of SEK 2,017 million, has been reported as a contingent liability in the Parent Company. As of the date of the sale, Ericsson is no longer a guarantor of term loans or credit facilities related to Sony Ericsson. See also Note P23 “Contingent liabilities”. SoNy eriCSSoN mobiLe CommuNiCatioNS related party transactions License revenues Dividends related party balances Receivables ericsson Nikola tesla d.d. 2011 2010 179 – 1 296 – 69 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% 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. eriCSSoN NikoLa teSLa d.d. related party transactions License revenues Dividends related party balances Receivables 2011 2010 4 154 1 2 104 – 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’ wireless business. It is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. The Parent Company holds 49.99% of shares in ST-Ericsson SA and 51% in ST-Ericsson AT SA, both in Switzerland. ST-Ericsson has been granted a revolving credit facility of USD 800 million which is equally shared by LME and STMicroelectronics. As per December, 2011, the amount drawn on the facility was SEK 5,518 million, SEK 2,759 million lent per parent. The Parent Company’s accrued interest towards ST-Ericsson amounted to SEK 7.5 million. The Parent Company does not have any contingent liabilities, assets pledged as collateral or guarantees towards ST-Ericsson. St-eriCSSoN related party transactions License revenues Dividends related party balances Receivables Loan other related parties 2011 2010 – – – – 1 2,759 3 1,030 For information regarding the remuneration of management, see Notes to the Consolidated Financial Statements – Note C28, “Information Regarding Members of the Board of Directors, the Group Management and Employees”. P28 fees to auditors FeeS to auditorS 2011 Audit fees Audit-related fees Tax services fees Other fees total 2010 Audit fees Audit-related fees Tax services fees Other fees total 2009 Audit fees Audit-related fees Tax services fees Other fees total pwC 18 8 – 12 38 19 12 1 3 35 23 12 2 1 38 Allocation of fees to auditors is based on the requirements in the Swedish Annual Accounts Act. 2009 figures are restated for comparability. During the period 2009–2011, in addition to audit services, PwC provided certain audit-related services, tax and other services to the Parent Company. The audit-related services include quarterly reviews, SSAE 16 reviews and services in connection with the issuing of certificates and opinions. The tax services include general expatriate services and corporate tax compliance work. Other services include consultation on financial accounting, services related to acquisitions, operational effectiveness and assessments of internal control. P29 events after the baLance sheet date On February 16, 2012, Ericsson announced that the Company, on February 15, 2012, completed the divestment of its 50% stake in Sony Ericsson Mobile Communications AB including the broad IP cross-licensing agreement. The divestment was originally jointly announced by Sony Corporation and Ericsson on October 27, 2011. This makes Sony Ericsson a wholly-owned subsidiary of Sony. The agreed cash consideration for the transaction is EUR 1.05 billion. 116 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS | Ericsson Annual Report 2011 P24XP29XENX2011_v44.indd 116 2012-02-29 17.34 risk factors You should carefully consider all the information in this Annual Report and in particular the risks and uncertainties outlined below. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our business. 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. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially adversely affect our business. 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 Challenging global economic conditions may adversely impact the demand and pricing for our products and services as well as limit our ability to grow. Challenging global economic conditions could have adverse, wide- ranging effects on demand for our products and for the products of our customers. Adverse global 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. If demand for our products and services were to fall in the future, we could experience material adverse effects on our revenues, cash flow, capital employed and value of our assets and we could incur operating losses. Furthermore, if demand is significantly weaker or more volatile than expected, our credit rating, borrowing opportunities and costs as well as the trading price of our shares could be adversely impacted. When deemed necessary, we undertake specific restructuring or cost saving initiatives, however, there are no guarantees that such initiatives will be sufficient, successful or executed in time to deliver any improvements in our earnings. Should global economic conditions fail to improve, or worsen, other business risks we face could intensify and could also negatively impact the business prospects of operators. Some operators, in particular in markets with weak currencies, may incur borrowing difficulties and slower traffic development, which may negatively affect their investment plans and cause them to purchase less of our products and services. The potential adverse effects of an economic downturn include: > > reduced demand for products and services, resulting in increased price competition or deferrals of purchases, with lower revenues not fully compensated through reduced costs; risks of excess and obsolete inventories and excess manufacturing capacity; MARKET, TECHNOLOGY AND BUSINESS RISKS contents MARKET, TECHNOLOGY AND BUSINESS RISKS REGULATORY, COMpLIANCE AND CORpORATE GOvERNANCE RISKS RISKS ASSOCIATED wITH OwNING ERICSSON SHARES 117 122 123 > > > > > > risk of financial difficulties or failures among our suppliers; increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterparty 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; a decline in the value of the assets in our pension plans and/or increased pension liabilities due to discount rate changes; end user demand could also be adversely affected by reduced consumer spending on technology, changed operator pricing, security breaches and trust issues. The telecommunications industry fluctuates and is affected by many factors, including the economic environment, decisions by operators and other customers regarding their deployment of technology and their timing of purchases. The telecommunications industry has experienced downturns in the past in which operators substantially reduced their capital spending on new equipment. While we expect the network service provider equipment market and telecommunications services market to grow in the coming years, the uncertainty surrounding the global economic recovery may materially harm actual market conditions. Moreover, market conditions are subject to substantial fluctuation, and could vary geographically and across technologies. Even if global conditions improve, conditions in the specific industry segments in which we participate may be weaker than in other segments. In that case, the results of our operations may be adversely affected. If capital expenditures by service providers and other customers is weaker than we anticipate, our revenues and profitability may be adversely affected. The level of demand by service providers and other customers who buy our products and services can change quickly and can vary over short periods of time, including from month to month. Due to the uncertainty and variations in the telecommunications industry, accurately forecasting revenues, results, and cash flow remains difficult. Sales volumes and gross margin levels are affected by the variation and short order time of our products and services. Our sales to network operators represent a mix of equipment, software and services, which normally generate different gross margins. We sell our own products as well as third party products, which normally have Ericsson Annual Report 2011 | RISK FACTORS 117 RISKXFACTORSXENX2011_v30.indd 117 2012-02-28 14.35 MARKET, TECHNOLOGY AND BUSINESS RISKS lower margins than our own products. As a consequence, our 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. Further, network expansions and upgrades have much we face intense competition from our existing competitors as well as new entrants, including IT companies entering the telecommunications market, and this could materially adversely affect our results. shorter lead times for delivery than initial network build outs. Orders The markets in which we operate are highly competitive in terms for such network expansions and upgrades are normally placed with of price, functionality, service quality, customization, timing of short notice by customers, often with less than a month’s notice, and development, and the introduction of new products and services. consequently variations in demand are difficult to forecast. As a result, We face intense competition from significant competitors many of changes in our product and service mix and the short order time for which are very large, with substantial technological and financial certain of our products may affect our ability to accurately forecast resources and established relationships with operators. Further, certain sales and margins or detect in advance whether actual results will competitors, Chinese companies in particular, have become relatively deviate from market consensus. Short-term variation could have a stronger in recent years. We may also encounter increased competition material adverse effect on our business, operating results and financial from new market entrants, alternative technologies or due to evolving condition. we may not be able to properly respond to market trends in the telecommunications industry, including the ongoing convergence of the telecom, data and media industries, which may harm our market position relative to our competitors. We are affected by market conditions and trends within the telecommunications industry, including the convergence of the telecom, data and media industries. Convergence is largely driven by technological development related to IP-based communications. This has changed the competitive landscape and affects our objective setting, risk assessment and strategies. Competitors new to our business may enter this new business context and negatively impact our market share in selected areas. If we fail to understand the market development, or fail to acquire the necessary competences to develop and market products, services and solutions that are competitive in this changing market, our business, operating results and financial condition will suffer. Our business depends upon the continued growth of mobile communications and the acceptance of new services. If growth slows or new services do not succeed, operators’ investment in networks may slow or stop, harming our business. industry standards. In particular, we may face competition from large IT companies entering the telecommunications market who benefit from economies of scale from being active in several industries. We cannot assure that we will be able to compete successfully with these companies. 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 also have greater resources in certain business segments or geographic markets than we do. Increased competition could result in reduced profit margins, loss of market share, increased research and development costs as well as increased sales and marketing expenses. Traffic development on cellular networks could be affected if more traffic is off-loaded to Wi-Fi networks. Further, alternative services provided over-the-top have profound effects on operator voice/ SMS revenues with possible reduced capital expenses consequences. Additionally, we operate in markets characterized by rapidly changing technology. This results in continuous price erosion and increased price competition for our products and services. If our counter measures, including enhanced products and business models or cost reductions cannot be achieved or do not occur in a timely manner, there could be adverse impacts on our operating results and A substantial portion of our business depends on the continued growth market share. of mobile communications in terms of both the number of subscriptions and usage per subscriber, which in turn drives the continued deployment and expansion of network systems by our customers. If vendor consolidation may lead to stronger competitors who are able to benefit from integration, scale and greater resources. operators fail to increase the number of subscribers and/or stimulate Industry convergence and consolidation among equipment and increased usage, our business and operational results could be services suppliers could potentially result in stronger competitors materially adversely affected. Also, if operators fail to monetize new that are competing as end-to-end suppliers as well as competitors services, fail to introduce new business models or experience a decline more specialized in particular areas. Consolidation may also result in in operator revenues or profitability, their willingness to further invest in competitors with greater resources than we have or in reduction of our their network systems may decrease which will reduce their demand for current scale advantages. This could have a materially adverse effect our products and services and have an adverse effect on our business, on our business, operating results, and financial condition. operational results and financial condition. 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 market acceptance of such services and the outcome of regulatory and standardization activities in this field, such as spectrum allocation. If delays in standardization, regulation, or market acceptance occur, this could adversely affect our business, operational results and financial condition. A significant portion of our revenue is currently generated from a limited number of key customers, and operator consolidation may increase our dependence on key customers. We derive most of our business from large, multi-year frame agreements with a limited number of significant customers. Many of these agreements are opened up on a yearly basis to re-negotiate the price for our products and services and do not contain committed purchase volumes. Although no single customer represents more than 7% of our sales in 2011, our ten largest customers accounted for 44% of our sales in 2011. 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 fewer number of operators with activities in 118 RISK FACTORS | Ericsson Annual Report 2011 RISKXFACTORSXENX2011_v30.indd 118 2012-02-28 14.35 MARKET, TECHNOLOGY AND BUSINESS RISKS several countries. This trend is expected to continue, and intra-country ready in time, or are not successful in the marketplace our sales and consolidation is likely to accelerate as a result of competitive pressure. earnings may materially suffer. Additionally, it is common for research A market with fewer and larger operators will increase our reliance and development projects to encounter delays due to unforeseen on key customers and may negatively impact our bargaining position problems. Delays in production may increase the cost of research and profit margins. Moreover, if the combined companies operate and development efforts and put us at a disadvantage against our in the same geographic market, networks may be shared and less competition. network equipment and associated services may be required. Network investments could be delayed by the consolidation process, which may include, among others, actions relating to merger or acquisition we engage in acquisitions and divestments which may be disruptive and require us to incur significant expenses. agreements, securing necessary regulatory approvals, or integration In addition to in-house innovation efforts, we make strategic of their businesses. Recently, network operators have started to share acquisitions in order to obtain various benefits such as reduced time- parts of their network infrastructure through cooperation agreements to-market, access to technology and competence, increased scale or rather than legal consolidations, which may adversely affect demand to broaden our product portfolio or customer base. Future acquisitions for network equipment. Accordingly, operator consolidation may have a could result in the incurrence of contingent liabilities and an increase in material adverse effect on our business, operating results and financial amortization expenses related to goodwill and other intangible assets, condition. we enter into long-term frame agreements with our customers which include commitments to future price reductions, requiring us to make constant cost reductions to maintain our gross margin. Long-term frame agreements with our customers are typically awarded on a competitive bidding basis. In some cases, such agreements also include a commitment to future price reductions. In order to maintain our gross margin with such price reductions, we continuously strive to reduce the costs of our products through design improvements, negotiation of better purchase prices from our suppliers, allocation of more production to low-cost countries and increased productivity in our own production. However, there can be no assurance that our actions which could have a material adverse effect upon our business, financial condition and results of operations. Risks we could face with respect to acquisitions include: > difficulties in the integration of the operations, technologies, products and personnel of the acquired company; > risks of entering markets in which we have no or limited prior experience; > potential loss of employees; > diversion of management’s attention away from other business concerns; and > expenses of any undisclosed or potential legal liabilities of the acquired company. to reduce costs will be sufficient or quick enough to maintain our gross From time to time we also divest parts of our business to optimize our margin in such contracts, which may have a material adverse effect on product portfolio or operations. Any decision to dispose of or otherwise our operating results. Growth of our managed services business is difficult to predict, and requires taking significant contractual risks. exit businesses may result in the recording of special charges, such as workforce reduction costs and industry and technology-related write- offs. We cannot assure that we will be successful in consummating future acquisitions or divestments on favourable terms or at all. The Operators increasingly outsource parts of their operations to reduce risks associated with such acquisitions and divestments could have cost and focus on new services. To address this opportunity, we offer a material adverse effect upon our business, financial condition and operators various services in which we manage their networks. The results of operations. growth rate in the managed services market is difficult to forecast and each new contract carries a risk that transformation and integration of the operations will not be as fast or smooth as planned. Additionally, we are a party to joint ventures and partnerships which may not be successful and expose us to future costs. early contract margins are generally low and the mix of new and old We are partners in joint ventures and partnerships. Our partnering contracts may negatively affect reported results in a given period. arrangements may fail to perform as expected for various reasons, Contracts for such services normally cover several years and generate including an incorrect assessment of our needs or the capabilities recurring revenues. However, contracts have been, and may in the or financial stability of our strategic partners. Our ability to work with future be, terminated or reduced in scope, which has negative impacts these partners or develop new products and solutions may become on sales and earnings. While we believe we have a strong position in constrained, which could harm our competitive position in the market. the managed services market, competition in this area is increasing, Additionally, our share of any losses from or commitments to contribute which may have adverse effects on our future growth and profitability. additional capital to such partnerships may adversely affect our results we depend upon the development of new products and enhancements to our existing products, and the success of our substantial research and development investments is uncertain. Rapid technological and market changes in our industry require us to of operations or financial position. we rely on a limited number of suppliers of components, production capacity and R&D and IT services, which exposes us to supply disruptions and cost increases. make significant investments in technological innovation. We invest Our ability to deliver according to market demands and contractual significantly in new technology, products and solutions. In order for us commitments depends significantly on obtaining a timely and adequate to be successful, those technologies, products and solutions must be supply of materials, components, production capacity and other vital accepted by relevant standardization bodies and by the industry as a services on competitive terms. Although we strive to avoid single- whole. There can be no assurance that our research and development source supplier solutions, this is not always possible. Accordingly, efforts will be technically or commercially successful. If we invest there is a risk that we will be unable to obtain key supplies we need in the development of technologies, products and solutions that do to produce our products on commercially reasonable terms, or at all. not function as expected, are not adopted by the industry, are not Failure by any of our suppliers could interrupt our product supply or RISKXFACTORSXENX2011_v30.indd 119 2012-02-28 14.35 Ericsson Annual Report 2011 | RISK FACTORS 119 MARKET, TECHNOLOGY AND BUSINESS RISKS operations and significantly limit sales or increase our costs. To find an alternative supplier or re-design products to replace components may take significant time which could cause significant delays or interruptions in the delivery of our products. We have from time to time experienced interruptions of supply and we may experience such Our ability to benefit from intellectual property rights (IpR) which are critical to our business may be limited by changes in regulation limiting patents, inability to prevent infringement, the loss of licenses from third parties and Ip infringement claims brought against us by competitors. interruptions in the future. Although we have a large number of patents, there can be no assurance Furthermore, our procurement of supplies requires us to predict that they will not be challenged, invalidated, or circumvented, or that future customer demands. If we fail to anticipate customer demand any rights granted in relation to our patents will in fact provide us with properly, an over or under supply of components and production competitive advantages. capacity could occur. In many cases, some of our competitors utilize In 2005, the European Union considered restricting the patentability the same contract manufacturers and if they have purchased capacity of software. Although the European Union ultimately rejected this ahead of us we could be blocked from acquiring the needed products. proposal, we cannot guarantee that they will not revisit this issue in This factor could limit our ability to supply our customers or could the future. We rely on many software patents, and limitations on the increase costs. At the same time, we commit to certain capacity levels patentability of software may materially affect our business. or component quantities, which, if unused, will result in charges for We utilize a combination of trade secrets, confidentiality policies, unused capacity or scrapping costs. We are also exposed to financial nondisclosure and other contractual arrangements in addition to relying counterpart risks to suppliers where we pay in advance for supplies. on patent, copyright and trademark laws to protect our intellectual product or service quality issues could lead to reduced revenue, gross margins and declining sales to existing customers. 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 Sales contracts normally include warranty undertakings for faulty timely steps to establish and enforce our proprietary rights. In fact, products and often include provisions regarding penalties and/or existing laws of some countries in which we conduct business offer termination rights in the event of a failure to deliver ordered products or services on time or with required quality. Although we undertake only limited protection of intellectual property rights, if at all. Our solutions may also require us to license technologies from third a number of quality assurance measures to reduce such risks, parties. It may be necessary in the future to seek or renew licenses and product quality or service performance issues may negatively affect there can be no assurance that they would be available on acceptable our reputation, results and financial position. If significant warranty terms, or at all. Moreover, the inclusion in our products of software or obligations arise due to reliability or quality issues, our operating results other intellectual property licensed from third parties on a non-exclusive and financial position could be negatively impacted by costs associated basis could limit our ability to protect proprietary rights in our products. with fixing software or hardware defects, high service and warranty Many key aspects of telecommunications and data network expenses, high inventory obsolescence expense, delays in collecting technology are governed by industry-wide standards usable by accounts receivable or declining sales to existing customers. all market participants. As the number of market entrants and the Due to having a majority of our costs in SEK and revenues in other currencies, our business is exposed to foreign exchange fluctuations that could negatively impact our revenue, operating profit and results of operations. We incur a significant portion of our expenses in SEK. As a result of our international operations, we generate, and expect to continue to generate, a significant portion of our revenue in currencies other than SEK. To the extent we are unable to match revenue received in foreign currencies with costs paid in the same currency, exchange rate fluctuations could have a negative impact on our consolidated income statement, balance sheet and cash flows when foreign currencies are exchanged or translated to SEK, which increases volatility in reported results. 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 to indemnify 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, and such judgments could have a materially adverse effect on our business. As market prices are predominantly established in USD or EUR, we presently have a net revenue exposure in foreign currencies which means that a stronger SEK exchange rate would generally have a we are involved in lawsuits and investigations which, if determined against us, could require us to pay substantial damages, fines and/or penalties. negative effect on our reported results. Our attempts to reduce the In the normal course of our business we are involved in legal effects of exchange rate fluctuations through a variety of hedging proceedings. These lawsuits include such matters as commercial activities may not be sufficient or successful, resulting in an adverse disputes, claims regarding intellectual property, antitrust, tax and impact on our results. 120 RISK FACTORS | Ericsson Annual Report 2011 labour disputes. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavourable 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 RISKXFACTORSXENX2011_v30.indd 120 2012-02-28 14.35 MARKET, TECHNOLOGY AND BUSINESS RISKS claims, the time and costs incurred to defend the Company and its demands may increase. Upon the financial failure of a customer, we officers and the potential settlement or compensation to the plaintiffs may experience losses on credit extended and loans made to such could have significant impact on our reported results and reputation. customer, losses relating to our commercial risk exposure, and the loss For additional information regarding certain of the lawsuits in which we of the customer’s on-going business. If customers fail to meet their are involved, see “Legal and Tax Proceedings” in the Board of Directors’ obligations to us, we may experience reduced cash flows and losses in Report. excess of reserves, which could materially adversely impact our results Our operations are complex and several critical operations are centralized in a single location. Any disruption of our operations, whether due to natural or man made events, may be highly damaging to the operation of our business. Our business operations rely on complex operations and of operations and financial position. we rely on various capital sources for short-term and long-term capital for the funding of our business. Should such capital become unavailable or available in insufficient amounts or unreasonable terms, our business may materially suffer. communications networks, which are vulnerable to damage or If we do not generate sufficient amounts of capital to support disturbance from a variety of sources. Having outsourced a significant our operations, service our debt and continue our research and portion of our IT operations, we depend partly on security and development and customer finance programs, or if we cannot raise reliability measures of external companies. Regardless of protection sufficient amounts of capital at the required times and terms, our measures, our systems and communications networks are susceptible business is likely to be adversely affected. Access to funding may to disruption due to failure, vandalism, computer viruses, security decrease or become more expensive as a result of our operational and breaches, natural disasters, power outages and other events. We financial condition, market conditions, including financial conditions in also have a concentration of operations on certain sites, including the Euro-zone, or due to deterioration in our credit rating. There can R&D, production, network operation centres, and logistic centres and be no assurance that additional sources of funds that we from time to shared services centres, where business interruptions could cause time may need, will be available or available on reasonable terms. If we material damage and costs. The delivery of goods from suppliers, and cannot access capital on commercially viable terms, our business could to customers, could also be hampered for the reasons stated above. materially suffer. We cannot provide any assurance that interruptions to our systems and communications that will have an adverse effect on our operations and Impairment of Goodwill may negatively impact financial condition. financial condition will not occur. An impairment of goodwill or other intangible assets could adversely Our operations, including our managed services business, are affect our financial condition or results of operations. We have a exposed to possible cyber security incidents occurring, such as know significant amount of goodwill and intangible assets, for example how and data privacy infringements or leakage, which could have patents, customer relations, trademarks and software. Goodwill is the material adverse effects or our business operations, financial condition only intangible asset the company has recognized to have indefinite and brand. we must continue to attract and retain highly qualified employees to remain competitive. useful life. Other intangible assets are mainly amortized on a straight- line basis over their estimated useful lives, but no more than ten years, and are reviewed for impairment whenever events such as product discontinuances, product dispositions or other changes in We believe that our future success largely depends on our continued circumstances indicate that the carrying amount may not be wholly ability to hire, develop, motivate and retain engineers and other qualified recoverable. Those not yet in use are tested for impairment annually. personnel needed to develop successful new products, support Historically, we have recognized impairment charges related to our existing product range and provide services to our customers. intangible assets mainly due to restructuring. Additional impairment Competition for skilled personnel and highly qualified managers in the charges may be incurred in the future that could be significant telecommunications industry remains intense. We are continuously due to various reasons, including restructuring actions or adverse developing our corporate culture, remuneration, promotion and benefits market conditions that are either specific to us or the broader policies as well as other measures aimed at empowering our employees telecommunications industry or more general in nature and that and reducing employee turnover. However, there are no guarantees could have an adverse effect on our results of operations or financial that we will be successful in attracting and retaining employees with condition. appropriate skills in the future, and failure in retention and recruiting Negative deviations in actual cash flows compared to estimated could have a material adverse effect on our business. cash flows as well as new estimates that indicate lower future cash If our customers’ financial conditions decline, we will be exposed to increased credit and commercial risks. flows might result in recognition of impairment charges. Estimates require management judgment as well as the definition of cash generating units for impairment testing purposes. Other judgments After completing sales to customers, we may encounter difficulty might result in significantly different results and financial position in the collecting accounts receivables and could be exposed to risks future. associated with uncollectable accounts receivable. We regularly assess the credit worthiness of our customers and upon which we determine a credit limit for customers. Challenging economic conditions have impacted some of our customers’ ability to pay their accounts receivables. Although our credit losses have historically been low and we have policies and procedures for managing customer finance credit risk we may be unable to avoid future losses on our trade receivables. We have also experienced demands for customer financing, and in adverse financial markets or more competitive environments, those RISKXFACTORSXENX2011_v30.indd 121 2012-02-28 14.35 Ericsson Annual Report 2011 | RISK FACTORS 121 REGULATORY, COMpLIANCE AND CORpORATE GOvERNANCE RISKS regulatory, coMpliance and corporate governance risks Our business may suffer as a result of changes in laws or regulations which could subject us to liability, increase costs, or reduce product demand. We must always comply with relevant export control regulations and sanctions or other trade embargoes in force, not only at the time of sale but also at the time of delivery. The political situation in parts of the world, particularly in the Middle East, has lead to an increase of sanctions imposed by the global community. A universal element of these sanctions is the financial restrictions with respect to individuals and/or legal entities, but sanctions can also restrict certain exports and ultimately lead to a complete trade embargo towards a country. There is a risk in many of these countries of unexpected changes Telecommunications is an industry which is subject to regulations. in regulatory requirements, tariffs and other trade barriers, price or Changes to these regulations may adversely affect both our customers’ exchange controls, or other governmental policies which could limit our and our own operations. For example, regulations imposing more operations and decrease our profitability. Although we seek to comply stringent, time-consuming or costly planning and zoning requirements with all such regulations, there can be no assurance that we are, or or building approvals for radio base stations and other network will be in the future, compliant with all relevant regulations and such infrastructure could adversely affect the timing and costs of network violations, even unintentional violations, could have material adverse construction or expansion, and ultimately the commercial launch and effects on our business, operational results and brand. success of these networks. Similarly, tariff and roaming regulations There has been a growing concern reported by media and others, or rules on network neutrality could also affect operators’ ability or that certain countries may use features of their telecommunications willingness to invest in network infrastructure, which in turn could systems violating the human rights. This may adversely affect the affect the sales of our systems and services. Additionally, delay in radio telecommunications business and may have a negative impact on our frequency spectrum allocation, and allocation between different types brand. of usage may affect operator spending adversely or force us to develop As a result of the credit crisis in Europe, concerns persist regarding new products to be able to compete. Further, we develop many of our products and services based the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the on existing regulations and technical standards. Changes to existing suitability of the euro as a single currency given the diverse economic regulations and technical standards, or the implementation of new and political circumstances in individual member states. These and regulations and technical standards relating to products and services other concerns could in worst case lead to the re-introduction of not previously regulated, could adversely affect our development individual currencies in one or more member states, or, in more extreme efforts by increasing compliance costs and causing delay. Demand for circumstances, the possible dissolution of the euro entirely. These those products and services could also decline. Regulatory changes potential developments, or market perceptions concerning these in license fees, environmental, health and safety, privacy and other and related issues, could adversely affect our operations and have a regulatory areas may increase costs and restrict our operations or the material adverse effect on our business, operating results and financial operations of network operators and service providers. Also indirect condition. impacts of such changes and regulatory changes in other fields, such as pricing regulations, could have an adverse impact on our business even though the specific regulations may not apply directly to our we may fail to comply with our corporate governance standards which could subject us to harm. products or us. Ericsson may fail or be unable to comply with laws or We apply mandatory corporate governance laws and regulations regulations and could experience adverse rulings in enforcement or and are also committed to several corporate responsibility and other proceedings, which could have a material adverse impact on our environmental initiatives. To ensure that our operations are executed in business operations, financial condition and brand. accordance with these requirements, our management system includes Our substantial international operations are subject to uncertainties which could affect our operating results. a Code of Business Ethics as well as policies and directives to govern our processes and operations. While we attempt to monitor and audit internal compliance with the policies and directives as well as our We conduct business throughout the world and are subject to the suppliers’ adherence to our Code of Conduct, we cannot provide any effects of general global economic conditions as well as conditions assurances that violations will not occur which could have material unique to specific countries or regions. We conduct business in adverse effects on our operations, business results and brand. more than 180 countries, with a significant proportion of our sales to emerging markets in the Asia Pacific region, Latin America, Eastern Europe, the Middle East and Africa. Our extensive operations are subject to numerous additional risks, including civil disturbances, economic and political instability, the imposition of exchange controls, economies which are subject to significant fluctuations, nationalization of private assets or other governmental actions affecting the flow of goods and currency, and difficulty of enforcing agreements and collecting receivables through local legal systems. Further, in certain markets in which we operate, there is a risk of protectionist governmental measures implemented to assist domestic market participants at the expense of foreign competitors. The implementation of such measures could adversely affect sales or our ability to purchase critical components. Failure to comply with environmental, health and safety regulations in many jurisdictions may expose us to significant penalties and other sanctions. 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. While we believe that we are in compliance with all material laws and regulations related to the environment, health, and safety, we can provide no assurance that we have been, are, or will in the future be compliant with these regulations. If we have failed or fail to comply with these regulations, we could be subject to significant penalties and other sanctions that could have a material adverse effect on our business, operating results and financial condition. Additionally, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain 122 RISK FACTORS | Ericsson Annual Report 2011 RISKXFACTORSXENX2011_v30.indd 122 2012-02-28 14.35 compliance with current or future laws and regulations or to undertake > announcements concerning bankruptcy or investigations into the any necessary remediation. It is difficult to reasonably estimate the accounting procedures of ourselves or other telecommunications future impact of environmental matters, including potential liabilities. companies; and This is due to several factors, particularly the length of time often > our ability to forecast and communicate our future results in a involved in resolving such matters. Adverse future events, regulations, manner consistent with investor expectations. RISKS ASSOCIATED wITH OwNING ERICSSON SHARES 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 New York (ADSs), fluctuations in exchange rates between SEK and USD may affect the value of our shareholders’ investment. In addition, because we pay cash dividends in SEK, fluctuations in exchange rates may affect the value of distributions when converted into other currencies. 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 New York. or judgments could have a material effect on our business, operating results and financial condition. potential health risks related to electromagnetic fields may subject us to various product liability claims and result in regulatory changes. 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 from 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, operating results and financial condition. risks associated with owning ericsson shares Our share price has been and may continue to be volatile, especially as technology companies, securities and markets as a whole remain volatile. Our share price has been volatile due to various factors, including our operating performance as well as the high volatility in the securities markets generally and volatility in telecommunications and technology companies’ securities in particular. Our share price is also likely to be affected by future developments 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 public communications, including reports of operating results, 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 our customers; 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 telecommunications market; technical problems, in particular those relating to the introduction and viability of new network systems, including LTE/4G and new platforms such as the RBS 6000 (multi-standard radio base station) platform; actual or expected results of ongoing or potential litigation; RISKXFACTORSXENX2011_v30.indd 123 2012-02-28 14.35 Ericsson Annual Report 2011 | RISK FACTORS 123 Auditors’ report Auditors’ report to the Annual General Meeting of the shareholders of telefonaktiebolaget LM ericsson (publ), corporate identity number 556016-0680 report on the annual accounts and consolidated accounts We have audited the annual accounts and consolidated accounts of Telefonaktiebolaget LM Ericsson (publ) for the year 2011. (The annual accounts and consolidated accounts of the company are included in the printed version of this document on pages 19–123.) responsibiLities of the boArd of directors And the president And ceo for the AnnuAL Accounts And consoLidAted Accounts The Board of Directors and the President and CEO are responsible for the preparation and fair presentation of these annual accounts and consolidated accounts in accordance with International Financial Reporting Standards, as adopted by the EU, and the Annual Accounts Act, and for such internal control as the Board of Directors and the President and CEO determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error. Auditor’s responsibiLity Our responsibility is to express an opinion on these annual accounts and consolidated accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the annual accounts and consolidated accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts and consolidated accounts. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the annual accounts and consolidated accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors and the President and CEO, as well as evaluating the overall presentation of the annual accounts and consolidated accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinions In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the Parent Company as of 31 December 2011 and of its financial performance and its cash flows for the year then ended in accordance with the Annual Accounts Act, and the consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2011 and of their financial performance and cash flows in accordance with International Financial Reporting Standards, as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the annual meeting of shareholders adopt the income statement and balance sheet for the parent company and the group. report on other legal and regulatory requirements In addition to our audit of the annual accounts and consolidated accounts, we have examined the proposed appropriations of the company’s profit or loss and the administration of the Board of Directors and the President and CEO of Telefonaktiebolaget LM Ericsson (publ) for the year 2011. responsibiLities of the boArd of directors And the president And ceo The Board of Directors is responsible for the proposal for appropriations of the company’s profit or loss, and the Board of Directors and the President and CEO are responsible for administration under the Companies Act. Auditor’s responsibiLity Our responsibility is to express an opinion with reasonable assurance on the proposed appropriations of the company’s profit or loss and on the administration based on our audit. We conducted the audit in accordance with generally accepted auditing standards in Sweden. As a basis for our opinion on the Board of Directors’ proposed appropriations of the company’s profit or loss, we examined the Board of Directors’ reasoned statement and a selection of supporting evidence in order to be able to assess whether the proposal is in accordance with the Companies Act. As a basis for our opinion concerning discharge from liability, in addition to our audit of the annual accounts and consolidated accounts, we examined significant decisions, actions taken and circumstances of the company in order to determine whether any member of the Board of Directors or the President and CEO is liable to the company. We also examined whether any member of the Board of Directors or the President and CEO has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. opinions We recommend to the annual meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the President and CEO be discharged from liability for the financial year. Stockholm, February 24, 2012 peter nyllinge Authorized Public Accountant PricewaterhouseCoopers AB Auditor in Charge Johan engstam Authorized Public Accountant PricewaterhouseCoopers AB 124 AUDITORS’ REPORT | Ericsson Annual Report 2011 AUDITXENX2011_v18.indd 124 2012-02-28 14.44 Forward-looking statements 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”, “ambition”, “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 chapter “Board of Directors’ Report” 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 the 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. FLSXENX2011_v14.indd 125 2012-02-28 14.49 Ericsson Annual Report 2011 | FORWARD-LOOKING STATEMENTS 125 THINKING AHEAD To enable the networked society, we need to be more than just market leaders. We need to be thought leaders. We make sure that the knowledge we gain is shared with our people. This keeps our thinking – and our business – one step ahead. 30,000 WiTh 30,000 paTenTs and 90 license agreemenTs, We have The indusTry’s sTrongesT Wireless inTellecTual properTy porTfolio. 126 Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 126 2012-03-04 15.14 corporaTe governance reporT 2011 CorporATE GovErNANCE rEporT 2011 As Chairman of the Board it lies at the core of my responsibilities to ensure that the Board’s work is conducted in an optimal way, in line with the principles and processes in the work procedure for the Board of Directors. The Board has two key roles: to provide good support for Group management and to exercise critical review of their work. This requires at all times an open, meaningful dialogue on important issues. In my view, the Group management and the Board do not have to be in agreement from the beginning, but our dialogue must always result in agreement being reached. It is of utmost importance that the Board is well informed at all times in order to give constructive input to management. The Board’s work is constantly scrutinized and improved to ensure that it has the best possible basis for its resolutions. Good corporate governance is the basis for building robust corporate culture. However, corporate governance can not only be about efficient and reliable controls and procedures. It is also about the adherence to a strong principle of ethical business practice by all people in the organization – starting at the top and permeating to all employees. This strengthens the business, which in turn generates shareholder value. leif Johansson Chairman of the Board of Directors CoNTENTs regulaTion and compliance shareholders governance sTrucTure general meeTing of shareholders nominaTion commiTTee Board of direcTors commiTTees of The Board of direcTors remuneraTion To Board memBers memBers of The Board of direcTors managemenT memBers of The eXecuTive leadership Team audiTors inTernal conTrol over financial reporTing 2011 audiTors’ reporT on The corporaTe governance reporT 128 129 129 130 131 132 134 137 138 142 145 148 148 151 Corporate governance describes the ways in which rights and responsibilities are distributed among the various corporate bodies according to applicable laws, rules and processes. Corporate governance also defines the decision-making systems and structure through which owners directly or indirectly control a company. KEy EvENTs 2011 leif Johansson was elected new chairman of the Board This Corporate Governance Report is rendered as a separate report added to the Annual Report in accordance with the Annual Accounts Act ((SFS 1995:1554) Chapter 6, Section 6 and 8) and the Swedish Corporate Governance Code. The report has been reviewed by Ericsson’s auditors in accordance with the Annual Accounts Act and a report from the auditors is appended hereto. Jacob Wallenberg was elected new member of the Board Three new members joined the executive leadership Team CGRXPARTX1XENX2011_v81.indd 127 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 127 regulaTion and compliance rEGulATIoN AND ComplIANCE external rules As a Swedish public limited liability company with securities quoted on NASDAQ OMX Stockholm as well as on NASDAQ New York, Ericsson is subject to a variety of rules that affect its governance. Major external rules include: > The Swedish Companies Act > The Rulebook for issuers of NASDAQ OMX Stockholm > The Swedish Corporate Governance Code (the “Code”) > NASDAQ New York Stock Market Rules, including applicable NASDAQ New York corporate governance requirements (subject to certain exemptions principally reflecting mandatory Swedish legal requirements) > Applicable requirements of the US Securities and Exchange Commission. internal rules In addition, to ensure compliance with legal and regulatory requirements and the high ethical standards that we set for ourselves, Ericsson has adopted internal rules that include: > A Code of Business Ethics > Group Steering Documents including Group policies and directives, instructions and business processes for approval, control and risk management > A Code of Conduct, to be applied in the product development, production, supply and support of Ericsson products and services worldwide. The Board of Directors has also included internal rules in its work procedure. compliance with the swedish corporate governance code 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 Code. Ericsson has not deviated from any of the rules of the Code. The Code can be found on the website of the Swedish Corporate Governance Board which administrates the Code (www.corporategovernanceboard.se). compliance with applicable stock exchange rules There has been no infringement of applicable stock exchange rules and no breach of good practice on the securities market reported by the stock exchange’s disciplinary committee or the Swedish Securities Council. code of Business ethics Ericsson’s Code of Business Ethics sets out how the Group achieves and maintains high ethical standards. It summarizes the Group’s fundamental policies and directives and underpins the importance of ethical conduct in all business activities. The Code of Business Ethics has been translated into 25 languages. This ensures that it is accessible to all employees. During recruitment, employees 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 process, Ericsson strives to ensure that high ethical standards are continuously upheld. All employees have an individual responsibility to ensure that business practices adhere to the rules of the Code of Business Ethics. CODE OF BUSINESS ETHICS The Code of Business Ethics can be found at www.ericsson.com/ code-of-business-ethics Information on the Ericsson website does not form part of this Report. ericsson’s core values Professionalism Respect Perseverance 128 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 128 2012-03-04 15.14 governance sTrucTure GovErNANCE sTruCTurE The shareholders may exercise their decision-making rights in the Company at General Meetings of shareholders. A Nomination Committee is appointed by the major shareholders in accordance with a procedure adopted by the Annual General Meeting of shareholders. One of the tasks of the Nomination Committee is to propose candidates for election to the Board of Directors at the Annual General Meeting of shareholders. The Board of Directors is ultimately responsible for the organization of Ericsson and the management of its operations. In addition to the Directors elected by the shareholders, the Board of Directors consists of employee representatives appointed by the unions. The President and CEO, appointed by the Board of Directors, is responsible for the day to day management of Ericsson in accordance with instructions from the Board. The President and CEO is supported by the Executive Leadership Team. The external auditor of Ericsson is elected by the General Meeting of shareholders. sHArEHolDErs ownership structure As of December 31, 2011, Telefonaktiebolaget LM Ericsson (the “Parent Company”) had 592,542 shareholders (according to the share register kept by Euroclear Sweden AB). Institutions, both Swedish and international, own approximately 80% of the shares. The largest shareholders are Investor AB, holding 21.48% of the votes and AB Industrivärden, holding 19.92% of the votes (together with Svenska Handelsbankens Pensionsstiftelse and Pensionskassan SHB Försäkringsförening). 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. More information on Ericsson’s shareholders can be found in the chapter “Share Information” in the Annual Report. shares and voting rights The share capital of the Parent Company consists of two classes of listed shares: A and B shares. 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 to dividends. The Parent Company may also issue Class C shares in order to create treasury stock to finance and hedge long- term variable remuneration programs resolved by the General Meeting of shareholders. The Class C shares are converted into Class B shares before they are used for the long-term variable remuneration programs. The members of the Board of Directors and the Executive Leadership Team have the same voting rights on shares as other shareholders. shareholders governance sTrucTure Ownership percentage (voting rights) 6 7 28 % 59 Swedish institutions. 59.29%, of which: – Investor AB: 21.48% – AB Industrivärden (together with SHB Pensionsstiftelse and Pensionskassan SHB Försäkringsförening): 19.92% Foreign investors: 27.95% Retail Swedish investors: 7.00% Other: 5.76% Source: Capital Precision General Meetings of shareholders Annual General Meeting/ Extraordinary General Meeting Unions Board of Directors 12 Directors elected by the General Meetings of shareholders 3 Directors and 3 Deputies appointed by the Unions Audit Committee Finance Committee Remuneration Committee Nomination Committee External Auditor President and CEO Management CGRXPARTX1XENX2011_v81.indd 129 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 129 general meeTing of shareholders GENErAl mEETING of sHArEHolDErs decision-making at general meetings Decisions of the AGM 2011 included: The decision-making rights of Ericsson’s shareholders are exercised at General Meetings of shareholders. Most resolutions at General Meetings are passed by a simple majority. However, the Swedish Companies Act requires qualified majorities in certain cases, for example in case of: > Amendment of the articles of association > Resolution to transfer own shares to employees participating in long-term variable remuneration programs. > Payment of a dividend of SEK 2.25 per share for 2010 > Election of Leif Johansson as new Chairman of the Board of Directors > Re-election of members of the Board of Directors: Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, Hans Vestberg and Michelangelo Volpi > Election of Jacob Wallenberg as a new member of the Board The annual general meeting of shareholders of Directors > Board of Directors’ fees: The Annual General Meeting of shareholders (AGM) is held in Stockholm. The date and venue for the meeting is announced on the Ericsson website no later than at the time of release of the third-quarter interim financial report. Shareholders who cannot participate in person may be represented by proxy. Only shareholders registered in the share register have voting rights. Nominee-registered shareholders who wish to vote may request to be entered into the share register by the record date for the AGM. The AGM is held in Swedish and is simultaneously interpreted into English. All documentation provided by the Company is available in both Swedish and English. The AGM gives shareholders the opportunity to raise questions relating to the operations of the Group. Ericsson always strives to ensure that the members of the Board of Directors and the Executive Leadership Team are present to answer such questions. Shareholders and other interested parties may also correspond in writing with the Company at any time. The external auditor is always present at the AGM. ericsson’s annual general meeting 2011 Including shareholders represented by proxy, 2,263 shareholders attended the AGM held on April 13, 2011, representing approximately 64% of the votes. The meeting was also attended by the Board of Directors, members of the Executive Leadership Team and the external auditor. – Chairman: SEK 3,750,000 (unchanged) – Other non-employed Board members: SEK 825,000 each (previously SEK 750,000) – Chairman of the Audit Committee: SEK 350,000 (unchanged) – Other non-employed members of the Audit Committee: SEK 250,000 each (unchanged) – Chairmen of the Finance and Remuneration Committees: SEK 200,000 each (previously SEK 125,000) – Other non-employed members of the Finance and Remuneration Committees: SEK 175,000 each (previously SEK 125,000) > Approval for part of the Directors’ fees to be paid in the form of synthetic shares > Approval of guidelines for remuneration to the Executive > Leadership Team Implementation of a Long-Term Variable Remuneration Program 2011 > Approval of the Board of Directors’ proposal to amend the articles of association to adjust the description of the objects of the Parent Company to the Group’s strategy to expand into new industry segments. The minutes of the AGM 2011 are available at: http://www.ericsson.com/res/investors/docs/2011/agm/ amg2011_minutes_en.pdf (information on the Ericsson website does not form part of this Report). annual general meeTing 2012 Ericsson’s AGM 2012 will take place on May 3, 2012 at Kistamässan in Kista, Stockholm. Shareholders who wish to have a matter addressed at the AGM may submit their written request to the Board in due time before the AGM. Further information is available on Ericsson’s website. (Information on the Ericsson website does not form part of this Report.) conTacT The Board of direcTors Telefonaktiebolaget LM Ericsson The Board of Directors Secretariat SE-164 83 Stockholm Sweden boardsecretariat@ericsson.com 130 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 130 2012-03-04 15.14 NomINATIoN CommITTEE Work of the nomination committee for the agm 2012 nominaTion commiTTee The Nomination Committee starts its work by going through a checklist of all its duties according to the Code and the appointment procedure, resolved by the AGM. The Committee also sets a time plan for its work ahead. A thorough understanding of Ericsson’s business is paramount to the role of the members of the Committee. Therefore, the President and CEO is invited to, together with the Chairman of the Board, present their views on the Company’s position and strategy. The Committee has been thoroughly informed of the results of the evaluation of the Board work and procedures, including the performance of the Chairman of the Board. From this basis the Committee can make assessments on the competence and experience required by Board members. The Committee has acquainted itself with the assessments made by the Company and the Audit Committee on the quality and efficiency of external auditor work, including recommendations regarding auditors and audit fees. As of February 24, 2012 the Nomination Committee has held six meetings. Shareholders may submit proposals to the Nomination Committee at any time, but should do so in due time before the AGM to ensure that the proposals can be considered by the Committee. Further information is available on Ericsson’s website. (Information on the Ericsson website does not form part of this Report.) conTacT The nominaTion commiTTee Telefonaktiebolaget LM Ericsson The Nomination Committee c/o General Counsel’s Office SE-164 83 Stockholm Sweden nomination.committee@ericsson.com A Nomination Committee was elected by the AGM for the first time in 2001. Since then, each AGM has appointed a Nomination Committee, or resolved on the procedure for appointing the Nomination Committee. The AGM 2011 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 AGM was held > The Chairman of the Board of Directors. As described in the procedure for appointing members to the Nomination Committee, the Committee may include additional members following a request by a shareholder. The request must be justified by changes in the shareholder’s ownership of shares and be received by the Nomination Committee no later than December 31. No fees are paid to the members of the Nomination Committee. members of the nomination committee In addition to the Chairman of the Board of Directors, the current Nomination Committee consists of four representatives appointed by the four shareholders with the largest voting power as of April 29, 2011: > Carl-Olof By (AB Industrivärden, Svenska Handelsbankens Pensionsstiftelse), Chairman of the Nomination Committee > Petra Hedengran (Investor AB) > Caroline af Ugglas (Livförsäkringsaktiebolaget Skandia) > Marianne Nilsson (Swedbank Robur Fonder). 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 remains to propose candidates for election to the Board of Directors. In doing this, the Committee must not only orientate itself on the Company’s strategy and future challenges to be able to assess the competence and experience that is required by the Board; it must also consider all applicable rules on independence of the Board of Directors. The Committee also prepares remuneration proposals for resolution by the AGM to non-employed Directors elected by the AGM and to the auditor. The assignment of the Nomination Committee further includes proposing auditors, whereby candidates are selected in cooperation with the Audit Committee of the Board. The Committee also proposes a candidate for election of the Chairman at the Annual General Meeting. CGRXPARTX1XENX2011_v81.indd 131 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 131 Board of direcTors BoArD of DIrECTors The Board of Directors is ultimately responsible for the organization of Ericsson and the management of Ericsson’s operations. The Board of Directors develops guidelines and instructions for day-to-day operations, managed by the President and CEO. The President and CEO ensures that the Board is updated regularly on events of importance to the Group. This includes updates on business development, results, financial position and the liquidity of the Group. According to the Articles of Association, the Board of Directors shall consist of no less than five and no more than twelve directors, with no more than six deputies. In addition, under Swedish law, trade unions have the right to appoint three directors and their deputies to the Board. Directors serve from the close of one AGM to the close of the next, but can serve any number of consecutive terms. The President and CEO may be elected director of the Board, but under the Swedish Companies Act the President of a public company may not be elected Chairman of the Board. rules and regulations Ericsson strictly follows rules and regulations regarding conflicts of interest. Directors are disqualified from participating in any decision regarding agreements between themselves and Ericsson. The same applies to agreements between Ericsson and any third party or legal entity in which the Board member has an interest. The Audit Committee has implemented a procedure on related-party transactions and 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 12 Directors, including the Chairman of the Board, elected by the shareholders at the AGM 2011 for the period until the close of the AGM 2012. It also includes three employee representatives, each with a deputy, appointed by the trade unions for the same period of time. The President and CEO, Hans Vestberg, is the only Board member who was also a member of Ericsson’s management during 2011. Work procedure 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 in the Articles of Association of the Company. The work procedure is reviewed, evaluated and adopted by the Board as required and at least once a year. independence The Board of Directors and its Committees are subject to a variety of independence requirements. Ericsson applies independence rules in applicable Swedish law, the Code, the NASDAQ New York 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 New York Stock Market Rules that are contrary to Swedish law. The composition of the Board of Directors meets all applicable independence criteria. The Nomination Committee concluded before the AGM 2011 that, for the purposes of the Code, at least six of the 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, Leif Johansson, Ulf J. Johansson, Nancy McKinstry and Michelangelo Volpi. 132 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 132 2012-03-04 15.14 structure of the work of the Board of directors > Budget and financial outlook meeting Board of direcTors A meeting is held for the Board to address budget and financial outlook as well as further analysis of internal and external risks. > fourth quarter and full-year financial results meeting Following the end of the calendar year, the Board holds a meeting which focuses on the financial results of the entire year and handles the fourth-quarter financial report. > annual report meeting The Annual Report meeting closes the yearly cycle of work of the Board of Directors and at this meeting the Board approves the Annual Report. As the Board is responsible for financial oversight, financials are presented and evaluated at each Board meeting. Furthermore, each Board meeting generally includes reports on Committee work by the Chairman of each Committee. In addition, minutes from the Committee meetings are distributed to all Directors prior to the Board meeting. At each Board meeting, the President and CEO reports on business and market developments as well as on the financial performance of the Company. The Board is regularly informed of developments in legal and regulatory matters of importance. The work of the Board follows a yearly cycle. This enables the Board to appropriately address each of its duties and to keep strategy, risk assessment and value creation high on the agenda. > statutory meeting The yearly cycle starts with the statutory Board meeting which is held in connection with the AGM. At this meeting, members of each of the three Committees are appointed and the Board resolves on matters such as signatory power. > first interim report meeting At the next ordinary meeting, the Board handles the interim financial report for the first quarter of the year. > main strategy meeting Various strategic issues are addressed at most of the Board meetings. In accordance with the annual cycle for the strategy process, a main strategy Board meeting is also held, which is in essence dedicated to short and long-term strategies of the Group. Following the Board’s input on and approval of the overall strategy, the strategy is cascaded throughout the entire organization, starting at the Global Leadership Summit with Ericsson’s top 250 managers. > second interim report meeting At the second interim report meeting, the Board convenes to handle the interim financial report for the second quarter of the year. > follow-up strategy and risk management meeting Following the summer, a meeting is held to address particular strategy matters in further detail and to finally confirm the Group strategy. The meeting also addresses the overall risk management of the Group. > Third interim report meeting A Board meeting is held to handle the interim financial report for the third quarter of the year. At this meeting, the results of the Board evaluation are presented to and discussed by the Board. The Board’s annual Work cycle Budget and financial outlook meeting Fourth quarter and full-year financial results meeting > Financial result of the entire year Third interim report meeting > Q3 Financial report > Board work evaluation > Board training Follow-up strategy and risk management meeting Q4 Nov Dec Jan Q1 Feb Annual Report meeting > Board signs the annual report > Board training Oct Sep Aug Q3 Board meetings – annual cycle Mar Apr Statutory meeting (in connection with AGM) > Appointment of Committee Members > Authorization to sign for the Company Jul Jun May Q2 First interim report meeting > Q1 Financial report Second interim report meeting > Q2 Financial report Main strategy meeting CGRXPARTX1XENX2011_v81.indd 133 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 133 Board of direcTors auditor involvement The Board meets with Ericsson’s external auditors at least once a year to receive and consider the auditors’ observations. The auditors report to management on the accounting and financial reporting practices of the Group. The Audit Committee also meets with the auditors to receive and consider observations on the interim reports and the Annual Report. The auditors have 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 2011”. Combined with the internal controls, the Board’s and the auditors’ 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 needs. Introductory training typically includes meetings with the heads of the business units and Group functions, as well as training arranged by NASDAQ OMX Stockholm on listing issues and insider rules. In addition, full- day training sessions are held twice a year for all Directors. These sessions enhance their knowledge of specific operations and issues as appropriate to ensure that the Board has knowledge and understanding at the forefront of technical development and of the business activities of the Group. As a rule, the Board receives Sustainability and Corporate Responsibility training at least once a year. Key focus areas in Board training 2011 were: > Technology, research and thought leadership. Being the thought leader is being the prime driver, while also introducing entirely new thoughts, ideas and concepts > Growth drivers and market trends. Work of the Board of directors in 2011 In 2011, 12 Board meetings were held. For attendance at Board meetings see the table on page 137. Among the matters addressed by the Board this year (apart from regular matters in the annual Board work cycle) were: > A number of acquisitions, including Nortel’s Multiservices Switch business, GDNT in China, Telcordia and the M2M technology platform from Telenor Connexion > Exclusive strategic alliance with Akamai to create mobile cloud acceleration solutions > Acquisition of a Nortel patent portfolio as part of a consortium of technology companies > Continued focus on effects of the general financial uncertainty on the market, including effects of the political unrest in the Middle East and Africa, the earthquake and tsunami in Japan and other natural disasters > Sale of Ericsson’s share of Sony Ericsson to Sony > An increased focus on patents and licensing as a key revenue area with growth opportunities. 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 focus, as well as determining areas where additional competence is needed within the Board. 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 and discussions. In 2011, all the Directors responded to three separate written questionnaires, covering the Director’s individual performance, Board work in general and the Chairman’s performance. The Chairman was not involved in the development or compilation of the questionnaire which related to his performance, nor was he present when his performance was evaluated. The evaluations were thoroughly discussed and an action plan was developed in order to further improve the work of the Board. CommITTEEs of THE BoArD of DIrECTors The Board of Directors has established three Committees: the Audit Committee, the Finance Committee and the Remuneration Committee. Members of each Committee are appointed for one year amongst the Board members in accordance with the Swedish Companies Act and the Code. The task 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. It may also on occasion provide extended authorization to the Committees 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. organizaTion of The Board Work Board of Directors 15 Directors Finance Committee (4 Directors) > Financing > Investing > Customer credits Remuneration Committee (4 Directors) > Remuneration policy > Long-Term Variable Remuneration > Executive compensation Audit Committee (5 Directors) > Oversight over financial reporting > Oversight over internal control > Oversight over auditing 134 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 134 2012-03-04 15.14 Prior to every Board meeting, each Committee submits to the Board minutes from Committee meetings held since the last Board meeting. The Chairman of the Committee also reports on the Committee work at each Board meeting. The Audit Committee has also established the following: > A process for reviewing transactions with related parties > A whistleblower procedure for the reporting of violations relating to accounting, internal control and auditing matters. commiTTees of The Board of direcTors audit committee On behalf of the Board, the Audit Committee monitors the following: > The scope and correctness of the financial statements > Compliance with legal and regulatory requirements Internal control over financial reporting > > Risk management. 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 auditors, the financial statements (including their 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 > 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 Committee is also involved in the preparatory work of proposing candidates for election of the auditor. It also monitors Group transactions and the ongoing performance and independence of the auditors with the aim to avoid conflicts of interest. In order to ensure the auditors’ independence, the Audit Committee has established pre-approval policies and procedures for non-audit related services to be performed by the external auditors. Pre-approval authority may not be delegated to management. memBers of The commiTTees Members of the Committees of the Board of Directors 2011 Audit Committee Finance Committee > Ulf J Johansson (Chairman) > Roxanne S. Austin > Sir Peter L. Bonfield > Jan Hedlund > Sverker Martin-Löf > Leif Johansson (Chairman) > Pehr Claesson > Anders Nyrén > Jacob Wallenberg Remuneration Committee > Leif Johansson (Chairman) > Börje Ekholm > Nancy McKinstry > Karin Åberg Alleged violations are investigated by Ericsson’s internal audit function together with the relevant Group function. Information regarding any incident is reported to the Audit Committee. Reports include measures taken, details of the responsible Group function and the status of any investigation. memBers of The audiT commiTTee The Audit Committee consists of five Board members appointed by the Board. In 2011, the Audit Committee comprised Ulf J. Johansson (Chairman of the Committee), Roxanne S. Austin, Sir Peter L. Bonfield, Jan Hedlund and Sverker Martin-Löf. The composition of the Audit Committee meets all applicable independence requirements. Each member is financially literate and familiar with the accounting practices of an international company such as Ericsson. The Board of Directors has determined that Ulf J. Johansson, Roxanne S. Austin, Sir Peter L. Bonfield and Sverker Martin-Löf all satisfy the requirement of being an audit committee financial expert, in accordance with the Sarbanes-Oxley Act, Section 407. Each of them fulfill relevant US independence requirements. Former authorized public accountant Peter Markborn has been appointed external expert advisor to assist and advise the Audit Committee. Work of The audiT commiTTee in 2011 The Audit Committee held 8 meetings in 2011. Directors’ attendance is reflected in the table on page 137. During the year, the Audit Committee reviewed the scope and results of external financial audits and the independence of the external auditor. It also monitored the external audit fees and approved non-audit services performed by the external auditor in accordance with 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 monitored the continued compliance with the Sarbanes-Oxley Act as well as the internal control and risk management process. It also reviewed certain related-party transactions in accordance with its established process. CGRXPARTX1XENX2011_v81.indd 135 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 135 To achieve this, the Committee holds annual remuneration reviews with Company representatives. These reviews determine the strategic direction, and align program designs and remuneration policies with the business objectives. Consideration is given to trends in remuneration, legislative changes, disclosure rules and the general global environment surrounding executive remuneration. 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 2011, the Remuneration Committee comprised: Leif Johansson (Chairman of the Committee), Börje Ekholm, Nancy McKinstry and Karin Åberg. Piia Pilv was appointed by the Remuneration Committee in September 2011 as an independent expert advisor to assist the Committee, particularly regarding international trends and developments. Piia Pilv replaced Gerrit Aronson as expert advisor. Work of The remuneraTion commiTTee in 2011 The Remuneration Committee held 8 meetings in 2011. Directors’ attendance is reflected in the table on page 137. The Committee reviewed and prepared for resolution by the Board a proposal for the Long-Term Variable remuneration program 2011. This was approved by the AGM 2011. The Committee further resolved on salaries and Short Term Variable remuneration for 2011 for CEO direct reports. It prepared remuneration to the President and CEO, for resolution by the Board. The Committee also prepared a remuneration policy and guidelines for remuneration to the Executive Leadership Team, which were subsequently referred by the Board to the AGM for approval. Towards the end of the year, the Committee concluded its analysis of the current Long-Term Variable remuneration structure and remuneration policy. The resulting proposals will be referred to the AGM 2012 for resolution. For further information on fixed and variable remuneration, please see Notes to the Consolidated Financial Statements – Note C28 “Information Regarding Members of the Board of Directors, the Group management and Employees” and the “Remuneration Report” included in the Annual Report. commiTTees of The Board of direcTors 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 > 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 2011, the Finance Committee comprised: Leif Johansson (Chairman of the Committee), Pehr Claesson, Anders Nyrén and Jacob Wallenberg. Work of The finance commiTTee in 2011 The Finance Committee held 6 meetings in 2011. Directors’ attendance is reflected in the table on page 137. During the year, the Finance Committee has approved numerous customer finance credit arrangements and reviewed a number of potential mergers and acquisitions from a financial perspective. As a result of the uncertainty on the financial markets and the macro-economic development, the Finance Committee has focused particularly on discussing and securing an adequate capital structure, cash flow and cash-generating ability. It has also continuously monitored Ericsson’s financial position and credit exposure. remuneration committee The Remuneration Committee’s main responsibility is to prepare for resolution by the Board of Directors matters regarding salary and other remuneration, including 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, monitoring and evaluating strategies and general guidelines for employee remuneration, including Short-Term Variable remuneration (“STV”) and pension benefits > Reviewing the results of Short-Term Variable remuneration plans before pay out > Preparation of the Long-Term Variable remuneration (“LTV”) program for referral to the Board and resolution by the General Meeting of shareholders > Preparation of targets for Short-Term Variable remuneration for the following year, for resolution by the Board. 136 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX1XENX2011_v81.indd 136 2012-03-04 15.14 remuneraTion To Board memBers rEmuNErATIoN To BoArD mEmBErs Remuneration to Board members not employed by the Company is proposed by the Nomination Committee for resolution by the AGM. The AGM 2011 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 2011, please refer to Notes to the Consolidated Financial Statements – Note C28 “Information Regarding Members of the Board of Directors, the Group management and Employees” in the Annual Report. The AGM 2011 also approved the Nomination Committee’s proposal that 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 director’s right to receive payment with regard to allocated synthetic shares occurs, as a main rule, after the publication of the Company’s year-end financial statement during the fifth year following the general meeting which resolved on the allocation of the synthetic shares. The purpose of paying part of the Board of Directors’ 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 AGM 2011 at www.ericsson.com/thecompany/investors/general-meetings. (Information on the Ericsson website does not form part of this Report.) direcTors’ aTTendance and fees 2011 fees resolved by the agm 2011 number of Board/committee meetings attended Board member Leif Johansson 2) Michael Treschow 3) Sverker Martin-Löf 4) Jacob Wallenberg 2) Marcus Wallenberg 3) Roxanne S. Austin Sir Peter L. Bonfield Börje Ekholm Ulf J. Johansson Nancy McKinstry Anders Nyrén Carl-Henric Svanberg Hans Vestberg Michelangelo Volpi Pehr Claesson 5) Anna Guldstrand 7) Jan Hedlund Karin Åberg Kristina Davidsson Karin Lennartsson Roger Svensson 8) Total number of meetings Board fees 1) committee fees Board audit committee finance committee remuneration committee 3,750,000 400,000 250,000 175,000 250,000 250,000 175,000 350,000 175,000 175,000 – 825,000 825,000 – 825,000 825,000 825,000 825,000 825,000 825,000 825,000 – 825,000 18,000 6) 6,000 6) 16,500 6) 18,000 6) 18,000 6) 18,000 6) 12,000 6) 8 4 11 8 4 12 12 12 12 11 12 10 12 11 12 4 11 12 12 12 8 12 3 2 3 3 6 3 3 6 5 3 8 8 7 8 5 8 8 8 7 8 1) Non-employed Directors can choose to receive part of their Board fee (exclusive of Committee fees) in the form of synthetic shares. 2) Elected Board member as of April 13, 2011. 3) Resigned as Board member as of April 13, 2011. 4) Member of the Audit Committee since April 13, 2011. 5) Member of the Finance Committee since April 13, 2011. 6) Employee representative Board members and their deputies are not entitled to a Board fee but a compensation in the amount of SEK 1,500 per attended Board meeting. 7) Resigned as employee representative as of April 13, 2011. 8) Appointed deputy employee representative as of April 13, 2011. CGRXPARTX1XENX2011_v81.indd 137 2012-03-04 15.14 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 137 MEMBERS OF THE BOARD OF DIRECTORS MeMbers of the board of directors Board members elected by the AGM 2011 Leif Johansson (first elected 2011) Chairman of the Board of Directors, Chairman of the Remuneration Committee and of the Finance Committee Born 1951. Master of Science in Engineering, Chalmers University of Technology. Board Chairman: European Round Table of Industrialists and the International Advisory Board of the Nobel Foundation. Board Member: Svenska Cellulosa Aktiebolaget SCA, the Confederation of Swedish Enterprise and Ecolean AB. Sverker Martin-Löf (first elected 1993) Deputy Chairman of the Board of Directors, Member of the Audit Committee Born 1943. Doctor of Technology and Master of Engineering, Royal Institute of Technology, Stockholm. Board Chairman: Skanska AB, Svenska Cellulosa Aktiebolaget SCA, SSAB and AB Industrivärden. Board Member: Svenska Handelsbanken AB. Holdings in Ericsson 1): 10,400 Class B shares. Holdings in Ericsson 1): 17,933 Class B shares. Principal work experience and other information: President and CEO of AB Volvo 1997-2011. Executive Vice President of AB Electrolux 1988-1991, President 1991-1994 and President and CEO of AB Electrolux 1994-1997. Member of the Royal Swedish Academy of Engineering Sciences. Holds honorary Doctorates at Blekinge Institute of Technology and the University of Gothenburg. Awarded the large gold medal of the Royal Swedish Academy of Engineering Sciences in 2011. 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. Jacob Wallenberg (first elected 2011) Deputy Chairman of the Board of Directors, Member of the Finance Committee Born 1956. Bachelor of Science in Economics and Master of Business Administration, Wharton School, University of Pennsylvania, Officer of the Reserve, Swedish Navy. Board Chairman: Investor AB. Deputy Board Chairman: Atlas Copco AB, SAS AB and SEB Skandinaviska Enskilda Banken AB (SEB). Board member: ABB Ltd., The Coca-Cola Company, The Knut and Alice Wallenberg Foundation and Stockholm School of Economics. Holdings in Ericsson 1): 750 Class A shares and 3,413 Class B shares. Principal work experience and other information: Chairman of the Board of Investor AB since 2005. Extensive experience in banking and finance, including experience from the commercial banks JP Morgan, New York and SEB. Appointed President and CEO of SEB in 1997 and appointed Chairman of SEB’s Board of Directors in 1998. Executive Vice President and CFO of Investor AB 1990-1993. Chairman of IBLAC (Mayor of Shanghai’s International Business Leaders Advisory Council) and a member of The European Round Table of Industrialists. Roxanne S. Austin (first elected 2008) Member of the Audit Committee Born 1961. Bachelor of Business Administration in Accounting, University of Texas, San Antonio, USA. Board Member: Abbott Laboratories, Teledyne Technologies Inc. and Target Corporation. Holdings in Ericsson 1): 3,000 Class B shares. Principal work experience and other information: President of Austin Investment Advisors since 2004. President and CEO of Move Networks Inc. 2009–2010. President and CEO of DIRECTV 2001–2003. Corporate Senior Vice President and CFO of Hughes Electronics Corporation 1997–2000, which she joined in 1993. Previously 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. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 138 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 138 2012-03-01 09.50 Sir Peter L. Bonfield (first elected 2002). Member of the Audit Committee Born 1944. Honors degree in Engineering, Loughborough University, Leicestershire, UK. Board Chairman: NXP Semiconductors N.V. Deputy Board Chairman: British Quality Foundation. Board Member: Mentor Graphics Inc., Sony Corporation, TSMC and Actis Capital LLP. Holdings in Ericsson 1): 4,400 Class B shares. Principal work experience and other information: CEO and Chairman of the Executive Committee of British Telecommunications plc. 1996–2002. Chairman and CEO of ICL plc 1985–1996. Positions with STC plc and Texas Instruments Inc. Member of the Advisory Boards of New Venture Partners LLP, the Longreach Group and Apax Partners LLP. Board Mentor of CMi. Senior Advisor, Rothschild, London. Fellow of the Royal Academy of Engineering. 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. 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. MEMBERS OF THE BOARD OF DIRECTORS 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 Chairman: Royal Institute of Technology, Stockholm. Board Member: Investor AB, AB Chalmersinvest, EQT Partners AB, Husqvarna AB, Nasdaq OMX Group Inc. and Scania AB. Holdings in Ericsson 1): 30,760 Class B shares. Principal work experience and other information: President and CEO of Investor AB since 2005. Formerly Head of Investor Growth Capital Inc. and New Investments. Previous positions at Novare Kapital AB and McKinsey & Co Inc. 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: TiasNimbas Business School, Sanoma Corporation. Holdings in Ericsson 1): 4,000 Class B shares. 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 Board of Overseers of Columbia Business School and the Advisory Board of the Harrington School of Communication and Media. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 139 CGRXPARTX2XENX2011_v76.indd 139 2012-03-01 09.50 MEMBERS OF THE BOARD OF DIRECTORS 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: Sandvik AB. Deputy Board Chairman: Svenska Handelsbanken AB. Board Member: Svenska Cellulosa Aktiebolaget SCA, AB Industrivärden, SSAB, AB Volvo, Ernströmgruppen and Stockholm School of Economics. Holdings in Ericsson 1): 6,686 Class B shares. Principal work experience and other information: President and CEO of Industrivärden since 2001. CFO and EVP of Skanska AB 1997–2001. Director Capital Markets of Nordbanken 1996–1997. CFO and EVP of Securum AB 1992–1996. Managing Director of OM International AB 1987–1992. Earlier positions at STC Scandinavian Trading Co AB and AB Wilhelm Becker. Carl-Henric Svanberg (first elected 2003) Born 1952. Master of Science, Linköping Institute of Technology. Bachelor of Science in Business Administration, University of Uppsala. Board Chairman: BP p.l.c. Board Member: Melker Schörling AB. Holdings in Ericsson 1): 3,234,441 Class B shares. Principal work experience and other information: President and CEO of Telefonaktiebolaget LM Ericsson 2003-2009. President and CEO of Assa Abloy AB 1994–2003. Various positions within Securitas AB 1986–1994 and Asea Brown Boveri (ABB) 1977–1985. Member of the Steering Committee of the Global Alliance for Information and Communication Technologies and Development (GAID), the External Advisory Board of the Earth Institute at Columbia University and the Advisory Board of Harvard Kennedy School. Holds Honorary Doctorates at Luleå University of Technology and Linköping University. Recipient of the King of Sweden’s medal for his contribution to Swedish industry. Hans Vestberg (first elected 2010) Born 1965. Bachelor of Business Administration and Economics, University of Uppsala. Board Chairman: ST-Ericsson and Svenska Handbollförbundet. Board Member: Sony Ericsson Mobile Communications AB and Thernlunds AB. Holdings in Ericsson 1): 116,535 Class B shares. Principal work experience and other information: President and CEO of Telefonaktiebolaget LM Ericsson since January 1, 2010. First Executive Vice President until December 31, 2009. Chief Financial Officer and Head of Group Function Finance until October 31, 2009. Previously Executive Vice President and Head of Business Unit Global Services. Various positions in the Group since 1988, including Vice President and Head of Market Unit Mexico and Head of Finance and Control in USA, Brazil and Chile. International advisor to the Governor of Guangdong, China and co-chairman of the Russian-Swedish Business Council. Member of the Broadband Commission for Digital Development, heading the broadband and climate-change workstream and member of the advisory board of the Digital Health Initiative. Michelangelo Volpi (first elected 2010) Born 1966. Bachelor of Science in Mechanical Engineering and Masters in Manufacturing Systems Engineering from Stanford University, USA. MBA from the Stanford Graduate School of Business, USA. Board Member: None. Holdings in Ericsson 1): None. Principal work experience and other information: Partner at Index Ventures since July 2009. Previously CEO of Joost Inc.. Various positions in Cisco from 1994-2007, including Senior Vice President & General Manager of the Routing and Service Provider Technology Group and Chief Strategy Officer. Has also worked for Hewlett Packard in the optoelectronics division. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 140 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 140 2012-03-01 09.50 MeMbers of the board of directors Board members and deputies appointed by the unions MEMBERS OF THE BOARD OF DIRECTORS Pehr Claesson (first appointed 2008) Jan Hedlund (first appointed 1994) Karin Åberg (first appointed 2007) Employee representative, Member of the Finance Committee Employee representative, Member of the Audit Committee Employee representative, Member of the Remuneration Committee Born 1946. Appointed by the union IF Metall. Born 1959. Appointed by the union Unionen. Born 1966. Appointed by the union The Swedish Association of Graduate Engineers. Holdings in Ericsson 1): 767 Class B shares. Holdings in Ericsson 1): 1,259 Class B shares. Employed since 1997. Working with marketing and communication for Consulting and Systems Integration within Business Unit Global Services. Employed since 1982. Previously working with model production mechanics within Business Unit Networks. Currently working full time as union representative. Holdings in Ericsson 1): 2,289 Class B shares. Employed since 1995. Working as a Service Engineer within the IT organization. Kristina Davidsson (first appointed 2006) Karin Lennartsson (first appointed 2010) Roger Svensson (first appointed 2011) Deputy employee representative Deputy employee representative Deputy employee representative Born 1955. Appointed by the union IF Metall. Born 1957. Appointed by the union Unionen. Holdings in Ericsson 1): 1,369 Class B shares. Holdings in Ericsson 1): 404 Class B shares. Employed since 1995. Previously working as repairer within Business Unit Networks and currently working full time as union representative. Employed since 1976. Working as Process Expert within Group Function Finance – Process Management. Born 1971. Appointed by the union The Swedish Association of Graduate Engineers. Holdings in Ericsson 1): 6,031 Class B shares. Employed since 1999. Working as Senior Specialist Test Strategy Power Amplifier within Business Unit Networks. Hans Vestberg was the only Director who held an operational management position at Ericsson in 2011. No Director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person. At the Annual General Meeting 2011, Leif Johansson replaced Michael Treschow as Chairman of the Board of Directors and Jacob Wallenberg replaced Marcus Wallenberg as Deputy Chairman of the Board of Directors. Anna Guldstrand resigned as employee representative of the Board of Directors as of the date of the Annual General Meeting 2011 and Pehr Claesson was appointed employee representative as of the same date (previously deputy employee representative). Roger Svensson was appointed new deputy employee representative as of the date of the Annual General Meeting 2011. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 141 CGRXPARTX2XENX2011_v76.indd 141 2012-03-01 09.50 MANAGEMENT ManageMent The President/CEO and the Executive Leadership Team 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 Executive Leadership Team (ELT). In addition to the President and CEO, the ELT consists of heads of Group functions, heads of business units and heads of two of Ericsson’s regions. Up until December 21, 2011, the Chief Brand Officer was also part of the ELT. The role of the ELT is to: > To fulfill the objectives of Ericsson’s major stakeholders (customers, shareholders, employees) > Within established risk limits and with reliable internal control > In compliance with relevant applicable laws, listing requirements, governance codes and corporate social responsibilities. The EGMS is founded on ISO 9001 (International Standard for Quality management system) but is designed as a dynamic governance system, enabling Ericsson to adapt the system to evolving demands and expectations, including new legislation as well as customers’ and other stakeholders’ requirements. The management system is an important foundation and is continuously evaluated and improved. > Establish a strong corporate culture, a long-term vision and Certificates are evidence from an independent body verifying 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 to the Executive Leadership Team A remuneration policy including guidelines on remuneration to the ELT was approved by the AGM 2011. For further information on fixed and variable remuneration, see the Remuneration Report and Notes to the Consolidated Financial Statements – Note C28, “Information Regarding Members of the Board of Directors, the Group management and Employees” in the Annual Report. that the operations fulfill defined requirements. As the EGMS is a global system, group-wide certificates can be issued by a third party certification body proving that the system is efficient throughout the whole organization. Ericsson has a number of certificates and is currently globally certified to ISO 9001 (Quality) and ISO 14001 (Environment) and is in the process of obtaining global OHSAS 18001 (Health & Safety) certification. Ericsson is also ISO 27001 (information security) certified in selected units. The EGMS comprises three elements: > Management and control > Ericsson business processes > Organization and resources. MANAGEMENT AND CONTROL Strategy and target setting The Ericsson Group Management System Ericsson has a global management system, the Ericsson Group Management System (EGMS) to drive corporate culture and to ensure that the business is managed: Ericsson’s strategy and target setting processes consider the demands and expectations of customers as well as other key stakeholders. The process facilitates the alignment of objectives and their measurement in activities at all levels of the organization. ERICSSON GROUP MANAGEMENT SySTEM Demands and Expectations Objectives Strategies Performance Improvement Customers Key Stakeholders Business Environment Management and Control Vision Policies and Directives Corporate Culture Ericsson Business Processes IT Organization and Resources Satisfaction through Value Deliverables Results Performance Evaluation 142 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 142 2012-03-01 09.50 Ericsson uses balanced scorecards as tools for translating strategic objectives into a set of performance indicators for its operational units. Based on the annual strategy work, these scorecards are updated with targets for each unit for the next year and are communicated throughout the organization. Group policies and directives Group-wide policies and directives govern how the organization works and are core elements in managing and controlling Ericsson. The policies and directives include a Code of Business Ethics, a Code of Conduct and accounting and reporting directives to fulfill external reporting requirements and the Sarbanes-Oxley Act. The Group Steering Documents Committee secures that the policies and directives cover relevant issues; that they are aligned and consistent with Group strategies, values and structures; and that they are not in conflict with legal and regulatory requirements. ERICSSON BUSINESS PROCESSES As a market leader, Ericsson utilizes the competitive advantages that are gained through global scale and has implemented common processes and IT tools across all operational units worldwide. Customer requirements are identified, clarified and formalized in Ericsson Business Processes where requirements transform from theory to reality. Through management and continuous improvement of processes and IT tools, Ericsson reduces costs with efficient and effective process flows and with standardized internal controls and performance indicators. ORGANIzATION AND RESOURCES Company structure Ericsson is operated in two dimensions: one operational structure and one legal structure. The operational structure aligns accountability and authority regardless of country borders and supports the process flow with cross-country operations. There are four business units and ten regions. Group functions coordinate Ericsson’s strategies, STRATEGIC, TARGET SETTING AND RISK MANAGEMENT CyCLE MANAGEMENT operations and resource allocation and define the necessary directives, processes and organization for the effective governance of the Group. The legal structure is the basis for legal requirements and responsibility as well as for tax and statutory reporting purpose. There are more than 200 legal entities within the Ericsson Group with representation (via legal entities, branch and representative offices) in more than 140 countries. Risk management Ericsson’s risk management is integrated with the business and its operational processes, and is a part of the EGMS to ensure accountability, effectiveness, efficiency, business continuity and compliance with corporate governance, legal and other requirements. The Board of Directors is also actively engaged in the Company’s risk management. Risks related to set long-term objectives are discussed and strategies are 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. Certain transactional risks require specific Board approval, e.g. acquisitions, management remuneration, borrowing or customer finance in excess of pre-defined limits. STRATEGIC AND TACTICAL RISKS Strategic risks constitute the highest risk to the Company if not managed properly as they could have a long-term impact. Ericsson therefore reviews its long-term objectives, main strategies and business scope on an annual basis and continuously works on its tactics to reach these objectives and to mitigate any risks identified. 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. The strategy process in the Company is well established and involves regions, business units and Group functions. The strategy is finally summarized and discussed in a yearly Global Leadership Summit with approximately 250 managers from all Board Target Approval Review of one-year risks Group Management Strategy directives Quantitative and qualitative situation analysis Target Setting Related risk identification and mitigation (12 month horizon) Region & Account Planning Board Strategy Approval Review of long-term risks Q4 Nov Dec Jan Q1 Feb Oct Sep New Business Development Mar Apr Q3 Aug May Q2 Jul Jun Group Strategy Development (five-year perspective) Board quarterly risk monitoring Business Unit & Group Function strategy planning Strategic risk identification and mitigation Leadership Summit on Strategy Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 143 CGRXPARTX2XENX2011_v76.indd 143 2012-03-01 09.50 MANAGEMENT parts of the business. By involving all parts of the business in the process, potential risks are identified early and mitigating actions can be incorporated in the strategy and in the annual target process following the finalization of the strategy. Statements – Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments” in the Annual Report. Technology development, industry and market fundamentals and the development of the economy are key components in the evaluation of risks related to Ericsson’s long-term objectives. The outcome from the strategy process forms the basis for the annual target process which involves regions, business units and Group functions. Risks and opportunities linked to the targets are identified as part of this process together with actions to mitigate the identified risks. Follow-up of targets, risks and mitigating actions are reported and discussed continuously in business unit and region steering groups and are reviewed by the Board of Directors. The Company has been using the Balanced Scorecard concept to structure its targets, risks and opportunities for many years. For 2011 risks and opportunities were identified and analyzed in the three balanced scorecard perspectives. For more information on risks related to Ericsson’s business, see the chapter “Risk Factors” in the Annual Report. 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 are centrally coordinated, such as information security, IT security, corporate responsibility and business continuity and insurable risks. 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. 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 COMPLIANCE RISKS Ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business Ethics and a Code of Conduct. 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, such as 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 PwC, and ISO/management system audits by Det Norske Veritas, DNV and Intertek. Internal audits are performed by the company’s internal audit function which reports to the Audit Committee. Audits of suppliers are also conducted in order to secure compliance with agreed key performance indicators and Ericsson’s Code of Conduct which is mandatory for suppliers to the Ericsson Group. RISK MITIGATION Significant activities ongoing in order to mitigate risks are: > Establish flexibility to cost-effectively accommodate for fluctuations in demand > Conduct regular Supplier Code of Conduct audits > Efficient business continuity management > Corporate governance training as needed > Continuous monitoring of information systems to guard against data breaches. PROCESS TO IDENTIFy AND MANAGE OPERATIONAL RISKS FOR REGIONS, BUSINESS UNITS AND GROUP FUNCTIONS Leadership Team meeting and workshop Preparations Establish gross list Prioritize risks Assign responsibility Manage risks > Group similar risks together > Rank > Prioritize > Assign responsibility for > Develop mitigation managing each top risk to a member of the leadership team actions (member of the leadership team) > Secure risk reviews in connection with performance reviews Compile input: > Business plan/growth plan SWOT and risks > Previously identified risks > Scorecard and target descriptions > Preparatory meeting/ workshop > Business continuity management for local operation Consider each scorecard perspective Consider risk areas to make additions to list: > External environment (e.g. political risk) > Customers > Competitors > Suppliers/subcontractors > Internal operations > Competence > Contractual conditions > Product roadmaps 144 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 144 2012-03-01 09.50 MeMbers of the eXecUtiVe LeadershiP teaM MEMBERS OF THE EXECUTIVE LEADERSHIP TEAM 1. Hans Vestberg 6. Per Borgklint 2. Jan Frykhammar 7. Bina Chaurasia 11. Helena Norrman 12. Mats H. Olsson 3. Magnus Mandersson 8. Håkan Eriksson 13. Rima Qureshi 4. Johan Wibergh 5. Cesare Avenia 9. Douglas L. Gilstrap 14. Angel Ruiz 10. Nina Macpherson 15. Jan Wäreby 2 13 3 4 1 11 14 15 9 12 6 10 8 7 5 CGRXPARTX2XENX2011_v76.indd 145 2012-03-01 09.50 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 145 MEMBERS OF THE EXECUTIVE LEADERSHIP TEAM Hans Vestberg President and CEO (since 2010). Born 1965. Bachelor of Business Administration and Economics, University of Uppsala. Johan Wibergh Executive Vice President (since 2010) and Head of Business Unit Networks (since 2008). Born 1963. Master of Computer Science, Linköping Institute of Technology. Board Chairman: ST-Ericsson and Svenska Handbollförbundet. Board member: Telefonaktiebolaget LM Ericsson, Sony Ericsson Mobile Communications AB and Thernlunds AB. Board member: ST-Ericsson, Confederation of Swedish Enterprise, Royal Institute of Technology and Teknikföretagen. Deputy board member: Sony Ericsson Mobile Communications AB. Holdings in Ericsson 1): 116,535 Class B shares. Holdings in Ericsson 1): 28,655 Class B shares. Background: First Executive Vice President until December 31, 2009. Chief Financial Officer and Head of Group Function Finance until October 31, 2009. Previously Executive Vice President and Head of Business Unit Global Services. Various positions in the Group since 1988, including Vice President and Head of Market Unit Mexico and Head of Finance and Control in USA, Brazil and Chile. International advisor to the Governor of Guangdong, China and co-chairman of the Russian-Swedish Business Council. Member of the Broadband Commission for Digital Development, heading the broadband and climate-change workstream, and member of the advisory board of the Digital Health Initiative. Jan Frykhammar Executive Vice President and Chief Financial Officer and Head of Group Function Finance (since 2009). Born 1965. Background: President of Ericsson Brazil, President of Market Unit Nordic and Baltics and Vice President and Head of Sales at Business Unit Global Services. Cesare Avenia Chief Brand Officer (from 2010 up until December 21, 2011). Born 1950. Bachelor of Electronics engineering, University of Naples, Italy. Board member: Sony Ericsson Mobile Communications Italy S.p.A, member of the Steering Committee for Innovation and Technology Services within the Association of Telecom service providers within Confindustria, the National Association of Industrialists in Italy. Holdings in Ericsson 1): 11,704 Class B shares. Background: Previously Head of Market Unit Italy and Market Unit South East Europe. Bachelor of Business Administration and Economics, University of Uppsala. Per Borgklint Board member: Sony Ericsson Mobile Communications AB, ST-Ericsson and the Swedish International Chamber of Commerce. Senior Vice President and Head of Business Unit Multimedia (since June 7, 2011). Holdings in Ericsson 1): 6,837 Class B shares. Born 1972. Background: Previously Senior Vice President and Head of Business Unit Global Services. Various positions within Ericsson including 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. Master of Science in Business Administration, Jönköping International Business School. Holdings in Ericsson 1): None. Background: Previously CEO of Net1 (Ice.net), Canal Plus Nordic and Versatel. Has also held several leading positions at Tele2. Magnus Mandersson Executive Vice President (since November 1, 2011) and Head of Business Unit Global Services (since 2010). Born 1959. Bina Chaurasia Senior Vice President and Head of Group Function Human Resources and Organization (since 2010). Bachelor of Business Administration, University of Lund. Born 1962. Deputy board member: Sony Ericsson Mobile Communications AB. Holdings in Ericsson 1): 12,875 Class B shares. Background: Previously Head of Business Unit CDMA, Market Unit Northern Europe, Global Customer Account Deutsche Telekom AG and Product Area Managed Services. Has also been President and CEO of SEC/Tele2 Europe and COO of Millicom International Cellular S.A. Master of Science in Management and Human Resources, Ohio State University and Master of Arts in Philosophy, University of Wisconsin. Holdings in Ericsson 1): 14,735 Class B shares. Background: Joined Ericsson from Hewlett Packard, where she was Vice President of Global Talent Management. Has held senior HR leadership roles at Gap, Sun Microsystems and PepsiCo/Yum. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 146 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 146 2012-03-01 09.50 MEMBERS OF THE EXECUTIVE LEADERSHIP TEAM Håkan Eriksson Mats H. Olsson Senior Vice President, Chief Technology Officer, Head of Group Function Technology & Portfolio Management (since 2003) and Head of Ericsson in Silicon Valley (since 2010). Born 1961. Master of Science and Honorary Ph D, Linköping Institute of Technology. Board member: Vestas Wind Systems A/S. Holdings in Ericsson 1): 40,696 Class B shares. Background: Previously Senior Vice President and Head of Research and Development. Has held various positions within Ericsson since 1986. Member of the Royal Swedish Academy of Engineering Sciences. Douglas L. Gilstrap Senior Vice President and Head of Group Function Strategy (since 2009). Born 1963. Bachelor of Accounting, University of Richmond and Master of Business Administration, Emory University, Atlanta. Executive program at INSEAD, France. Board member: TM Forum. Deputy board member: Sony Ericsson Mobile Communications AB, ST-Ericsson. Holdings in Ericsson 1): 5,069 Class B shares. Background: Has held various global managerial positions within the telecommunications sector for more than 15 years. Head of Region China & North East Asia (since 2010). Born 1954. Master of Business Administration from the Stockholm School of Economics. Board member: Sony Ericsson Mobile Communications (China) Co. Ltd. Holdings in Ericsson 1): 50,547 Class B shares. Background: Also International Economic Advisor to a number of Chinese provincial and municipal governments. Previously Head of Market Unit Greater China. Has held various executive positions across Asia-Pacific over the last 25 years. Appointed President of Ericsson Greater China in 2004, with overall responsibility for Mainland China, Hong Kong, Macao and Taiwan. Rima Qureshi Senior Vice President and Head of Business Unit CDMA Mobile Systems (since 2010). Born 1965. Bachelor of Information Systems and Master of Business Administration, McGill University, Montreal, Canada. Board member: MasterCard Incorporated. Holdings in Ericsson 1): 3,477 Class B shares. Background: Also serves as head of Ericsson Response. Previously Vice President of Strategic Improvement Program and Vice President Product Area Customer Support. Has held various positions within Ericsson since 1993. Nina Macpherson Angel Ruiz Senior Vice President, General Counsel and Head of Group Function Legal Affairs (since January 1, 2011) Head of Region North America (since 2010). Born 1956. Born 1958. Master of Laws, LL M, University of Stockholm. Board member: The Swedish Anti-Corruption Institute and the Association for Listed Companies. Bachelor of Electrical Engineering, University of Central Florida and Master of Management Science and Information Systems, Johns Hopkins University, USA. Board member: CTIA, Sony Ericsson Mobile Communications (USA) Inc. Holdings in Ericsson 1): 4,508 Class B shares. Holdings in Ericsson 1): 23,023 Class B shares. Background: Previously Vice President and Deputy Head of Group Function Legal Affairs at Ericsson. Previous positions also include private practice and in-house attorney. Member of the Swedish Securities Council. Background: Joined Ericsson in 1990 and has held a variety of sales and managerial positions within the Company, including heading up the global account teams for Cingular/SBC/BellSouth (now AT&T). Was appointed President of Ericsson North America in 2001. Helena Norrman Jan Wäreby Senior Vice President and Head of Group Function Communications (since May 23, 2011). Senior Vice President and Head of Sales and Marketing (since January 1, 2011). Born 1970. Master of International Business Administration, Linköping University. Holdings in Ericsson 1): 4,619 Class B shares. Background: Previously Vice President, Communications Operations at Group Function Communications at Ericsson. Has held various positions within Ericsson’s global communications organization since 1998. Previous positions as communications consultant. Born 1956. Master of Science, Chalmers University, Göteborg. Board member: Sony Ericsson Mobile Communications AB, ST-Ericsson. Holdings in Ericsson 1): 55,617 Class B shares. Background: Senior Vice President and Head of Business Unit Multimedia and Executive Vice President and Head of Sales and Marketing for Sony Ericsson Mobile Communications. Up until May 23, 2011, Henry Sténson, former Senior Vice President and Head of Group Function Communications, was a member of the Executive Leadership Team. 1) The number of shares reflects ownership as of December 31, 2011 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 147 CGRXPARTX2XENX2011_v76.indd 147 2012-03-01 09.50 AUDITORS 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. Pursuant to the Swedish Companies Act, the mandate period of an auditor shall be one year, unless the Articles of Association provides for a longer mandate period up to four years. The auditors report to the shareholders at General Meetings. The duties of the auditors include the following: > Updating the Board of Directors regarding the planning, scope and content of the annual audit > Examining the interim and year-end financial statements to assess accuracy and completeness of the accounts and adherence to accounting standards and policies > Advising 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 this Corporate Governance Report. All Ericsson’s quarterly financial reports are reviewed by the auditors. Current auditors PricewaterhouseCoopers AB was elected auditor at the AGM 2011 for a period of one year, i.e. until the close of the AGM 2012. PricewaterhouseCoopers AB has appointed Peter Nyllinge, Authorized Public Accountant, to serve as auditor in charge. Fees to the auditors Ericsson paid the fees (including expenses) for audit- related and other services listed in the table in Notes to the Consolidated Financial Statements – Note C30, “Fees to Auditors” in the Annual Report. internaL controL oVer financiaL rePorting 2011 This section has been prepared in accordance with the Annual Accounts Act and the Swedish Corporate Governance Code 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 as well as management’s assessment of the effectiveness of the controls. In order to support high quality reporting and to meet the requirement of SOX, the Company has implemented detailed documented controls and testing and reporting procedures based on 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 2011, the Company has included operations of acquired entities as well as continued to improve the design and execution of its financial reporting controls. 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 – enhancing understanding of the economic drivers and operational performance of the business, building 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 that 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. 148 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 148 2012-03-01 09.50 Ericsson’s website (www.ericsson.com/investors) comprises comprehensive information on the Group, including: > An archive of annual and interim reports > On-demand access to recent news > Copies of presentations given by senior management at industry conferences. 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 is an aggregation of components such as a control environment, risk assessment, control activities, information and communication and monitoring. INTERNAL CONTROL OVER FINANCIAL REPORTING 2011 (Information on the Ericsson website does not form part of this Report.) Disclosure controls and procedures Ericsson has controls and procedures in place to ensure timely information disclosure under applicable laws and regulations, including the US Securities Exchange Act of 1934 and under agreements with NASDAQ OMX Stockholm and NASDAQ New York. 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. The Disclosure Committee comprises members with various expertise. It 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, 2011. During the period covered by the Annual Report 2011, 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. Control environment The Company’s internal control structure is based on the division of tasks 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 > 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. The management of each reporting legal entity, region and business unit is supported by a financial controller function with execution of controls related to transactions and reporting. The financial controller functions are organized in a number of Company Control Hubs, each supporting a number of legal entities within a geographical area. A financial controller function is also established on Group level, reporting to the CFO. Risk assessment Risks of material misstatements in financial reporting may exist 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, CGRXPARTX2XENX2011_v76.indd 149 2012-03-01 09.50 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 149 INTERNAL CONTROL OVER FINANCIAL REPORTING 2011 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, region 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. It maintains detailed documentation on internal controls related to accounting and financial reporting. It also keeps records on the monitoring of the execution and results of such controls. This 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. In order to secure compliance, governance and risk management in the areas of legal entity accounting and taxation, as well as securing funding and equity levels, the Company operates through a Company Control hub structure, covering subsidiaries in each respective geographical area. Based on a common IT platform, a common chart of account and common master data, the hubs and shared services 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 whistleblower 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 and company control hub management continuously monitors 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 company controllers in all subsidiaries as well as in business units and regions. 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. BOARD OF DIRECTORS Stockholm, February 24, 2012 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016–0680 150 CORPORATE GOVERNANCE REPORT | Ericsson Annual Report 2011 CGRXPARTX2XENX2011_v76.indd 150 2012-03-01 09.50 AUDITORS’ REPORT ON THE CORPORATE GOVERNANCE REPORT aUditors’ rePort on the corPorate goVernance rePort To the Annual General Meeting of the shareholders in Telefonaktiebolaget LM Ericsson (publ), corporate identity number 556016-0680. It is the Board of Directors who is responsible for the report has been prepared and is consistent with the annual accounts and the consolidated accounts, we have read the corporate governance report and assessed its statutory content based on our knowledge of the company. corporate governance report for the year 2011 and that it has been prepared in accordance with the Annual Accounts Act. As a basis for our opinion that the corporate governance In our opinion, the corporate governance report has been prepared and its statutory content is consistent with the annual accounts and the consolidated accounts. Stockholm 24 February, 2012 Peter Nyllinge Authorized Public Accountant PricewaterhouseCoopers AB Auditor in Charge Johan Engstam Authorized Public Accountant PricewaterhouseCoopers AB CGRXPARTX2XENX2011_v76.indd 151 2012-03-01 09.50 Ericsson Annual Report 2011 | CORPORATE GOVERNANCE REPORT 151 IntroductIon remuneratIon report IntroductIon This report outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best practice, with specific references to Group management. To begin with, the work of the Remuneration Committee 2011 and the remuneration policy are explained, followed by descriptions of plans and approaches. This report also includes information on how the remuneration programs have been evaluated and draws conclusions from that. More details of the remuneration of Group management and Board members’ fees can be found in the Notes to the Consolidated Financial Statements – Note C28, “Information regarding members of the Board of Directors, the Group management and employees” (Note C28). the remuneratIon commIttee The Remuneration Committee advises the Board of Directors on an ongoing basis on the remuneration of the Executive Leadership Team (ELT). 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 for the ELT > Prepares remuneration related proposals for Board and shareholder approval > Develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration. The Remuneration Committee’s work is the foundation for the governance of Ericsson’s remuneration processes together with Ericsson’s internal systems and audit controls. The Committee is chaired by Leif Johansson and its other members are Börje Ekholm, Nancy McKinstry, and Karin Åberg. All the members are non-executive directors, independent (except remuneratIon polIcy Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. The remuneration policy, together with the mix of remuneration elements, is designed to reflect these principles by creating a balanced remuneration package. The policy for 2011 can be found in Note C28. The auditor’s report regarding whether we have complied with the guidelines for compensation to the ELT during 2011 is posted on the Ericsson website*. 152 REMUNERATION REPORT | Ericsson Annual Report 2011 contents IntroductIon the remuneratIon commIttee remuneratIon 2011 total remuneratIon remuneratIon of the Board of dIrectors 152 152 153 154 156 for the employee representative) as required by the Swedish Corporate Governance Code 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, Head of Human Resources and Organization and the Vice President, Head of Total Rewards 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, Piia Pilv, to assist and advise the Committee. The independent advisor provided no other services to the Company during 2011. 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 remain going forward and its responsibilities can be found on the Ericsson website*. These responsibilities, together with the remuneration policy, are reviewed and evaluated 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 guidelines for remuneration to the ELT is, in accordance with Swedish law, brought to shareholders annually for approval. * Information on the Ericsson website (www.ericsson.com) does not form part of this Report. REMUNXENX2011_v56.indd 152 2012-03-01 10.03 summarIes of 2011 short and lonG-term VarIaBle remuneratIon What we call it What is it? What is the objective? Who participates? how is it earned? remuneratIon 2011 short term: remuneration delivered over 12 months or less Fixed salary Fixed remuneration paid at set times Short-Term Variable remuneration (STV) A variable plan that is measured and paid over a single year Attract and retain employees, delivering part of annual remuneration in a predictable format Align employees with clear and relevant targets, providing an earnings opportunity in return for performance, and flexible cost All employees Enrolled employees, including Executive Leadership Team. Approx. 72,500 in 2011 Local and Sales Incentive Plans Tailored versions of the STV As for STV, tailored for local long term: remuneration delivered over 3 years or more Stock Purchase Plan (SPP) All-employee stock-based plan Key Contributor Retention Plan (KC) Share-based plan for selected individuals Executive Performance Stock Plan (EPSP) Share-based plan for senior executives or business requirements, such as sales Reinforce a “One Ericsson” and align employees’ interests with those of shareholders Recognize, retain and motivate key contributors for performance, critical skills and potential Remuneration for long-term commitment and value creation Employees in sales. Approx. 4,500 in 2011 All employees are eligible Up to 10% of employees Senior executives, including Executive Leadership Team Market appropriate levels set according 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 Get up to 4, 6 or, for CEO, 9 further matching shares to the SPP one for long-term performance remuneratIon 2011 The Remuneration Committee met eight times during the year. The winter meetings focused on following up on results from the 2010 variable remuneration programs and preparing proposals to shareholders for the 2011 Annual General Meeting (AGM). During the spring the committee considered feedback from the AGM and remuneration to new members of the ELT were established. In the fall when the new independent advisor was appointed the scope of the independent advisor role was reviewed. The committee continued with a review of the remuneration strategy with focus on the Long-Term Variable remuneration plans, the Short-Term Variable remuneration plans and levels of fixed compensation. It was concluded that the committee will recommend to continue the Long-Term Variable remuneration plan without any substantial changes based on feedback from investors, market analysis and global trend analyses. The Committee has also considered market trends, target setting, its working arrangements and corporate governance. As of 2011 a new initiative for the ELT was introduced by the Committee. On a voluntary basis ELT members may participate in a wellness program that provides proactive and individual coaching and training. ELT members have large responsibilities, substantial travel and heavy workloads. The purpose of the program is to actively reduce their health risks. evaluation of remuneration policy and plans The Remuneration Committee has supported the Board with the review and evaluation of remuneration policy and practice. As described later in this report, all remuneration elements and levels are evaluated through benchmarking against market data provided by external sources. Analyses of market data, as well as of attrition data, show that Ericsson is in general competitive in local markets and that total remuneration is appropriate and not excessive. The remuneration policy is evaluated annually. This is in light of the long-term strategy as well as the Remuneration Committee’s overview of total remuneration and each individual remuneration element. The Committee has concluded and the Board has decided that the remuneration policy remains valid and right for Ericsson and should not be materially changed for 2012. To enhance the understanding of how Ericsson translates remuneration principles and policy into practice, an internal remuneration website was launched in January 2011. The site contains e-learning and training programs targeted at line managers. It supports more informed decisions and better communication to the wider employee population. Extensive analyses of local market data for each position in the ELT have been conducted. Decisions on remuneration increases for the ELT have been taken by the Remuneration Committee. The work is also reviewed by the independent advisor to the Committee. In its evaluation of the Long-Term Variable remuneration plan the Remuneration Committee concluded that the plan fulfills the defined objectives of the Stock Purchase Plan, namely to promote “One Ericsson” and to align the interests of employees with those of shareholders. The participation rate as of December 1, 2011 was 30%, compared to 27% as of December 1, 2010. The evaluation conducted also confirms that the Key Contributor Retention Plan meets the purpose of REMUNXENX2011_v56.indd 153 2012-03-01 10.03 Ericsson Annual Report 2011 | REMUNERATION REPORT 153 remuneratIon 2011 retaining our key employees. The voluntary attrition rate among Key Contributors is about two thirds compared to the attrition rate in the total number of employees. or decreased when setting the remuneration, at least one other element has to change if the competitive position is to remain unchanged. A survey of Ericsson’s managers in January 2011 verified that all managers consider the Long-Term Variable and Short- Term Variable remuneration plans to be “effective” or “very effective” in meeting the purpose of the plans. This confirms earlier third-party research that has shown that the Long-Term Variable plan drives the right values and enhancing retention. The plan remains competitive by Swedish standards. The participation rate among Key Contributors remains high compared with international benchmarks. The evaluation also showed that the Executive Performance Stock Plan has had limited success in terms of meeting the purpose of rewarding long-term financial performance. The Earnings per Share (EPS) performance target proved to be more binary than anticipated, where the 2004 plan vested in full and the plans for 2005, 2006, 2007 and 2008 did not vest. The 2009 and 2010 plans, that are still in the performance period, have EPS as the performance target. The following targets apply to the Executive Performance Stock Plan 2011: > Net sales growth > Operating income growth > Cash conversion rate. For further information see below under the Executive Performance Stock Plan. The remuneration costs for the CEO and the ELT are reported in Note C28. 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, ELT 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. Variable remuneration Ericsson strongly believes that, where possible, variable compensation should be encouraged as an integral part of total remuneration. 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. Short-term variable remuneration is to a greater extent dependent on the own unit or function, while long-term variable remuneration is dependent on the achievements of the Ericsson Group. total remuneratIon short-term VarIaBle remuneratIon When considering the remuneration of an individual, it is the total remuneration that matters. First the total annual cash compensation is defined, consisting of the target level of short- term variable remuneration plus fixed salary. Thereafter target long-term variable remuneration may be added to get to the total target remuneration and, finally, pension and other benefits to arrive at the total remuneration. For the ELT, 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 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 three core targets: > Net sales growth > Operating income > Cash flow. short-term VarIaBle remuneratIon payouts as percentaGe of tarGet leVels fIxed salary, short-term and lonG-term VarIaBle remuneratIon as percentaGe of total tarGet remuneratIon 2011 2010 2009 2008 2007 30.1% 40.6% 80.2% 64.4% 49.4% 56.8% 49.4% 5.0% 10.0% 28.5% CEO 46.1% 18.4% 35.5% CEO Average Ericsson Leadership Team excluding CEO Average ELT excl CEO 60.3% 21.6% 18.1% Fixed Salary 2011 Short-Term Variable Target 2011 Long-Term Variable at half of max 2011 0 20 40 60 80 100 0% 20% 40% 60% 80% 100% 154 REMUNERATION REPORT | Ericsson Annual Report 2011 REMUNXENX2011_v56.indd 154 2012-03-01 10.03 short-term VarIaBle remuneratIon structure short-term Variable remuneration as percentage of fixed salary maximum level target level actual paid for 2010 total remuneratIon percentage of short-term Variable remuneration maximal opportunity Group financial targets unit/functional financial targets non-financial targets CEO 2011 CEO 2012 Average ELT 2011 1) Average ELT 2012 1) 40% 40% 34% 36% 80% 80% 68% 72% 24% – 29% – 90% 90% 61% 49% 0% 0% 23% 27% 1) Excludes CEO – differences in target and maximum levels from year to year are due to changes in the composition of the ELT. 10% 10% 16% 24% For the ELT, targets are thus predominantly financial targets at either Group level (for Heads of Group Functions) or at the individual unit level (for Heads of Regions or Business Units) 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. All variable remuneration targets have to be objective and measurable. They 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 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-level 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 or stretching or to enhance shareholder value. During 2011, approximately 77,000 employees participated in short-term variable plans. Of these 8,000 were in the global Short-Term Variable remuneration plan (STV) for management, including the ELT, and 4,500 were in the global Sales Incentive Plan (SIP). Local plans vary in design according to local competitive practice but typically mirror the STV. The chart on page 154 illustrates how payouts to the ELT 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 AGM. All long-term variable remuneration plans are designed to form part of a well-balanced total remuneration package and to 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 2011, 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. This reinforces “One Ericsson” aligned with shareholder interests. Employees can save up to 7.5% (CEO 10%) of gross fixed salary (CEO gross fixed salary and annual variable remuneration) for purchase of Class B shares at market price on NASDAQ OMX Stockholm or ADSs on NASDAQ New York (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 as applicable. The plan was introduced in 2002 and employees in 71 countries participated during its first year. In December 2011 the number of participants was over 24,000, or approximately 30% of eligible employees in 96 countries. Participants save each month, beginning with the 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. It is designed to recognize individuals for performance, critical skills and potential as well as encouraging retention of key employees. Under the program, operating units around the world can nominate up to 10% of employees worldwide. Each unit nominates individuals that have been identified according to performance, critical skills and potential. The nominations are calibrated in management teams locally and are 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 investment period. The plan was introduced in 2004. the executIVe performance stock plan The Executive Performance Stock Plan was first introduced in 2004. The plan is designed to focus management on driving long-term financial performance and providing market REMUNXENX2011_v56.indd 155 2012-03-01 10.03 Ericsson Annual Report 2011 | REMUNERATION REPORT 155 total remuneratIon competitive remuneration. Senior executives, including the ELT, 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. The performance matching is subject to the fulfillment of the performance targets. Since 2010, the CEO may obtain up to nine performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share. In the 2004 to the 2010 plans the performance targets were Earnings Per Share (EPS) targets. To support the long-term strategy and the value creation of the Company, new operational targets were defined for the 2011 plan. At the AGM 2011, the following targets for the 2011 Executive Performance Stock Plan were resolved on proposal by the Board: > Up to one third of the award will vest based on the compound annual growth rate of consolidated net sales comparing 2013 to 2010 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 the ELT employed in Sweden before 2011, 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 for these ELT members is normally 60 years. The pensionable salary for ELT members employed before 2011 on local contract in Sweden consists of the annual fixed salary including vacation pay and the target value of the Short-Term Variable remuneration. ELT members employed in Sweden as of 2011 are normally covered by the defined contribution plan under the ITP1 scheme, with a pensionable age of 65 years. The pensionable salary includes all cash compensation. For members of the ELT who are not employed in Sweden, > Up to one third of the award will vest based on the local market competitive pension arrangements apply. compound annual growth rate of consolidated operating income comparing 2013 to 2010 > One third of the award will vest based on the cash Other benefits, such as company car and medical insurance, are also set to be competitive in the local market. ELT members may not receive loans from the Company. conversion rate. If the cash conversion rate is at or above 70% during each of the years 2011 to 2013 one ninth of the total award will vest for each year the target is achieved. 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 will consider the impact of larger acquisitions, divestments, the creation of joint ventures and any other significant capital event on the three targets on a case-by-case basis. Also, the Board may reduce the number of performance matching shares, if deemed appropriate, considering the Company’s financial results and position, conditions on the stock market and other relevant circumstances at the time of matching. 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 ELT members locally employed in Sweden 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. For other ELT members different notice period and severance pay agreements apply, however no agreement exceeds the notice period of 6 months or the severance pay period of 18 months. remuneratIon of the Board of dIrectors The remuneration of Directors not employed by Ericsson is handled separately and the Nomination Committee makes remuneration proposals for resolution 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. 156 REMUNERATION REPORT | Ericsson Annual Report 2011 REMUNXENX2011_v56.indd 156 2012-03-01 10.03 Gdp 0.3 percent Gdp Increase When BroadBand speed douBles. share InspIre GroW as network speeds increase, their users find better, richer ways to share. this inspires new ideas and fresh thinking. In turn, this stimulates economic growth – creating more opportunity for everyone. REMUNXENX2011_v56.indd 157 2012-03-01 10.03 Ericsson Annual Report 2011 157 Glossary GLOSSARY 2G The first digital generation of mobile systems. Includes GSM, TDMA, PDC and cdmaOne. 3G 3rd generation mobile system. includes WCDMA/HSPA, 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 as well as 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. caGr Compound Annual Growth Rate. caPex Capital expenditure. cDMa (Code Division Multiple Access) A radio technology on which the cdmaOne (2G) and CDMA2000 (3G) mobile communication standards are both based. clouD When data and applications reside in the network. eDGe A mobile standard, developed as an enhancement of GSM. Enables the transmission of data at speeds up to 250 kbps. (Evolved EDGE up to 1 Mbps) IMs (IP Multimedia Subsystem) A standard for offering voice and multimedia services over mobile and fixed networks using internet technology (IP). 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. 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. PeNeTraTIoN The number of subscriptions divided by the population in a geographical area. PeTaByTe Million gigabytes. raN Radio Access Network. soFTswITch A software-based system for handling call management functionality. Integrates IP-telephony and the legacy circuit-switched part of the network. GPoN (Gigabit Passive Optical Network) Used for fiber-optic communication to the home (FTTH). JV (Joint Venture) A business enterprise in which two or more companies enter a partnership. TDM (Time Division Multiplexing) Legacy technology for circuit switching. 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. hIGh-TraFFIc sMarTPhoNes High-traffic smartphones are defined as the subset of open-OS phones (e.g. iPhone, Android & Windows) that typically generate high traffic, 5–10 times that of low-traffic devices. hsPa (High Speed Packet Access) Enhancement of 3G/WCDMA that enables mobile broadband. IcT Information and Communication Technology. lTe (Long-Term Evolution) The next evolutionary step of mobile technology beyond HSPA, allowing data rates above 100 Mbps. M2M Machine-to-Machine. MaNaGeD serVIces Management of operator networks and/or hosting of their services. MoBIle BroaDBaND A wireless access technology. It enables high-speed internet access services, such as video streaming. oPex Operating expenses. wcDMa (Wideband Code Division Multiple Access) A 3G mobile communication standard. WCDMA builds on the same core network infrastructure as GSM. xDsl Digital Subscriber Line technologies for broadband multimedia communications in fixed-line networks. Examples: IP-DSL, ADSL and VDSL. 158 GLOSSARY, FINANCIAL TERMINOLOGY AND EXCHANGE RATES | Ericsson Annual Report 2011 GLOSSXTERMSXENX2011_v21.indd 158 2012-03-05 12.33 exchaNGe raTes FINANCIAL TERMINOLOGY 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 DSO are the 90 days of the most current quarter plus the additional days from the previous quarter. earNINGs Per share (ePs) 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. eBITa MarGIN Earnings Before Interest, Taxes, Amortization and write-downs of acquired intangibles, as a percentage of net sales. ePs (NoN-IFrs) EPS, diluted, excluding amortizations and writedowns of acquired intangible assets. equITy raTIo Equity, expressed as a percentage of total assets. Gross cash Cash and cash equivalents plus short-term investments. 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 investments less interest-bearing liabilities and post- employment benefits. sTockholDers’ equITy Per share Stockholders’ equity divided by the number of shares outstanding at end of period, basic. ToTal shareholDer reTurN (Tsr) The increase or decrease in share price during the period plus dividends paid, expressed as a percentage of the share price at the start of the period. TraDe receIVaBles TurNoVer Net sales divided by average trade receivables. Value aT rIsk (Var) A statistical method that expresses the maximum potential loss that can arise with a certain degree of probability during a certain period of time. workING caPITal Current assets less current non-interest-bearing provisions and liabilities. 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 January–December sek/eur Average rate Closing rate sek/usD Average rate Closing rate 2011 9.02 8.92 6.48 6.90 2010 9.56 9.02 7.20 6.80 GLOSSXTERMSXENX2011_v21.indd 159 2012-03-05 12.33 Ericsson Annual Report 2011 | GLOSSARY, FINANCIAL TERMINOLOGY AND EXCHANGE RATES 159 SHAREHOLDER INFORMATION Shareholder>InformatIon CONTACT FOR PRINTED PUBLICATIONS A printed copy of the Annual Report is provided on request. >> Strömberg Distribution 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 (toll free within the U.S.) Email: citibank@shareholders-online.com www.citi.com/dr Ordering a hard copy of the Annual Report: +1 888 301 2504 (toll free within the U.S.) https://secure.wilink.com/asp/NA012918/ hqgold/NA012918_search_ENG. asp?target=NA012918 WHERE YOU CAN FIND OUT MORE: It is our ambition to provide our shareholder with up to date information about Ericsson and its development. Information is available on Ericsson’s website: www.ericsson.com On the website, the Annual Report is available as an online version and as a pdf document. Previous annual and interim reports and other relevant shareholder information can be found at: www.ericsson.com/investors By publishing the Annual Report on the web, we will not only reduce the cost for print and distribution, but also the impact on the environment. The Annual Report on Form 20-F (filed with the Securities and Exchange Commission, SEC) is also available on: www.ericsson.com/investors Telefonaktiebolaget LM Ericsson’s shareholders are invited to participate in the Annual General Meeting to be held on Thursday, May 3, 2012, at 3 p.m. at Kistamässan, Arne Beurlings Torg 5, Kista, Stockholm, Sweden. 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 Thursday, April 26, 2012, and >> Give notice of attendance to the Company at the latest on Thursday, April 26, 2012. Notice of attendance can be given on Ericsson’s website: www.ericsson.com/investors; by telephone: +46 8 402 90 54 on weekdays between 10 a.m. and 4 p.m.; or by fax: +46 8 402 9256. 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 number 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 Thursday, April 26, 2012, 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 unless the power of attorney explicitly provides that it is valid for a longer period, up to a maximum of five years. 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 Wednesday, May 2, 2012. 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 2.50 per share for the year 2011 and that Tuesday, May 8, 2012 will be the record day for dividend. Financial information from Ericsson Interim reports 2012: >> April 25, 2012 (Q1) >> October 26, 2012 (Q3) >> January 25, 2013 (Q4) >> July 18, 2012 (Q2) Annual Report 2012: March, 2013 2011 Form 20-F for the US market: March-April, 2012 160 SHAREHOLDER INFORMATION | Ericsson Annual Report 2011 SHAREHOLDXENX2011_v28.indd 160 2012-03-01 10.06 SHAREHOLDER INFORMATION CONTACT INFORMATION Headquarters Torshamnsgatan 23 Kista, Stockholm Sweden Registered office Telefonaktiebolaget LM Ericsson SE–164 83 Stockholm Sweden Investor Relations For questions on the Company, please contact Investor Relations: 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 headquarters at Torshamnsgatan 23 in Kista, Stockholm, Sweden. 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, the 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. ERICSSON ANNUAL REPORT 2011: Project Management: Ericsson Investor Relations Design and production: Harleys and Paues Media All Group Management and Board of Directors photography: Per Myrehed Reprographics and Printing: Imprima Visuell Kommunikation AB 2012 SHAREHOLDXENX2011_v28.indd 161 2012-03-01 10.06 Ericsson Annual Report 2011 | SHAREHOLDER INFORMATION 161 I S H A P N G T H E N E T W O R K E D S O C E T Y I SHAPING THE NETWORKED SOCIETY Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden Telephone +46 10 719 0000 www.ericsson.com Printed on Maxi Offset and Artic Matt Wind – chlorine free paper that meets international environmental standards EN/LZT 138 0622 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2012 I E R C S S O N a n n u a l r e p o r t 2 0 1 1 Annual Report 2011 COVERXEN_v19.indd 1 07/03/2012 10:19 

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