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Ericssonwelcome to the networked society Ericsson Annual Report 2014 contents The business Ericsson in brief ................................................................................ 1 Results Board of Directors’ report* ......................................................... 42 2014 in review .................................................................................. 2 Consolidated financial statements* ......................................... 55 Letter from the CEO ....................................................................... 4 Notes to the consolidated financial statements* ................ 63 This is Ericsson ................................................................................. 8 Parent Company financial statements* ............................... 102 The strategic direction .................................................................. 12 Notes to the Parent Company financial statements* ....... 108 Core business ................................................................................. 14 Risk factors* .................................................................................. 121 Targeted areas ................................................................................ 20 Auditors’ report ............................................................................ 129 Resource allocation ...................................................................... 26 Forward-looking statements ................................................... 130 The IPR portfolio ............................................................................. 27 Business structure ......................................................................... 28 The people ........................................................................................36 Sustainability and Corporate Responsibility ..........................38 Letter from the Chairman ............................................................ 41 Section “The business” aims to provide insight into Ericsson’s transformation journey and its strategic direction (p.1–13), building on the core business (p. 14–19) and aiming to transform targeted areas into core business (p.20–26). IPR portfolio and business structure (p.27–29) lead over to the current offering and the regional perspective (p.30–35). People and Sustainability & CR (p.36–39) end the section. MORE INFORMATION Corporate Governance Corporate Governance report 2014 ..................................... 132 Remuneration report .................................................................. 160 Shareholders Ericsson and the capital market ............................................. 164 Share information ........................................................................ 168 Other information Ten-year summary ...................................................................... 172 Glossary ......................................................................................... 174 Financial terminology and Exchange rates ......................... 175 Shareholder information ........................................................... 176 * Chapters covered by the Auditors’ report. The Annual Report describes Ericsson’s financial and operational per formance during 2014. A Corporate Governance Report is attached to the Annual Report. Ericsson issues a separate Sustainability and Corporate Responsibility Report. www.ericsson.com/thecompany/ sustainability _corporateresponsibility Find this Annual Report online: www.ericsson.com/annualreport2014 There is further information on sustainability and corporate respon sibility on pages 38–39 and pages 50–51. ericsson in brief Ericsson is a driving force behind the Networked Society – a world leader in communications technology and services. The Company’s long-term relationships with every major telecom operator in the world allow people, businesses and societies to fulfill their potential and create a more sustainable future. Ericsson’s services, soft- ware and infrastructure – especially in mobility, broadband and the cloud – are enabling the telecom industry and other sectors to do better business, increase efficiency, improve the user experience and capture new opportunities. With more than 115,000 professionals and customers in more than 180 countries, Ericsson combines global scale with tech nology and services leadership. Investments in research and development ensure that Ericsson’s solutions – and its customers – stay in the forefront. The Company provides support for networks with more than 2.5 billion subscribers. Approx imately 40% of the world’s mobile traffic is carried through networks delivered by Ericsson. Founded in 1876, Ericsson has its headquarters in Stockholm, Sweden. The Ericsson share is listed on Nasdaq Stockholm and NASDAQ New York. Net sales SEK billion 228.0 (2013: 227.4) Operating income SEK billion 16.8(2013: 17.8) Operating margin Percent 7.4(2013: 7.8) Cash flow from operating activities SEK billion 18.7 (2013: 17.4) Net sales per segment 6% 51% 43% Networks SEK 117.5 (117.7) billion Global Services SEK 97.7 (97.4) billion Support Solutions SEK 12.7 (12.2) billion Modems – no material revenues Global presence Ericsson is a global company supporting more than 500 operator customers and an increasing number of non-operator customers. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The ten largest customers, half of which are multinational, account for 47% of Ericsson’s net sales. THE BUSINESS – Ericsson in brief 1 Ericsson | Annual Report 2014 THE BUSINESS – 2014 in review 2014 in review Examples of what Ericsson has achieved, and of business highlights from around the world during 2014. JANUARY – MARCH APRIL – JUNE Ericsson and Samsung reached cross- license agreement. The agreement includes global cross licensing of patents relating to GSM, UMTS and LTE standards for networks and hand- sets. (Jan. 27) Ericsson announced the acquisition of Azuki Systems. The acquisition helps Ericsson to deliver on the Networked Society’s demand for TV Any- where services – on any screen, any time, across any network. (Feb. 6) Ericsson announced the industry’s first coordinated network-wide software launch. A software-driven network evolution enables operators to respond to quickly changing network requirements. (Feb.12) Century Link, a large US operator, signed a contract with Ericsson for operations and busi- ness support systems (OSS & BSS) software suite Service Agility. The solution enables quick delivery of new applications to customers. (Feb. 24) Ericsson and Royal Philips jointly launched an innovative connected LED street lighting solution which integrates telecom equipment into light poles. The Zero Site provides energy- efficient public lighting and improved network performance in dense urban areas. (Feb. 24) Ericsson announced several operator trials of the Radio Dot System. Radio Dot System is a small-cell architecture for enterprise buildings and public venues. (Feb. 24) At the Mobile World Congress in Barcelona, Ericsson showed innovations and its technol- ogy and service capabilities . Ericsson leads the way with solutions that drive the development in mobility, broadband and the cloud, creating the foundation for eco-systems and transformation across industries. (Feb. 24) Ericsson was awarded a five-year network transformation contract by Vodafone. The con- tract includes products and services and is a part of Vodafone’s growth plan, called Spring. (Feb. 26) 2 Ericsson completed the acquisition of Red Bee Media, a media services company in the UK. The acquisition, announced in 2013, strength- ens Ericsson’s broadcast services business and expands the customer list. (May 12) New Ericsson Campus in Silicon Valley to drive innovation. Ericsson will bring together approximately 2,000 R&D staff to accelerate the development of IP, TV and media innovation. (May 28) Ericsson announced OSS and BSS software suite Cloud Manager 2.0. It supports operators in the transformation to virtualized network infra- structure. (June 2) Ericsson won a long-term managed services agreement with T-Mobile for Service Agility, the pre-integrated OSS and BSS software suite. The solution allows T-Mobile to create, launch, deliver and manage services efficiently while at the same time reduce overall operational costs. (June 2) Taiwanese operator Far EasTone selected Ericsson as the major supplier for its LTE radio and core network. The contract also includes net- work optimization and 4G Cell Broadcast System for disaster warning services. (June 5) The legend indicates which part of the business strategy the event is related to: Core business Targeted areas Group Read more on page 12. Ericsson | Annual Report 2014 JULY – SEPTEMBER OCTOBER – DECEMBER Ericsson completed the acquisition of the business of Ambient, a US-based smart grid communications provider. The Ambient platform enables multiple smart grid applications and tech- nologies on a single infrastructure. (Oct.1) Network functions virtualization (NFV) successfully demonstrated with Japanese operator NTT DOCOMO. NFV enhances network flexibility, speeds up service introduction and increases resilience. (Oct. 14) Ericsson strengthened its position in the cloud market. Ericsson announced the acquisition of Fabrix Systems (Sept.12), Sentilla (Oct.16) and the majority stake in Apcera (Sept. 22) as well as a partnership with Guardtime (Sept. 3). (Sept–Oct.) Ericsson signed a five-year global frame- work agreement with international operator Telenor. The agreement covers hardware, profes- sional services, support and maintenance for 2G, 3G and 4G networks. (Oct. 27) Ericsson reports on ICT use in cities. The reports show that cities with low ICT maturity are improving their ICT maturity faster than high per- forming cities and that the internet facilitates smart choices in city life. (Nov. 10) Ericsson’s Capital Markets Day provided an update on the progress on its Networked Society strategy. With a clear strategic agenda, Ericsson is transforming, with the aim to becoming a leading ICT company. (Nov.13) Reliance Communications and Ericsson signed a seven-year nationwide managed services contract. This expansion contract covers operation and management of wireline and wireless networks and field maintenance and operational planning of mobile networks. (Dec. 5) Vodafone, Netherlands, was the first opera- tor in the world to commercially deploy Erics- son Radio Dot System at Dutch Radboud Uni- versity. Ericsson Radio Dot System allows quick indoor deployment and efficient integration into macro-network. (Dec. 10) Ericsson signed a framework agreement with Ethio Telecom for network transformation regarding 2G/3G mobile communication equipment and related services. Products and services (such as design, planning, deployment, tuning, and optimization) will be used to transform the network and add capacity. (Dec. 16). Through a seven-year con- tract for managed services with operators in Romania, Ericsson is responsible for operations of networks and OSS systems and network maintenance. Ericsson helps Romtelecom (extended con- tract) and Cosmote (new con- tract) to improve network quality and quality of service. (July 1) Live, over-the-air demon- stration of pre-standard 5G technology achieves 5 Gbps speeds in the 15 GHz fre- quency band. Faster speeds, lower latency and better perfor- mance in urban areas address the mobile data growth and next-generation machine-to- machine applications. (July 1) Ericsson prepared Telefon- ica network for the 2014 FIFA World Cup in Brazil. Ericsson’s Key Event Experience solution for events with high mobile traffic when network capacity is key, was used for the first time. (July 17) Ericsson acquired MetraTech to accelerate cloud and enterprise billing capabili- ties. The acquisition broadens Ericsson’s software portfolio with billing-platform based on metadata architecture. (July 29) MTV, a Finnish media com- pany, selected Ericsson for broadcast and media ser- vices, including media man- agement and playout. The five- year agreement and establish- ment of a purpose-built media hub in Helsinki strengthens Ericsson’s broadcast and media services business. (Aug.13) Ericsson was awarded its Fifth Emmy® award for its JPEG2000 interoperability tech- nology. JPEG2000 is a compression standard for broadcast applications for IP networks, distributing high picture quality content for live events. (Aug. 18) Australian operator Telstra selected Erics- son for its next generation optical transport equipment and services. The agreement sup- ports the introduction of software defined network- ing (SDN) and network functions virtualization (NFV) funct ionality. (Aug.18) Ericsson opened its first of three Global ICT Centers. The Swedish center houses the com- pany’s complete portfolio and enables Ericsson’s cross-functional teams to work more efficiently, using the latest cloud technology. (Sept. 8) Ericsson completed the small-cell portfolio with launch of RBS 6402 Indoor Picocell to address approximately 10 million commercial buildings worldwide. This is the first indoor picocell to deliver 300 Mbps LTE speeds with carrier aggregation. (Sept. 9) Ericsson introduced MediaFirst, an end- to- end cloud-based TV platform. MediaFirst is offered as software as a service for creation, management and delivery of Pay TV. (Sept. 11) Ericsson announced the discontinuation of modems development and the shift of parts of Modems’ workforce to radio network R&D. Ericsson took over the LTE thin modems opera- tions when the ST-Ericsson JV was broken up in 2013. (Sept. 18) Ericsson was selected by T-Mobile to pro- vide equipment and services to expand its nationwide 4G LTE network, improve in-build- ing, highway and rural performance. The con- tract includes LTE-Advanced and seamless service continuity for voice calls between LTE and Wi-Fi on select T-Mobile smartphones. (Sept. 23) Ericsson announced Software 15A , intro- ducing a new software model for networks, similar to the software model in the IT industry. The software model includes predefined software value packages and a software subscription com- ponent. (Sept. 23) THE BUSINESS – 2014 in review 3 Ericsson | Annual Report 2014 THE BUSINESS – Letter from the CEO lETTER FROM THE CEO We are on a journey of transformation. Our industry is changing and we are changing to stay relevant to our customers and to capture opportunities both in our core business and in our targeted growth areas. Dear reader Value creation Our sales of SEK 228 b. was stable for the full year 2014, with an operating margin of 7.4%. Growth in the Middle East, Europe and Asia compensated for a sales decline in North America and the operating margin improved in our core business. We improved cash flow from operating activities during the year and generated a full-year cash flow of SEK 18.7 b., exceeding our cash conversion target of more than 70%. Our strong financial position has over the years secured our financial flexibility and enabled us to implement our strategy and to deliver consistent returns to our shareholders. Going into 2015, we aim to continue to grow faster than the market combined with best-in-class margins and strong operating cash flow. In doing so, we will not only drive shareholder value creation but also Ericsson’s ambition Customer Leading ICT transformation partner Employees Attract, develop and retain best talent Grow faster than the market with best-in-class margins. Shareholder Shareholder value creator Society Responsible and relevant driver of positive change 4 Ericsson | Annual Report 2014 The transformation journey accelerated during 2014 and will continue throughout 2015, and beyond.” generate value for our customers, employees and for society at large. The pace of change in the market is increas- ing as the telecom, IT and media industries con- verge into a broader ICT industry. At the same time, ICT is starting to transform other industries. Both operators and vendors are deciding on dif- ferent strategic routes depending on the assets they have. We are now at an inflection point where the Networked Society, is starting to take shape around us. The transformation to the Net- worked Society, where anything that benefits from being connected will be connected, is driven by broadband, mobility and cloud. The pace of change within the Company is also increasing as we take action to secure con- tinued leadership in this transforming market. We are investing not only in our core areas of mobile infrastructure and telecom services, but also in targeted growth areas. We are stream- lining our portfolio, with an increased focus on software and professional services. We are also investing in new competence to make sure that we can keep our technology and services lead- ership and be a trusted business partner to our customers. Let me give you a few examples from recent years. We have reduced the number of hardware platforms, reduced the number of software stacks, made strategic investments and acqui- sitions in our targeted growth areas, divested our handset operations and discontinued our modem development. This streamlining of operations has made us stronger as a company and improved earnings in our core business. However, our profit is not yet on the level where we want it to be. Current company trans- formation uncovers opportunities to leverage global skills and scale to increase efficiencies and reduce cost further. Therefore a global cost and efficiency program was presented at our Capital Markets Day in November. The ambition with the program is to achieve savings of approximately SEK 9 b., including SEK 4.5 billion in operating expense savings, with full effect during 2017. We aim to improve operating income by mon- etizing our footprint, building success in targeted growth areas and by efficiency improvements. Excel in core and establish leadership in targeted areas Our strategy builds on a combination of excelling in our core business and establishing leadership in targeted growth areas. We are market leaders in both mobile infrastructure and telecom ser- vices with a large installed base to build on. We continue to invest in R&D and services capabili- ties, relentlessly innovating and shaping the market as we move towards 5G. At the same time, we invest in five targeted growth areas that are adjacent to our core busi- ness: IP Networks, Cloud, OSS and BSS, TV and Media and Industry and Society. They all have a high share of software and professional services, a high degree of recurring business and a higher growth rate than the core business. We made good progress in these targeted areas during 2014, with sales growth above 10%. and we continued to invest both in our own R&D and in selected acquisitions and partner- ships: > The partnership with Ciena will support our Service Provider-SDN and IP Optical conver- gence ambitions. > The acquisition of a majority stake in Apcera strengthens our position in enterprise cloud. > The acquisition of MetraTech improves our cloud and enterprise billing capabilities within BSS. > Our acquisitions of Azuki Systems, Red Bee Media and Fabrix Systems extend our leader- ship in TV and media. Earnings per share, diluted sek 3.54 (2013: 3.69) THE BUSINESS – Letter from the CEO 5 Ericsson | Annual Report 2014 Long-term fundamentals The long-term fundamentals in the industry remain attractive and the transformation journey that accelerated during 2014 will continue throughout 2015, and beyond. Going forward, I am convinced Ericsson has what it takes to generate sustainable value for shareholders and customers, and to continue to lead and shape the industry. Hans Vestberg President and CEO THE BUSINESS – Letter from the CEO Investing in the future During 2014, we invested SEK 36 b. in R&D – which adds up to a total investment of SEK 166 b. over the past five years. Our technology lead- ership is built on our investments in R&D and evidenced by more than 37,000 granted patents, one of the strongest patent portfolios in the ind- ustry. Our expanding licensing business is based on our continued ambition to generate value from our intellectual property (IPR) portfolio. We have a holistic approach to capital and resource allocation across the Company, where investments in services capabilities go hand in hand with investments in R&D, product develop- ment, sales capabilities as well as in acquisitions and partnering. Sustainability and corporate responsibility Sustainability and corporate responsibility remained important during 2014, and we continue to lead the industry in working with sustainable development and responsible busi- ness practices to ensure positive triple-bottom- line (economic, environmental and social) growth in society. We focus our efforts where we can make the biggest difference. This involves improving the accessibility and afford- ability of mobile communication and improving energy performance and optimizing the use of materials in our products, solutions and in our own activities. We are helping to address and minimize climate change and we are also tackling chal- lenges and opportunities provided by urbaniza- tion for example through the Ericsson Industry & Society product portfolio. We are also empha- sizing the importance of responsible business practice and employee engagement. We address growing challenges in areas such as responsible sourcing, health and safety, privacy and human rights with transparency and seek to build trust among our stakeholders. We have made visible progress during 2014, and will continue to ensure that technology is a force for positive, lasting change. 6 Ericsson | Annual Report 2014 managing day-to-day operations The media industry is undergoing dramatic changes. By 2020, Ericson predicts that there will be 50 billion connected devices – 15 billion of which will be video enabled. Most broadcasters do not have the time, scale or infrastructure to adapt effectively to the new technical challenges such as media asset management, multi- platform multi-screen delivery, archive and disaster recovery. The combination of global services expertise and the industry-leading position in managed services enables Ericsson to enhance the efficiency of the busi- ness operations of global and regional content owners and broadcasters. Every day, people on all continents watch television programs prepared, managed and broadcast by Ericsson staff. Ericsson has broadcast and media services agreements with customers such as the BBC, BSkyB, BT Sport, Canal Digital, Channel 4, Channel 5, Virgin Media, and many others. Ericsson manages the day-to-day operations, so that the cus- tomer can devote attention to users, program and content acquisition as well as strategic planning. THE BUSINESS – This is Ericsson This is Ericsson Technology and services leadership, combined with business expertise, global scale and skills, allows Ericsson to generate customer and shareholder value. The ability to transform is critical in the ICT industry (information and communi- cation technology) and Ericsson strives to become a leader in this industry. 3-5% Market CAGR 2013–2017 Over the past 100 years, Ericsson has continu- ously evolved its business portfolio, entered into new and adjacent markets, developed new products and solutions and adapted to new ways of working. Ericsson reported four business segments in 2014: Networks, Global Services, Support Solu- tions and Modems1), each of which is responsi- ble for a full profit & loss statement and for the development and maintenance of its specific portfolio of products, solutions and services. The core assets of the Company are tech- nology and services leadership and global scale and skills. Long-term customer relationships and the fact that Ericsson has remained in the forefront in a competitive, fast-moving market for more than 100 years, shows the ability to deliver customer value. Approximately 40% of the world’s mobile traffic goes through networks delivered by Ericsson. The progress of the strategy imple- mentation to extend the business to adjacent customer segments is visible in an increasing share of sales to non-operator customers. 1) Development of modems was discontinued in 2014 . The ambition is to grow faster than the market Ericsson’s ambition is to grow faster than the market, which is estimated, by the Company, to grow at a compound annual growth rate (CAGR) of 3–5% from 2013 to 2017. A growth faster than the market is based on excelling in the core business (“Radio, Core and Transmission” and “Telecom Services”) and establishing leadership in the targeted areas of IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society, while at the same time increasing the share of recurring revenues and intellectual property rights (IPR) revenues. Best-in-class margins and strong cash flow A market-leading position, global presence, regional and local competence as well as close customer relationships provide a solid founda- tion for profitable growth. A market-leading position is an enabler of the aim to create share- holder value by growing sales faster than the market and generating industry best-in-class margins and generating strong cash flows. Ericsson’s current position Mobile infrastructure OSS and BSS Telecom Services TV platforms Technology leadership Services leadership Scale and skills 37,000 25,700 Patents R & D Employees 1 billion 2.5 billion 36 billion Annual investments in R&D (SEK) 65,000 Subscribers managed by Ericsson Subscribers supported by Ericsson Services professionals 8 Net sales (SEK) LTE market share in the world’s 100 largest cities 228.0 b. #1 180 118,000 Countries with customers Employees Ericsson | Annual Report 2014 A strong financial position, focus on profitable growth and operational efficiencies and the ambition to improve earnings in the core busi- ness remain the cornerstones of Ericsson’s financial ambitions, while continuously mone- tizing the footprint and making cost efficiency improvements. By industrializing, centralizing and automating, as well as leveraging a less capital intensive business mix, the ambition is to have strong operating cash flow develop- ment. A strong cash flow generation has enabled increased dividends, and also provided the financial strength to invest. Over the last five years, the annualized total share- holder return has averaged 10%. The financial strategy includes unlocking additional values through a global cost and effi- ciency pro gram, reaching an annual run-rate saving of SEK 9 billion during 2017, compared to 2014. Efficiency measures include structural enhancements, supply efficiencies and an accelerating transformation of the service delivery organization. Transformation Ericsson has always been at the forefront of transformation driven by ever-changing market conditions and major technological disruptions. This technological and financial capability to adapt and the will to change are major compe- titive strengths. The ongoing market transformation is reflected in Ericsson’s business mix. Over the past 15 years, the business has evolved from being hardware-centric to becoming software- and services-centric. In 2014, 66% of Ericsson’s business was related to services and software, compared with 34% in 1999. With the share of software and services likely to continue to increase, Ericsson’s competitive hardware will still remain important as a performance differen- tiator. Operator segmentation drives change in strategy A clear customer segmentation is taking place, as operators take different roles in the trans- forming ICT market. Ericsson works closely with operators to support their different strategic ambitions, providing solutions and services that grow their business and meet their operational priorities. In simple terms, network infrastructure con- sists of three layers: the network forms the base; the platforms represented by IT platforms and operations and business support systems (OSS and BSS) is the second layer, and the applica- tions and services are at the top. Network per- formance, efficient processes and structured OSS and BSS implementations – which enable Operator and industry roles Applications & Services Platforms & IT Systems Connectivity & Infrastructure Users, Content & Devices There are three strategic operator segments. The largest share of total network investments is in the Service creator segment. THE BUSINESS – This is Ericsson Operator Other 9 Ericsson | Annual Report 2014Service enablerService platform developerNetwork developerService producerService creator the proactivity, flexibility and performance that the business portfolio requires – have moved into focus, driven by high data volumes, demanding applications and new service offer- ings for consumers. Operator segmentation will have a significant impact on Ericsson’s ambitions and strategies. The ambition is to identify where value can be created and growth can be captured. The trans- formation drives new requirements on the net- works. This is a major reason as to why Ericsson has chosen a strategy to invest in the targeted areas of IP Networks, Cloud, OSS and BSS, TV and Media, as well as Industry and Society. Ericsson sees three strategic operator segments emerging: > Network developer > Service enabler > Service creator For all three operator segments, connectivity is, and will continue to be, the foundation for their businesses and the key factor for differentiation as user demand for performance of applications and app coverage, increases. Network developer; Network performance The operators who have chosen to address user demands through network performance and efficiency are the Network developers. They concentrate on the broadband experience through internet connectivity and communica- tion services. For these customers, the network perfor- mance is key, and Ericsson addresses opera- tors’ demands with solutions for high perfor- mance network architecture. The Network developers use external service platforms to address the increased demand of applications and services, but their own ambitions are focused on high quality connectivity, cost-effi- ciency and on operating the network as a utility service with a good return on capital investment. Service enabler; Capable network platforms The operator segment, represented by the ser- vice enablers, focuses on establishing systems and platforms that enable new enterprise prac- tices such as IT cloud services and business processes, as well as services to enrich the con- sumer experience. In terms of applications and services they use external service producers. Their focus, on top of a well-performing net- work, is on billing, customer care and service assurance. Service enablers provide functional- ity on capable platforms that are easy for other industries to integrate into their respective busi- ness processes. They are capitalizing on mobile broadband growth by introducing new pricing and revenue models such as targeted offerings based on usage patterns, capacity, service bun- dles, multi-device plans and real-time features such as top-up plans. Ericsson addresses these needs with its OSS and BSS platforms and pro- fessional services offering which cater for the control and management of the operations and the identification of new revenue streams. The large majority of the operators are thus represented by Network developers and Service enablers, but they only represent a smaller share of current total network investments. Service creator; New services The largest share of current investments can be related to the group of operators representing the Service creators, who have the ambition to create intelligent networks to allow the creation of new services. In addition to network perfor- mance and consumer experience, these opera- tors take the lead in providing innovative new services. They are active participants in the establish- ment of new ecosystems in adjacent markets, such as utilities, transport and public safety. Their strategic focus is broader than that of the other two roles as, in addition to connectivity and customer experience, they focus on expanding business in applications and services to increase the share of profits from other indus- tries. Service creators are increasing their invest- ments in the development of new businesses in media and entertainment, cloud and IT services, machine-to-machine (M2M) communications and enterprise offerings, as well as in specific industry solutions. Still, they would not compro- mise on the IT systems part, such as the OSS and BSS platforms, to orchestrate the traffic flows. The user experience is increasingly deter- mined by the actual performance of applications or app coverage, and the network needs not only to provide access but to also safeguard and optimize the actual performance of the applica- tions used. Ericsson’s strategy is to offer solu- tions that fit the demands of the Service creators and to develop these offerings to enable an expansion of market position and value creation, and to capture growth. THE BUSINESS – This is Ericsson 10 Ericsson | Annual Report 2014 Efficient RESPONSE By equipping police, firemen and paramedics with real time information, connectivity helps to keep both civilians and emergency services away from harm. When all information is at hand, danger is minimized and safety is optimized. The combination of technol- ogy, processes and people can help save lives and property by enabling rapid and correct information sharing. An application especially developed for fire- men, such as the “Firefighter Log” gives them infor- mation more rapidly than through the conventional communication channels. The app displays the address, map and water supply and the floor plans of burning buildings. Improved situation-awareness empowers efficient decisions, secures assets and may even save lives. Stable communication net- works enable critical processes and services to be enhanced by the collective knowledge and experi- ence stored in the cloud. First responders are now better prepared and supported while saving lives. THE BUSINESS – The strategic direction THE strategic direction As a market leader, Ericsson strives to lead industry transformation through mobility. In order to stay relevant in the future, and to generate further shareholder and customer value, Ericsson continues to implement the Networked Society strategy. 3-5% Market CAGR 2013–2017 Ericsson’s ambition is to grow faster than the market which the Company estimates to increase by CAGR 3–5% (2013–2017). Growth is expected to be achieved primarily through organic growth, but also in combination with acquisitions and partnerships. The Company believes that the track record of moving into new areas and markets is reflected in the current market position and global scale. The strategy is to excel in the core business, establish leader- ship in targeted areas and expand business in new areas. Excel in Core business Ericsson’s two core businesses are “Radio, Core and Transmission” and “Telecom Services” The Networked Society is Ericsson’s vision of a society where everything that benefits from being connected will be connected. The demand for increased mobility, better broad- band and secure access to cloud-based ser- vices are the enablers of the Networked Society and thus the network infrastructure forms the foundation for business with operator customers. Radio, Core and Transmission networks are based on industry standards which ensures global interoperability across all devices and all subscriptions. To enable value creation, the network is, and will be, based on a high-per- formance common infrastructure that offers seamless connectivity and delivers relevant services and content. The rising number of smartphone subscrip- tions and changing user behavior, drives the demand for better coverage, speed and capac- ity. Operators are responding by differentiating their services and adapting them to new busi- ness models. Initially, Telecom Services business was highly dependent on the network infrastructure Excel in core business Establish leadership in targeted areas Expand business in new areas Strategic direction 2014 Future/ Emerging IP Networks Cloud Present/ Large Radio, Core & Transmission OSS & BSS TV & Media Telecom Services Industry & Society In order to be relevant in the future, Ericsson’s strategy is to excel in its core business, establish leadership in targeted areas, and expand business in new areas. 12 Ericsson | Annual Report 2014 utilities, transport and public safety. The ambi- tion is to address these adjacent industry verti- cals in a focused manner, using the existing product offering, core technology expertise, network competence and skills. Expand business in new areas In order to stay in the forefront, the long-term strategy also includes expanding into new areas. The ambition is to develop new areas into value creative businesses with cutting-edge offerings that are competitive and profitable. Ericsson selectively invests in, explores, expands, and may also discontinue, business in new areas. In line with the strategy, the modems development was discontinued in 2014, and the capital was reallocated to areas which are expected to have stronger growth potential. Managing the transition In the transformation process, Ericsson will remain true to its core values of professionalism, respect and perseverance. The ability to imple- ment the strategy depends on the Company’s ability to leverage on its current assets namely the technology and services leadership and its global scale and skills. Ericsson believes that the strategy to become a leader in the ICT industry allows the Company to be in the midst of the market transformation as telecom, IT and media come together and form the foundation for the Networked Society. The strategy implies that the Company needs to make progress on the present and the future at the same time, thus both in the core business and in the targeted areas. The ability to implement the strategy is key to staying relevant and will be reflected in future earnings development and in the ability to create shareholder value. business and was dominated by the installation of network equipment. As competition in the operator market intensified and operators needed to focus on their core skills, Ericsson identified an expanded market opportunity in services. An evolution of capabilities was initiated, in order to match the market demand. Ericsson developed new business models, more inde- pendent of the network infrastructure business, and acquired small and medium-sized local service and consulting companies. The success- ful implementation of this business strategy resulted in a significant shift in business mix. In 2014, 42% of sales was derived from services. Establish leadership in targeted areas To capture growth, Ericsson will continue to real- locate capital and resources to areas beyond its core business. The targeted areas where the strategy is to establish leadership positions include IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society. Ericsson is expanding into targeted areas because they: > address markets that are expected to grow faster than the core business > are adjacent to the core business > have a significant share of software and services > have a larger share of recurring sales and tie up less working capital. Through solutions, network competence as well as service and business capabilities, Ericsson offers tools for its customers to differentiate themselves. The Company will also expand its market exposure to new customers by re-using prod- ucts, solutions and services skills in selected industries. Ericsson believes it can generate value by targeting customers in new industries, either because they have similar business mod- els to telecom operators, or gain from mobile broadband and the larger opportunity for con- nectivity. Ericsson believes mobility is helping industries reinvent the way they create value and today, the Company engages directly with customers in three selected industry verticals – THE BUSINESS – The strategic direction 13 Ericsson | Annual Report 2014 THE BUSINESS – Core business Core BUSINESS Ericsson is a market leader in its core business areas. The strategy is to excel in the core busi- ness, to improve earnings and to continue to lead and innovate. The ambition is to leverage on its installed base and make further investments in R&D to maintain a strong position. The core business areas are called “Radio, Core and Transmission” and “Telecom Services”. C O R E B U S I N E S S Radio, core & transmission In Radio, Core and Transmission, Ericsson sup- ports its customers in the new ICT landscape by leveraging the advantages of technology leader- ship, a position which has resulted in a competi- tive portfolio of radio networks and core net- works. Ericsson continues to invest in new capa- bilities to support customers in the transforma- tion of their networks. The offering includes high-performance net- works that meet demanding customer require- ments. The network equipment market which Ericsson is exposed to is estimated by the Com- pany to increase by CAGR 2–4% (2013–2017). The strategy is to excel with a leading portfo- lio for high-performance networks, by building on scale and operational efficiency to > contribute to the best user experience for consumers > maximize business innovation and business efficiency for customers > maximize earnings for Ericsson. Ericsson wants to remain number one in solu- tions for operator networks and lead the transi- tion to the network architecture that will enable the Networked Society. Maintain performance leadership By the end of 2020, Ericsson estimates that the number of mobile subscriptions will increase to 9.5 billion (from 7.1 billion in 2014) and that around 55% of the traffic that users will generate will be video. High network performance is a key competitive advantage when offering solutions to operators in their transition from circuit- switched to IP-based networks. The capability to provide high-performance networks enables Ericsson to compete on qual- ity and value, which is often reflected in a price premium. The Company believes that, with a user-centric approach, it can meet operator expectations on network performance, regard- ing speed, quality, personalization, simplicity and fast response time. Radio Over time, Ericsson believes that, even if the strategy implies that the business will comprise large infrastructure projects, capacity upgrades and the number of small-cell projects, which are an effect of network densification and indoor coverage build, are expected to increase as a share of total revenues. End-to-end leadership in mobile infrastructure Trans- mission Microwave and optical Internet Radio, based on RBS 6000 Multi-standard radio base station for GSM, WCDMA/ HSPA, LTE and CDMA Core network Core business > Radio, Core & Transmission > Telecom Services 2-4% Market CAGR 2013–2017 Ericsson can deliver end-to-end solutions for mobile infrastructure, including radio, transmission and core. 14 Ericsson | Annual Report 2014 The increasing demand for small-cell solutions is based on arguments such as spectrum effi- ciency, reduced total cost of ownership (TCO) and improved user experience. The key priority is that the software solutions and the functionality in the small-cell environ- ment is the same as in the macro network, to allow for a viable business case for the operator. To meet this demand, Ericsson offers integrated solutions that enable the operator to implement an intelligent heterogeneous network that uses the available spectrum efficiently. This network combines small-cell networks and operator Wi-Fi networks with a densified and improved macro network. The result is a dense multi-lay- ered network, where traffic flows seamlessly. Capacity is where the user needs it, especially indoors where an estimated 70% of mobile traffic is generated. Transmission Ericsson also offers backhaul solutions that match operators’ demands on cost-efficiency, scalability with low complexity, and that are resil- ient to failures with fast recovery times. Erics- son’s backhaul solutions use technologies such as microwave and optical fiber transmission, which are the major transmission solutions avail- able to meet the capacity requirements set by the increased LTE and video traffic. Currently, microwave is the dominating transmission tech- nology for mobile backhaul worldwide, with major arguments being that it enables cost- efficient and fast roll out of mobile broadband. The Company expects the share of microwave backhaul to remain high in the future, connect- ing around 50% of all radio sites in 2020. Core network The IP-based core network portfolio allows operators to use their complete network as a single business resource as opposed to the fragmentation and complexity of most legacy networks. Operators continue to evolve their communication services, by implementing solutions such as IMS, which is also used for providing voice over LTE (VoLTE). Preparing for the next generation; 5G The 5G mobile network is an evolution of the LTE networks, but with new frequencies, technolo- gies and expanded business opportunities. 5G implementation in commercial mobile networks is expected in 2020, but Ericsson has already achieved speeds of 5 Gbps in live, over-the-air demonstrations. The next-generation network, 5G, addresses the relentless growth in mobile data demand, and is an efficient enabler of tai- lored mobile accesses to multiple industries. With 5G, the network performance will be further enhanced to support demands on low latency in real time applications . Ericsson is at the forefront of the develop- ment of this global standard. An important aspect of the next-generation mobile technology, is that it is also an enabler of increased sustainability and improved efficiency in industry and society. The new global standard will be flexible and reliable for multiple industries and use cases. 4-6% Market CAGR 2013–2017 C O R E B U S I N E S S Telecom services Ericsson wants to be an end-to-end business partner for network operators and other custom- ers as the Networked Society becomes a reality. The global scale, skilled workforce, business understanding and extensive experience of managing carrier-class projects and multi-ven- dor networks make Ericsson the largest telecom services provider in the world, supporting oper- ators in creating competitive, attractive and appealing offerings, while providing managed services to networks that serve more than 1 billion subscriptions worldwide. Ericsson addresses a telecom services market that is estimated by the Company to show a CAGR of 4–6% (2013–2017). Ericsson pioneered managed services. The Company had a first mover advantage and the possibility to build scale, and continues to be the undisputed leader. The significant experi- ence gained through 15 years in the managed services business has enabled the buildup of a best-practices pool. This is a significant com- petitive advantage enabling the Company to provide sophisticated methods, tools and pro- cesses as competitive capabilities for operators. Multivendor capability means that services can be provided to customers regardless of which vendor network they have as an installed base. The Company has different sets of skills cover- ing everything from network equipment to THE BUSINESS – Core business 15 Ericsson | Annual Report 2014 THE BUSINESS – Core business Ericsson’s ability to implement the strategy to excel in core business Telecom Services depends on its ability to leverage on its service lead- ership. The strength of the service business proves the value of combin- ing local capabilities with global scale. 16 The Ericsson transformation is expected to be led through these types of services. The strategy is to reuse telecom services capabilities and scale to grow in other industry domains and in new areas. This implies industrializing, globaliz- ing and introducing new processes, methods and tools, so that Ericsson’s customers can deliver high performance services to their users. Ericsson is also strengthening its CSI compe- tences further. CSI specialists focus on helping operators transform their business strategy and processes to improve efficiency, thereby creat- ing a competitive advantage. Analysis, integra- tion design, product customization and solution management are usually part of the offered scope of CSI services. The demand for consulting and integration is rapidly advancing as the Company builds skills and scale to expand the offering to become a trusted transformation partner in every part of the operator’s network. As the network transforms, its complexity increases. With the increased complexity, the need and demand for professional services offerings – including consulting and systems integration, network design and optimization as well as managed services – has evolved. Network design and optimization is currently one of the fastest growing segments within pro- fessional services because of this complexity. software-support processes and the expertise required to design and manage end-to-end solutions ranging from mobile access networks and OSS, to service deployment platforms and BSS. Ericsson wants to further strengthen the number one pos ition in telecom services and be a leading provider of professional services in ICT. The strength of the services business also proves the value of combining local capabilities with global scale. Telecom services evolution The current core offerings are directed to net- work operators. It includes professional services and network rollout. Professional services include: consulting and system integration (CSI), managed services, network design and optimi- zation services and customer support. IT man- aged services are also included in the portfolio. Ericsson’s ambition is to simplify the manage- ment of every element in the operator network. This includes not only access and core, but also IT systems and the applications and services layer. The Company believes that any area in the operator network is address able, but the busi- ness opportunity depends on the maturity of the network and the operations, the geographical location and the competitive situation of the operator. Services-led transformation With everything being connected, the demand for professional services increases. Telecom services strategy – the way forward Build and leverage Industry & Society, Broadcast & Media Services Grow and scale Consulting, Systems Integration, IT Managed Services Extend and excel in core business Network Design &Optimization, Network Rollout, Customer Support, Network Managed Services Ericsson | Annual Report 2014 C O R E B U S I N E S S business mix and cycles This section describes the business mix and business cycles of the core business. Business mix in mobile infrastructure The profitability in Radio, Core and Transmission depends on scale and the sustainability of the market leadership but also on the existing busi- ness mix. The combination of high quality hard- ware and software-based functionality as well as services offerings is Ericsson’s main competitive advantage in enabling high network perfor- mance. Despite a decreasing share of total revenue, hardware remains a core element of the strat- egy. The Company strives to gradually increase software sales as the core business evolves and this, in combination with continuous operational efficiency improvements, will also affect the prof- itability development. In 2014, software sales account for around 40% of total software and hardware sales. Software is an important link to new function- ality and to high-performance networks both of which are key to capturing future growth oppor- tunities, and enabling profitability improvements. Ericsson is leading the transformation of pricing models in the telecom industry by adapting the software pricing model to standard ICT and hav- ing an evolved transparent business model for infrastructure software sales. The Company believes that the way software is priced is critical to profitab ility, and the model will also facilitate customers’ cost predictability through improved transparency. Business cycles in mobile infrastructure The most traditional business model is in net- work infrastructure with its embedded software; delivering and rolling out physical networks including all necessary hardware and software. When Ericsson builds coverage there is a large share of hardware, and the project often includes network rollout services. The initial buildout or rollout phase is capital-intensive and has a lower-than-average gross margin. How- ever, when the network is up and running and demands for capacity expansions arise, profit- ability increases, driven by an increased share of software sales and higher-margin hardware through network densification. In the expansion phase, the network rollout services, which were essential in the rollout phase, make way for pro- fessional services. Business mix in telecom services Large network-infrastructure projects were, and will continue to be, a key element of Ericsson’s business. When building network coverage across one or more geographical areas, the offering often includes network rollout services. A larger share of network rollout, as a share of total services sales, is usually dilutive to Business cycles – mobile infrastructure Coverage (initial phase) > Break-in and green field > Open bidding > More hardware and rollout services > Negative effect on company gross margin > More capital tied up THE BUSINESS – Core business Capacity (expansion phase) > Upgrade, capacity increase > Small-cell deployments > Shorter order cycles > Positive effect on company gross margin The profitability in Radio, Core and Transmission depends on the sus- tainability of the market leadership but also on the existing business mix. Currently software sales as a proportion of software and hard- ware sales is around 40%. 17 Ericsson | Annual Report 2014 THE BUSINESS – Core business profitability. Thus, balancing the business mix between network rollout and professional ser- vices – customer support, network design and optimization, consulting and systems integration (CSI), network managed services – is central to the profitability. Business cycles in managed services The managed services business model is different from the other services offerings as Ericsson takes over aspects of a customer’s business operation as a long-term commitment, over several years. The business model includes three phases of which the initial phase, the tran- sition, is coupled with lower profitability, as it involves significant costs up front when staff and expertise are transferred from the customer to Ericsson. In the second phase, the transforma- tion, Ericsson introduces its global processes, methods and tools and implements a global delivery model. In the third phase, Ericsson focuses on optimization and industrialization by simplifying, implementing and consolidating resources, processes, methods and tools to allow for improved profitability. The Company has reached a good balance of contracts in the transition, transformation and optimization phases – with currently about 70% in the optimization phase – which have a benefi- cial effect on earnings and cash flow. Over time, the Company has advanced on the learning curve, which means that global synergies can be obtained, and thereby the initial phases can be shortened. This limits the negative impact on cash flow in the transition phase when going into new contracts. Business model – managed services Profitability Current contract mix ~30% ~70% TRANS- ITION TRANS- FORMATION OPTIMIZATION Industrialize and evolve contract Optimize and shorten transition and transformation Ericsson has a good balance of contracts in the transition, transformation and optimization phases. Over time Ericson has advanced on the learning curve which implies that it can now leverage global synergies and reduce the transition phase. 18 Ericsson | Annual Report 2014 Antenna Integrated Radio Ericsson’s AIR product combines antenna and radio in one elegant package. This enables the delivery of high network performance and enables the operator to deploy new technology in a swift and simple way, eliminating the vast majority of site components and in that way reduce site acquisition or leasing costs but also improve site estethics. By deploying AIR, the operator can roll out new technology or upgrade network coverage and capacity more efficiently and faster than by using conventional solutions. AIR also reduces the energy consumption of radio base stations and is therefore a key enabler for on-site energy solutions. With radio units mounted inside the antenna, Ericsson’s Antenna Integrated Radio (AIR) solution eliminates feeder losses and uses a simplified cooling system, resulting in a significant reduction in energy consumption and costs com- pared to conventional macro base stations using passive antennas. The AIR solution clearly increases operational efficiency in the network, and through increased energy efficiency.It also reduces the environmental footprint of the network. THE BUSINESS – Targeted areas targeted areas Global presence, software skills as well as the heritage of end-to-end and multi-tech- nology expertise form a sound foundation for Ericsson’s business in targeted areas. The ability to implement the strategy depends on the capabilities to transform the targeted areas to value creative core businesses in the long term. Targeted areas > IP Networks > Cloud > OSS and BSS > TV and Media > Industry and Society To remain relevant in the future market, Ericsson is investing in five targeted areas: IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society. The Company intends to implement the strat- egy by building on existing capabilities in the core business and leveraging its technology and services leadership combined with global scale and skills. The objective is to establish top three leader- ship positions in these targeted areas. Ericsson already has a number one position in some of these areas, such as in OSS and BSS and in IPTV and media delivery, and intends to further strengthen the offering. The targeted areas combined represented a market of USD 110–130 billion in 2013, with an estimated CAGR of about 10% (2013–2017). The targeted areas thus have a higher growth rate than the core business. They also have some characteristics that are important – a high degree of software and professional services, more recurring revenues and less working capi- tal. Since the target areas are adjacent to the core business, Ericsson believes that its global services expertise and software skills form a sound foundation for the business in these areas. The introduction of new pricing models for software sales, with an up-front payment of a permanent license, usually supplemented by a support and maintenance contract is expected by Ericsson to imply a higher degree of recurring revenues. The targeted areas play a significant role in the evolution of customers’ networks to match the demands of the Networked Society. As the targeted areas require a high degree of services and have a high degree of software, they also support the development of the business mix to one where services and software clearly domi- nate. Currently, a majority of the total business in targeted areas relates to services. Approxi- mately half of the sales growth up until 2020 is estimated to be derived from the targeted areas. Income from these areas is expected to be accretive to operating margin over time. Ericsson believes the combined strength of the product and professional services portfolio will be a competitive advantage. Criteria for targeted areas Growth potential High degree of software and professional services High degree of recurring revenues Adjacency – leveraging Ericsson core business areas 20 Ericsson | Annual Report 2014 3-5% Market CAGR 2013–2017 IP Edge, Metro Aggregation, Systems integration Definition Alcatel-Lucent, Cisco, Huawei, Juniper Competition Market 2017: USD 14–16 billion (includes SDN) Market outlook TA R G E T E D A R E A IP Networks Ericsson believes it can build on a leading position in mobile backhaul and packet core networks to grow the footprint in IP Networking for operators, where the Company wants to take a top three position. The market for IP Networks is exp ected to grow by GACR 3–5% (2013–2017). The market for IP Networks is driven by technology disruption and the prevailing IT paradigm. An evolved network architecture has become a critical enabler of the fast intro- duction of new services and of the efficient handling of the increasing amount of data traffic. The legacy telecom networks were designed to deliver a limited number of ser- vices, such as voice and text messages, while the new IP-based multi-service networks cre- ate opportunities for operators to unlock the full potential of mobility, video and the cloud. It allows for increasingly virtualized network features, adding flexibility and paving the way for cooperation with new partners. The network needs to be aware of con sumers, services, devices, location in order to scale bandwidth and connections, while being much simpler to operate and maintain. This is enabled through unified management and orchestration including capabilities such as service provider software defined networking (SDN) and service awareness. With the sup- port of Service Provider SDN, operators can orchestrate network resources on different layers for different purposes under the same management system. IP networking solutions and Service Provider SDN are the key enablers to building a future network that is smart, simple, scalable and capable of delivering superior performance. TA R G E T E D A R E A Cloud Ericsson intends to use its network experience and competence to create compelling cloud solutions and strives to be number 1 in opera- tor telecom cloud. The strategy includes the development of a broad range of offerings. The IT paradigm and technology disruption drives the demand for cloud solutions to enable more flexible access to real time ser- vices. Ericsson strives to ensure that products are ready for deployment in any type of cloud environment, and that applications are suitable for moving to virtualized environments. Network functions virtualization (NFV) offers a way to rationalize and simplify operations as well as speed up innovation, primarily for parts of the core and transport networks. The tech- nology enables the network to allocate resources to IP-based services and applica- tions according to capacity demand. Through NFV, combined with software defined net- working (SDN), the hardware and software are decoupled and the functionality is virtualized. An architecture built on cloud allows the operator to instantly deploy, modify and scale services and applications, and it enables an easier adaption of network characteristics and resources to serve the dynamic and real-time nature of new services. The virtual infrastruc- ture is thus extended beyond the traditional computing and storage resources. NFV and SDN together open up the oppor- tunity for operators to implement services more quickly and flexibly and to reduce opex and to some extent capex. Ericson recently added telecom cloud transformation as a CSI (consulting and sys- tems integration) offering to enable operators to provide high-performance services in the virtualized network. In 2014, Ericsson acquired a majority stake in Apcera to strengthen the cloud offering for the Enterprise IT market and entered into partnership with Guardtime to deliver secure clouds. Platform initially for network functions virtualization (operator telecom cloud) Definition Telecom vendors, IT vendors and Niche vendors Competition Early market for network function- virtualization. Driven by need for speed, efficiency and innovation Market outlook THE BUSINESS – Targeted areas 21 Ericsson | Annual Report 2014 THE BUSINESS – Targeted areas 5-7% Market CAGR 2013–2017 Operations and Business Support Systems Definition Accenture, Huawei, IBM, Amdocs, Netcracker, Comverse Competition Market size 2013: USD 51 billion Market outlook This is BSS and OSS Business Support Systems help with customer care, in areas such as ordering, billing and collecting payments. Operations Support Systems ensure the technical aspects of network quality, such as performance and capacity. 22 TA R G E T E D A R E A OPERATIONS AND BUSINESS SUPPORT SystEMS (OSS AND BSS) Ericsson has a complete end-to-end OSS and BSS software offering and consulting, systems integration and IT managed services capabili- ties. OSS and BSS systems allow operators to manage the network, provide high-quality user experience and quickly introduce new services and charge for them. The fragmented OSS and BSS market is expected by the Company to increase by CAGR 5–7% (2013–2017). Ericsson believes that its software expertise and real-time network experi- ence are competitive advantages in this market. The ambition is to extend the installed OSS and BSS base while also expanding the service offerings for transformation. The OSS and BSS software offerings are based on a modular architecture, which means that the products are configurable and easily integrated and thereby also less expensive to maintain. Focus is on process-oriented, pre-in- tegrated software suites to differentiate the offer- ing and to speed up time to market. Ericsson supports the transformation of OSS and BSS through these software suites com- bined with consulting and systems integration services, so that operators can adapt to rapidly changing and competitive markets. Through simplified processes and better business effi- ciency, Ericsson helps operators reduce total cost of ownership. Most importantly though, OSS and BSS transformations can provide competitive advan- tages for operators through better targeted offerings to their customers, better user experi- ence and improved customer service. In Ericsson’s role as a consolidator of opera- tors’ OSS and BSS systems, scale is an import- ant foundation for generating profitability. As the number of connected devices increases, so does the number of individualized subscriptions and price plans, and this increase will require real-time processing. Based on Ericsson’s real-time data expertise, its charging and billing software suite allow for quick intro- duction of new pricing models and offerings that enable value creation. The software suite allows operators to pro- vision, and charge for, the user services in an efficient way. It also offers operational efficiency through efficient data monetization including charging and billing, policy management and actionable insight via telecom analytics. The OSS system provides the foundation for an integrated solution for network services and over-the-top (OTT) services, as well as big data and analytics. This means that the OSS and BSS solutions enable the operators to manage user interactions and capitalize on the revenue streams that data generates, through offering efficient management of the operators’ custom- ers as well as of their networks. The software suite and related services match the key operator success factors of user experience, business efficiency and innovation. Customer Business Support Systems (BSS) Operations Support Systems (OSS) Network Ericsson | Annual Report 2014 TA R G E T E D A R E A TV and Media Ericsson’s ambition is to be the transformation partner of choice as the TV and Media industry undergoes change. The connectivity and capa- bility of broadband is redefining the user, busi- ness and technology aspects of digital entertain- ment. Ericsson has over 20 years of experience of content creation, exchange, distribution and delivery of TV. Ericsson expects the TV and Media market to have a CAGR of 11–13% (2013–2017). Ericsson aims to enable the evolution of TV by creating innovative solutions that enable content owners, broadcasters, TV service providers, and network operators to efficiently deliver, manage and monetize new TV experiences. The Company does this by combining a product portfolio that spans the TV value chain, comple- mented by systems integration and broadcast managed services. The offering includes a software portfolio of TV platforms, end-to-end video delivery network solutions for video compression that enable new consumer services such as digital TV, High Defi- nition (HD) and 3D. Ericsson launched the Ericsson MediaFirst TV Platform in 2014, a software-defined platform for the creation, management and delivery of next generation Pay TV. It is an end-to-end cloud-based platform for TV service providers. Ericsson’s media delivery network (MDN) solution empowers IP network owners with a suite of tools to efficiently manage video traffic, and ensure user experience while enabling new revenues. With network control and efficiency 11-13% Market CAGR 2013–2017 TV and video solutions for content own- ers, broadcasters, TV service providers and network operators Definition CISCO, Huawei, Arris, Harmonic, Alcatel-Lucent, Arqiva, Encompass Competition Market size 2013: USD 13 billion Market outlook from content to consumer, it positions operators for fast time-to-market and monetization. The broadcast market is in the midst of a technology disruption, caused by the over- the-top (OTT) companies, and the need for operational efficiency, which drives demand for outsourcing of broadcast services and for IP transformation. Ericsson has expanded its established model for network and IT managed services to deliver broadcast services. These services capabilities enable broadcasters to make significant capex and opex savings through automating processes and standardization in processes, methods and tools, while applying Ericsson’s global delivery model and services capabilities. Ericsson assumes responsibility for technical platforms, which means that the broadcaster can reduce time to market and minimize business continuity risks. Ericsson’s solutions address the demands of the traditional broadcasters, as well as those of new entrants. Both customer segments face the challenge of adapting to a fast-changing and complex technological landscape. The combi- nation of products and consulting, systems integration, training, and broadcast managed services allow Ericsson to advise, guide, sup- port, implement and manage its customers’ transformation in the evolution of TV. TV & Media Industry overview Global TV delivery industry Content production Content management Playout Service provisioning Distribution Consumption on devices Ericsson provides solutions and services to those managing, distributing, aggregating and delivering content to consumer screens and devices. Customers include: content owners, broadcasters, TV service providers and network operators. THE BUSINESS – Targeted areas 23 Ericsson | Annual Report 2014 TA R G E T E D A R E A Industry and society There is a high demand for connectivity and intelligent systems in markets such as utilities, transport and public safety. Ericsson believes that many of the demands in these market seg- ments, which it refers to collectively as “Industry & Society”, can be met with the Company’s existing portfolio. Ericsson’s capabilities, combined with its proven record of commercializing advanced ICT solutions, provides a solid foundation for bring- ing innovative capabilities into industry verticals while providing efficiencies of scale. The ambition is to strengthen the number one position in solutions for operators to become a leading professional services provider in three adjacent selected industry verticals; initially utili- ties, transport and public safety. The rapid uptake of connected devices and self-service applications is changing the way companies do business. The mobile network is fundamental to this development. Under the designation of Industry and Society, the industry verticals of utilities, transport and public safety play an important role in Ericsson’s strategy to grow in adjacent industries, reusing and extend- ing the current portfolio of both products and services. These selected industries are rapidly trans- forming driven by mobility and evolving technol- ogies entering the market, such as smart grids, intelligent transport systems and multimedia services. The technology shifts offer new business opportunities for Ericsson. Ericsson’s technology and services leader- ship form the foundation on which to expand the business by addressing new customers across the selected industry-vertical industries. The Company brings innovative thinking, a deep understanding of a wide variety of communica- tions technologies and experience in designing, deploying and managing services globally for the Networked Society. One of the innovative offerings is the Con- nected Vehicle Cloud which targets the global automotive industry’s existing and future demands for scalability, security and flexibility in the provisioning of connected car services to drivers and passengers. The selected industries are also facing increased demand on sustainability and effi- ciency – demands that Ericsson can address by leveraging its technology leadership in its core business. The telecom network and related services that Ericsson offers, including network infra- structure and professional services, meet com- munication needs that the industry verticals require, and helps to fulfill requirements of high reliability and high speed. The need for broad- band connectivity is becoming critical, and, in Ericsson’s view, proprietary networks are no longer necessary to cater for the vast needs in specific industries. The resources in technology, consulting, systems integration and managed services on a global scale enables Ericsson to address adjacent industries. The selected industries can benefit from Ericsson’s mobility expertise and services innovation, while the Company expands its footprint into new high-growth markets and brings disruptive change into the rapidly transforming industries. Three focus industries Utilities Transport Public safety THE BUSINESS – Targeted areas Focus on Utilities, Transport and Public safety Definition IT and telecom vendors as well as industry specific vendors Competition Large, fragmented market with good growth Market outlook 24 Ericsson | Annual Report 2014 A smart pole Ericsson “Zero Site”, developed in cooperation with Philips, is a transmitter of both light and mobile connectivity. The “Zero Site”, a connected lighting solution integrating telecom equipment into light poles, enables telecom operators to improve mobile network performance while reducing urban clutter. Citizens will benefit from improved mobile network coverage for data communications and enhanced safety with brighter, well-lit streets. The solution enables telecom operators to improve the mobile network, cities to save space and energy, and con- sumers to have a better user experience. Thus, the combination of wireless connectivity and energy- efficient lighting makes streets safer and communi- cation easier.Increasing mobile network density through the light pole and turning it into real estate is a sustainable way of improving network connectivity. By optimizing the use of power resources in real time, efficiency is increased and the environmental foot- print is reduced. THE BUSINESS – Resource allocation RESOURCE ALLOCATION Ericsson reallocates capital and resources to support the strategy. Invest- ments in services capabilities goes hand in hand with investment in product development, sales capabilities and in acquisitions and partnering. Ericsson has always been a company driven by innovation – in technology and business. The Company’s long-term lead- ership in technology and services is a result of continuous efforts to invest in the ability to deliver customer value and to be relevant in the future. R&D investment R&D investments are the foundation for maintaining a technology leadership posi- tion. Investments in R&D keep the product portfolio and customers in front of a rapidly transforming market and to safeguard, secure and improve technology leader- ship. Ericsson will continue to invest a sub- stantial part of R&D in the core area of Radio, Core and Transmission, to further enhance the capabilities in areas such as small cells and 5G. R&D investments in software are significant, as mobile net- works are increasingly software-centric. Ericsson will prioritize R&D investments in targeted areas to win technology leader- ship positions in these areas. R&D invest- ments in the targeted areas will help the company expand the positions in areas such as IP Networks and Cloud. Continuous focus will also be on finding better ways to do things internally, includ- ing how to further improve R&D agility. Lean and agile workflows in R&D has enabled Ericsson to bring innovations faster to the market and to increase oper- ational efficiency. During 2014, Ericsson opened its first ICT center in Sweden where R&D engi- neers can work beyond borders more easily and efficiently, bringing innovation and providing industry-leading cloud- enabled technology faster to the market. Two additional ICT centers are expected to be opened in 2015 – one in Canada and another in Sweden. Investment in services capabilities In Telecom Services, the global knowledge base enables Ericsson to develop new solutions that can be reused to offer bene- fits to customers. Locally, in each region, Ericsson professionals work with custom- ers to develop innovative, scalable solu- tions. Best practices are shared across regions, boosting quality and efficiency. When a successful customer solution is proven in one region, it can be rolled out globally. Ericsson has invested in common global processes, methods and tools to enable synergies and efficiency gains to safeguard the global scale advantage. Acquisitions and partnering Ericsson has made specific acquisitions to strengthen the offerings in the targeted areas. In core areas, especially in Radio, Core and Transmission, the acquisition activities have mainly been related to con- solidation activities and to create synergies to extend the leadership position. The strategy to establish leadership in targeted areas includes investing to accelerate growth and to improve Ericsson’s compet- itive position through small bolt-on acquisi- tions and strategic partnering agreements. The ambitions of M&A and partnering activities are to fill portfolio gaps, to improve scale and skills and, above all, to strengthen the ability to create value. The activities address both product and services com- panies. In 2014, Ericsson invested in com- panies like Red Bee Media, MetraTech and Apcera and also partnered with Guardtime in the area of secure cloud. Investment in sales competence Investment in new competence is required for new solutions in the targeted areas, not only for R&D but also in sales resources as well as in service delivery resources to allow for economies of scale. In 2014, Ericsson increased invest- ments in sales capabilities particularly for Cloud and IP. Industry and Society cus- tomers were first addressed in three regions to learn how to sell and deliver in this customer segment. After the initial phase, sales processes and ways of work- ing are reused in other regions to get scale. Resource allocation to secure strategy implementation Radio Cloud & IP Global Services Support Solutions R&D investments Services delivery investments Selling investments Incentives M&A and partnering 26 Ericsson | Annual Report 2014 THE IPR portfolio Licensing of intellectual property rights (IPR) contributes to a fair return on R&D investments and is a key element in Ericsson’s growth strategy. The royalty-based IPR (Intellectual Property Rights) licensing business is a key element in the strategy to capture growth. Higher IPR revenues have an accretive impact on profitability. Aligning with the strategic direction and ambition to grow faster than the market, these revenues are expected to continue to increase. The IPR strategy is to enlarge IPR licensing revenues by expanding the technology licensing portfolio to cover other products and by broadening Ericsson’s customer base beyond handset manufacturers and into new industries. The Company has created a licensing port- folio, representing the value of technology knowhow and R&D. The portfolio includes both technology and patent licensing. The defensive value of the IPR portfolio protects the sales of Ericsson’s products and services as cross- licensing agreements are signed with other major IPR holders. The offensive value allows Ericsson to commercialize and obtain a fair return on the IPR portfolio. Both these values are direct returns of the investments made in R&D. Over the past five years, annual R&D investments have been around SEK 31–33 billion and reve- nues from the IPR licensing business is increas- ing over time and were SEK 9.9 billion in 2014. In technology licensing, Ericsson provides specifications to proprietary technologies such as different interfaces, while the patent licensing includes giving access to essential patents for different technology standards. Ericsson complies with its commitment, to standardization bodies, to license essential patents on fair, reasonable and non-discrimi- natory (FRAND) terms, which implies that accu- mulated costs are kept at a reasonable level. Ericsson’s view is that owners of essential pat- ents should be compensated proportionally to their technology contribution to the standard. An example of a cross-licensing agreement is the multi-year license agreement between Samsung and Ericsson. The agreement covers patents for 2G, 3G, and 4G standards for net- works and handsets. Ericsson’s innovative portfolio is the result of the work of 25,000 R&D engineers. Most of the patents developed within the R&D organization are in wireless technology. Ericsson is involved in industry-wide standardization processes regarding mobile technologies and standards. By addressing the issue of spectrum by improv- ing spectral efficiency with new technologies or features, and taking part in the industry deci- sion-making regarding new suitable frequency bands, Ericsson has helped to render the devel- opment of many new technologies and patents. With more than 37,000 patents granted, the Company has one of the industry’s strongest patent portfolios. IPR strategy > Generating revenue by commercializing Ericsson’s IPR portfolio > Increased revenue from cross-licensing, divestments, structured deals and partnering > Protecting Ericsson by signing cross- license agreements with major IPR holders > Ensuring market access and reduced IPR-cost in Ericsson products’ cost-base Offensive value Defensive value Today Tomorrow THE BUSINESS – The IPR portfolio 27 Ericsson | Annual Report 2014 THE BUSINESS – Business structure business structure Strategic structure Reporting structure Segments and share of sales from targeted areas OSS & BSS TV and Media Industry & Society IP Networks Cloud CORE BUSINESS TARGETED AREAS NETWORKS GLOBAL SERVICES Share of sales from targeted areas Share of sales from targeted areas The strategic direction is to: Excel in core business Radio, Core and Transmission and Telecom Services. Establish leadership in targeted areas IP Networks, Cloud, OSS & BSS, TV and Media and Industry & Society. Expand in new areas with future possibilities and growth. To best reflect the business focus, Ericsson reported four business segments 1) in 2014 Radio, Core and Transmission, as well as IP Networks and Cloud report into Networks, while Telecom Services report into Global Services. The product and software deliveries of OSS and BSS, TV & Media, report into Support Solutions, while services related to these areas report into Global Services. Industry and Society reports into Global Services. Many of the areas there- fore have elements of both product and services. Each business segment contains various shares of sales from the targeted areas. Sales in targeted areas showed a growth of more than 10% in 2014. 1) Segment Modems did not contribute material revenues, as development of modems was discontinued in 2014. Read more in the Board of Directors’ Report on page 46. Read more on pages 12–24 Read more on pages 30–32 28 Ericsson | Annual Report 2014 Regions Sales per region and segment 2014 and percent change from 2013 SUPPORT SOLUTIONS SEK billion 2014 Change 2014 Change 2014 Change 2014 Change Networks Global Services Support Solutions Total Share of sales from targeted areas North America Latin America Northern Europe and Central Asia Western and Central Europe Mediterranean Middle East Sub-Saharan Africa India North East Asia South East Asia and Oceania Other 1) Total Share of total 26.1 10.7 8.0 8.1 9.6 11.6 3.9 4.1 18.0 8.4 9.1 117.5 51% –9% –5% 10% 6% –11% 36% –21% 32% 8% –6% –10% 0% –12% 14% –1% 8% 0% 12% 3% 15% –14% 10% 61% 0% 25.0 10.8 4.1 11.0 12.6 8.5 4.3 3.1 8.9 7.0 2.3 97.7 43% 34% –10% 10% 1% 12% –11% –39% 55% 82% –4% –12% 3% 3.5 1.0 0.3 0.6 0.8 1.2 0.6 0.5 0.7 0.5 3.1 12.7 6% 54.5 22.6 12.4 19.7 23.0 21.3 8.7 7.7 27.6 15.9 14.7 2) 228.0 100% –8% 3% 6% 7% –5% 22% –13% 25% 1% 0% –2% 0% 1) Region “Other” includes licensing revenues, broadcast services, power modules, Ericsson-LG Enterprise and other businesses. The power cable business was divested in 2013. 2) Total sales for region “Other” includes SEK 0.2 billion for Modems. Net sales per segment 6% The go-to-market organization is divided into 10 geographical regions. Together, they represent worldwide presence with customers in more than 180 countries. The three largest markets are North America, North East Asia and the Mediterranean region. 51% Revenues for the different business segments are reported for each region. 43% Networks SEK 117.5 (117.7) billion Global Services SEK 97.7 (97.4) billion Support Solutions SEK 12.7 (12.2) billion Modems – no material revenues Read more on pages 33–35 THE BUSINESS – Business structure 29 Ericsson | Annual Report 2014 S E G M E N T networks Within segment Networks, the strategy is to lead the radio evolution, grow IP networking and transform to cloud core. Networks delivers products and solutions needed for mobile and fixed communication, including 2G, 3G and 4G radio networks, IP and transmission networks, core networks and cloud. The main offerings include: > The multi-standard RBS 6000 radio base station supports all the major mobile tech- nologies including GSM/EDGE, CDMA, WCDMA/HSPA and LTE in a single cabinet. > The IP and transmission solutions are based on the SSR 8000 portfolio. The SSR 8000 is a high-capacity platform that improves net- work performance and supports service dif- ferentiation in fixed and mobile networks. The momentum for the multi-application router, has continued with 146 contracts signed since its launch in December 2011. > The Ericsson Blade Server platform includes functionality for handling network control in fixed and mobile core networks. The IP Multi- media Subsystem (IMS) solutions enable operators to offer communication in new ways, such as Voice over LTE (VoLTE), high-definition video calling and conferenc- ing, multi-party chat with presence informa- tion, and screen sharing, while reducing costs. IMS enables Voice over LTE (VoLTE), High Definition Video and the Ericsson Cloud System. > The Ericsson Cloud System is a platform for providing cloud services and to enable virtualization of network functions according to NFV, and where Service Provider SDN enables the distribution of the virtualized functionality. > Optimized transmission/backhaul products includes microwave and optical transmission solutions for mobile and fixed networks. The transmission network constitutes the links between the core network and access nodes. Networks’ major business models have so far been based on network coverage and network capacity expansions and upgrades. The revenue mix consists mainly of hardware and software. Gross margins are affected by the business mix between sales of upgrades and expansions and coverage or new build-outs. Network coverage build-out, which is mainly hardware related, is to a large extent done on site, supported by Ericsson’s network rollout services, while upgrades and expansions usually involve soft- ware and professional services, and are often delivered remotely. The Company is transform- ing its business model to be more software based, with an increasing share of royalty and license-based revenues. GSM/EDGE technology has by far the widest reach today, covering more than 85% of the global population. The areas yet to be reached by GSM/EDGE are in some countries that are sparsely populated. Demand for WCDMA/HSPA is driven by increased user demand for internet access, the growing affordability of smartphones and regulatory requirements to connect the unconnected. In terms of capacity and demand for superior network performance, mobile data traffic continued to grow rapidly in 2014. The rising number of smartphone subscriptions is a key driver for mobile data traffic growth, together with the fact that users are consuming more data per subscription – mainly driven by video. Total smartphone subscriptions reached 2.7 billion during 2014, and the number of subscrip- tions for mobile PCs, tablets and mobile routers reached 300 million. The majority of mobile broadband subscribers are connected using 3G/WCDMA networks, but increasing numbers are gaining 4G/LTE access. Ericsson expects LTE to keep expanding from 400 million sub- scriptions in 2014, reaching around 3.5 billion in 2020. 2G/GSM/EDGE networks are still an important part of the ecosystem and a com plement to 3G/WCDMA/HSPA and 4G/LTE coverage. THE BUSINESS – Business structure Ericsson provides the network infrastructure needed for mobile and fixed communication, including 2G, 3G and 4G radio networks, and IP core and transport networks. Market position #1 in radio access Market share estimate 23% in network equipment, key segments* * Key segments include Radio, IP and Transmission as well as Core. Sales SEK 117.5 billion (2013: 117.7 billion) Operating margin 12% (2013: 10%) Sales and operating margin SEK billion 150 120 90 60 30 0 12.0 117.5 2011 2012 2013 2014 Sales Operating margin 30 % 15 12 9 6 3 0 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Ericsson | Annual Report 2014 S E G M E N T Global Services The business strategy within Global Services is to extend and excel in the core business: net- work roll-out, customer support and managed services, while growing the business in consult- ing and systems integration as well as in IT managed services and broadcast services. The Company’s global set of processes, methods and tools are major competitive advan- tages and support the strategy to benefit from the global scale in targeted areas and especially in broadcast services and media services and in the selected industry verticals of transport, public safety and utility industries. The telecom services business, represented 43% of net sales in 2014 (43% in 2013). Within Global Services, Managed Services and Consulting & Systems Integration continue to drive growth. Through approximately 65,000 services pro- fessionals and four global service centers, which offer a universal approach to managed services based on years of innovation and global best practice, Ericsson deploys, operates and evolves networks and related support systems. The Company delivers managed services, prod- uct-related services, consulting and systems integration services and broadcast services. The ambition is to support operators to improve their revenues, increase their opera- tional efficiency and to transform their networks. Ericsson strives to create value by combining technical, services and customer experience expertise. The offerings include: > Network managed services for designing, building, operating and managing the day-to- day operations of the customer’s network or solution; maintenance; network sharing solu- tions; plus shared solutions such as hosting of platforms and applications. Complex issues are handled, such as convergence, quality and capacity management, so that operator resources can focus on strategy, marketing and customer care. > IT managed services, whereby Ericsson assumes responsibility for aspects such as application life-cycle management, applica- tion development, quality assurance and day-to-day operations and maintenance for both applications and infrastructure. Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Markera skiktade delar med vita pilen. Välj Object–Graph–Column. Där väljer man färg som ska vara på den översta rundade delen. Kolla särskilt att “Sliding” är valt på “Column type”. Då blir alla delar med rundad topp – inte bra ;). De nedre markeras då med vita pilen och i Column väljer man “none” och färglägger som vanligt från paletten swatches. > Broadcast services for TV and media com- panies. Services include responsibility for technical platforms and operational services related to TV content management, play out and service provisioning of a TV broadcast- er’s business. Ericsson has the capability to consult, integrate and manage business operations for TV and media, reusing skills, methods and tools from network managed services. Broadcast services help to enhance the efficiency of the business operations of content owners and broadcasters, providing significant operational and capital savings through assuming responsibility for technical platforms, enabling speeding time to market and minimizing business continuity risks. The investment in Red Bee Media in 2014 further enhanced the broadcast services capabilities. > Product-related services: Services to expand, upgrade, restructure, or migrate networks; network-rollout services; customer support; and network optimization services. Network design and optimization services ensure that networks can handle high levels of data traffic while maintaining service quality and user experience. > Consulting and systems integration (CSI): technology and operational consulting; inte- gration of multi-vendor equipment; design and integration of new solutions and transfor- mation projects. CSI services assist opera- tors in driving business transformation and ensuring competitiveness while facing the challenges of this new environment. Ericsson is expanding the established model for net- work and IT managed services to adjacent areas such as cloud services, TV and media, and selected industry verticals. The Company also offers services related to the planning, building and optimizing of OSS including ser- vice fulfillment and service assurance. > Services for Industry and Society; reusing existing portfolio for non-telecom customers in the areas of utilities, transport and public safety. The product mix is divided between network rollout services and professional services of which managed services is a significant part. The proportion of network build outs as well as managed services deals in the transition phase affects the gross margin of Global Services. As sales are based on various services offerings the challenge is to manage and optimize cost of sales. R&D investments are limited. Unlike the profes- sional services business, rollout services of extensive networks are working-capital intensive. Each year, Ericsson manages more than 1,400 major projects for network build, expan- sion or migration for all major standards of mobile and fixed networks worldwide. On aver- age, 100 of these are large, complex turnkey projects. The Company provides managed services to networks that serve more than 1 bil- lion subscribers in approximately 100 countries. These networks are typically multi-vendor, multi-technology environments, with more than half the equipment from non-Ericsson sources. Ericsson’s approximately 65,000 services profes- sionals around the world deploy, operate and evolve networks and related support systems. Global Services includes professional services and network rollout. Market position #1 in telecom services Market share estimate 13% in telecom services Sales SEK 97.7 billion (2013: 97.4 billion) Operating margin 6% (2013: 6%) Sales and operating margin SEK billion 100 % 97.7 10 80 60 40 20 0 6.0 2011 2012 2013 2014 8 6 4 2 0 Sales Operating margin THE BUSINESS – Business structure 31 Ericsson | Annual Report 2014 THE BUSINESS – Business structure The Support Solutions segment focuses on software for operations and business support systems (OSS and BSS), as well as TV and media management, and m-commerce. S E G M E N T support solutions The portfolio is designed around measurable performance improvement in an operator’s business processes, with software that is scal- able, configurable and provides end-to-end capabilities. The offerings includes: > Operations support systems (OSS) and business support systems (BSS) solutions for telecom operators. The growth of mobile broadband is leading operators to develop their OSS and BSS solutions in order to mon- etize the increasing amount of data traffic that flows in the networks, while at the same time managing the increasing complexity of net- works and services. OSS software solutions; support operators’ management of existing networks and the introduction of new tech- nologies and services, through software products for service enablement, fulfillment and assurance as well as telco analytics, orchestration and cloud management. Busi- ness Support Systems (BSS) handle revenue management (prepaid, post-paid, convergent charging and billing), mediation and customer care solutions. BSS manages how services are delivered and paid for. Products for reve- nue assurance and billing and revenue man- agement help maintain customer relationship and keep track of revenues > TV & Media solutions: a suite of standards- based products for the creation, manage- ment and delivery of evolved TV experiences on any device over any network. Ericsson’s TV platforms – enabling TV service providers to deliver on the TV Anywhere future – are powering more than 110 TV services for over 18 million subscribers. Through the acquisi- tion of Tandberg Television in 2007 and Mic- rosoft’s Mediaroom in 2013, Ericsson is now the leader in the video compression IPTV and business, with multi-screen solutions for TV > M-Commerce; solutions to enable mobile financial services for domestic and interna- tional money transfer, payment transactions and services between mobile subscribers and operators and other service providers. > Industry and Society; solutions for the indus- try and society market, Ericsson adapts existing solutions for new applications. The service enablement platform has been used to create the Connected Vehicle Cloud and billing-as-a-service products are reused for connected devices applications. Sales are dominated by software and the busi- ness is R&D-intensive, with limited working capi- tal. In order to be profitable, continuous central- ization and harmonization of R&D is important in order to keep the product portfolio together. Ericsson is executing on recent acquisitions, while transforming the business model from one that is based on a revenue intake from tradi- tional telecom software licenses to one that puts emphasis on recurring software sales based on subscription-base software as a service (SaaS) offerings. Market position #1 in OSS and BSS Market share estimate >20% in IPTV Sales SEK 12.7 billion (2013: 12.2 billion) Operating margin 0% (2013: 12%) Sales and operating margin SEK billion 15 10 5 0 –5 12.7 0 2011 2012 2013 2014 Sales Operating margin 32 % 15 10 5 0 –5 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. -5 9 12 01) Ericsson | Annual Report 2014 REGIONAL DEVELOPMENT Ericsson is a global company, with customers in more than 180 countries. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The expertise and local knowledge gained through working closely with customers create global scale, which is an important pillar of the business success. It is important to find a beneficial mix between different businesses and regions in order to secure a good balance between growth and profitability. The differing nature of the busi- nesses as well as regions reflects Ericsson’s global position and the ambition to be regionally diversified is part of the overall strategy to miti- gate the impact from imbalances and depen- dencies. Ericsson has ten geographical regions which vary in size and where the maturity of the opera- tors and the markets differ. The solutions-based go-to-market approach is built on close cooper- ation between business units and regions. Each region is organized the same way. The relation- ship between the regions and the business units is such that the business units develop the prod- ucts and the regions cultivate relationship with its customers and address customers’ needs. This also spurs innovation, as it allows the regions to identify local needs and when these are translated into solutions, the innovations can be spread globally. To manage the extensive managed services business in an efficient way, services are deliv- ered locally from the ten regions and globally from four Global Service Centers where large- scale activities are concentrated. The Global Service Centers are located in India, China, Mexico and Romania. Over the past five years, the North American region has increased the share of total Group sales, driven by intense operator activity. Ericsson is a market leader both in telecom services and mobile broadband infrastructure In the North American market. After a couple of years with major LTE network buildouts, the business in North America was driven by net- work quality and capacity expansion business in 2014. This was a consequence of the increase in user demand for mobile data. Business slowed down during the latter part of 2014 as operators focused on cash flow optimization. The overall market fundamentals are strong with continued need for capacity investments and densification, driven by video and the introduction of new ser- vices such as VoLTE. This market is in the fore- front when it comes to network development and LTE usage, and several of the targeted areas, such as OSS and BSS, IP, Cloud as well as TV and Media, have a strong potential. Ericsson has established a position in 4G in China, as mainland China has started a large scale roll out of LTE and over 1.2 billion LTE- subscriptions are expected by the end of 2020. Sales in 2014 were driven by delivery of 4G/LTE coverage type of contracts, primarily to one Chinese customer. Future capacity sales will be dependent on subscriber uptake in the LTE networks. Ericsson has a strong installed base in Europe, partly as a result of the modernization projects of European networks in 2011–2013, which was a prerequisite for the transformation. In 2014, business in Europe was driven by investments in network quality and capacity combined with managed services. Vodafone started to invest in a multi-year “project Spring” to increase coverage and capacity in several European countries. Operator consolidations continued to be on the agenda partly driven by an increasing need for network investments. Business in Russia developed favorably during the year driven by mobile broadband infrastruc- ture investments. THE BUSINESS – Business structure 33 Ericsson | Annual Report 2014 THE BUSINESS – Business structure ericsson 24/7 – global presence Ericsson is a global player, with customers in more than 180 countries. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The go-to-market organization is based in 10 geographical regions. KEY NORTH AMERICA MEDITERRANEAN Ericsson Global Service Center ±XX% The figure indicates percentage revenue increase or decrease Sales declined, driven by lower network sales as a result of large mobile network coverage pro- jects coming to an end, and increased operator focus on cash flow in the second half of the year. Sales in Support Solutions and Professional Services continued to grow, driven by OSS and BSS modernization. –8% Sales decreased as the European moderniza- tion projects came to an end while managed services contributed positively to sales. –5% OTHER Includes revenues generated across all regions through licensing, broadcast services, power modules, Ericsson-LG Enterprise and other businesses. Sales declined somewhat due to exit of the telecom and power cable busines- ses in 2013 as well as lower IPR revenues. Broadcast services grew, driven by the acquired Red Bee Media business that was fully consolidated in 2014. –2% LATIN AMERICA Sales increased, driven by mobile broadband coverage projects and network quality invest- ments, partly offset by currency restrictions. +3% 34 Ericsson | Annual Report 2014 WESTERN AND CENTRAL EUROPE NORTHERN EUROPE AND CENTRAL ASIA The European modernization projects came to an end in 2014. Sales growth was increa- singly driven by investments in network quality and capacity during the year. Sales increased, driven primarily by mobile bro- adband deployments in Russia with sales of SEK 6.7 (5.6) billion. Professional Services sales grew, driven by network design and optimization services. TV & Media business showed positive development. NORTH EAST ASIA Sales increased in mainland China and Taiwan as a result of delivering on previously awarded 4G/LTE contracts. The increase was partly offset by reduced network investment levels in Korea and Japan. +7% +6% +1% MIDDLE EAST Sales growth was driven by mobile broad- band investments related to new licenses and growth in data traffic in both advanced and developing markets. +22% SUB-SAHARAN AFRICA INDIA Sales declined but recovered in the second half of the year, mainly driven by operator focus on network traffic and quality mana- gement. This resulted in a continued demand for managed services. –13% Sales growth was driven by mobile broadband infrastructure investments. Increased smart- phone penetration drove growth in mobile data usage. SOUTH EAST ASIA AND OCEANIA Sales remained flat. Growth in major rollout projects in Australia compensated for a decline in Indonesia where major 3G projects peaked in 2013. +25% ±0% THE BUSINESS – Business structure 35 Ericsson | Annual Report 2014 THE BUSINESS – The people the PEOPLE Ericsson’s People Strategy is clear – to attract the best, to develop the best, and to establish a high performing organization of engaged employees. Right from the start, the ingenuity and profes- sionalism of the people have taken Ericsson forward in a world of continuous technical and societal developments. The Company and the employees share the vision of a sustainable Networked Society, and the continuous trans- formation of the business builds a culture of creativity and innovation. Ericsson’s future success largely depends on the ability to attract, develop, motivate and retain the talent needed to uphold and develop the business. Competition for skilled professionals in the ICT industry remains intense. To help Ericsson reach its full potential and maintain its leading position, the People Strategy has three objectives: attract the best talent, develop the best talent, and to establish a high performing organization of engaged employees. Attracting the best talent The Ericsson brand is well known in the ICT space. To attract the talent and skills needed to transform the business, strong efforts are being made to reach out even further. Ericsson is active in the global social media with the “You + Ericsson” concept, telling powerful peo- ple stories and presenting global opportunities. Through the employee referral program, the Company engages its top talent to attract other top talent from the marketplace. Ericsson is con- tinuously working with universities all over the world to increase the exposure to new talent in the different markets in which the Company operates. To attract exceptional talent, Ericsson takes a holistic approach to becoming an employer of choice across the world, with the consistent Ericsson values, but the Company also brings local nuances to meet local needs. Ericsson wants to be recognized as the Com- pany that fulfills both the personal and career ambitions of a potential employee. Continuous focus on competence In order to stay relevant and remain a pioneer and a thought leader in the Networked Society, Ericsson needs to keep continuous focus on competence. The Company has a strategic approach to learning, using a two-tier frame- work. Top-down, the process identifies gaps for strategic competences in relation to a specific Ericsson’s strategic foundation VISION A Networked Society where every person and every industry is empowered to reach their full potential We lead transformation through mobility MISSION Professionalism, Respect & Perseverance (culture) VALUES ASSETS Technology & Services leadership Global scale & skills 36 Ericsson | Annual Report 2014 companies included in this benchmark. One of the contributing factors to the high score was leadership. Strong leaders are essential for Ericsson to keep the technology and services leadership amid evolving business conditions. Therefore, the Company applies a rigorous talent planning process and run structured lead- ership programs at all levels. The leadership pipeline is under continual review to ensure that the right leadership capabilities are developed to take the business forward. Diversity of thought With customers in more than 180 countries around the world, Ericsson strives for the leader- ship teams and employee base to be as diverse as the world around. The Company’s definition of diversity extends beyond gender, race, religion, ethnicity, age and other established categories to focus on diversity of thought, the prime driver of the innovative culture. In Ericsson’s experience, diverse teams are the most productive and stable. The diversity is supported by a truly inclusive workplace, in which people are valued for the different perspectives, ideas and experiences that they bring. position or geography. These targeted gaps are being closed through development and deploy- ment of global learning programs. Ericsson has structured formal and on the job training pro- grams to build competences in emerging tech- nology areas and in best practices with a special focus on sales, services and product develop- ment teams. Bottom-up, each employee together with his or her manager identifies com- petence gaps and develop an annual develop- ment plan so that they continue to grow and advance. Ericsson invests in impactful and innovative ways of learning that can be accessed by every- one at all times, such as collaborative learning through a new virtual campus with live experts sharing knowledge or through Ericsson Play, a new mobile video sharing and learning platform. Certifications and assessments support the learning program to ensure that competence is obtained. The comprehensive career and com- petence model, supported by online and class- room training from Ericsson Academy and on-the-job development, helps employees to build their careers and develop capabilities that contribute to the Company’s continued success. Engagement and leadership The level of engagement from the people remains very high. The last employee survey had a 93% response rate. The Employee Engage- ment Index measures employees’ overall moti- vation and commitment to the Company’s suc- cess. Ericsson’s score for 2014 is 78% which puts the Company amongst the top-scoring ICT A learning organization – 2014 facts and numbers Share of employees that took formal training Average learning hours per active employee 78% 26.7 HOURS Total learning hours: 2.7 million different courses:13,000 No. of THE BUSINESS – The people 37 Ericsson | Annual Report 2014 THE BUSINESS – Sustainability and Corporate Responsibility sustainability and corporate responsibility By advocating Technology for Good, Ericsson aims to lead the industry in pro viding significant and measurable contributions to a sustainable Networked Society. In the Networked Society, Ericsson is the leading advocate of Technology for Good, the transfor- mative power of mobility, broadband and cloud solutions to help tackle global sustainable devel- opment challenges. In the Company’s sustain- ability and corporate responsibility work, Ericsson has two main focus areas: to reduce risks, and to create positive impacts for people, business and society. The below areas are integrated in the Ericsson business: > Conducting business responsibly > Environment, energy and climate change > Creating positive socio-economic impacts Conducting business responsibly Embedding responsible business practices into the Ericsson operations ensures that the Com- pany is running the business responsibly and capable of managing risks on a global scale. No matter what country or environment Ericsson operates in, global policies apply in terms of sound business practices, social responsibility and environmental protection. Ericsson is committed to upholding the ten UN Global Compact Principles in the areas of human rights, labor standards, the environment and anti-corruption as well as to the UN Guiding Principles on Business and Human Rights (UNGP). Ericsson’s key areas of commitment and actions are the respect for human rights in the ICT field, fostering anti-corruption, applying responsible sourcing practices, improving environmental performance and upholding high standards for labor rights as well as occu- pational health and safety. The Company has a strong global gover- nance process through the Ericsson Group Management System (EGMS) that supports efforts to create business value and minimize negative impacts. The robustness of the processes have systematically been improved over time. In 2014, Ericsson updated its Code of Busi- ness Ethics to align it with the UNGP, with par- ticular focus on human rights. Ericsson’s most salient human rights issues are the right to pri- vacy and freedom of expression. Human rights focus is growing in many of the Company opera- tions. One example is through Ericsson’s Sales Compliance Board, which provides a cross- functional forum for handling, for example, human rights risks as part of the sales process. In 2014, more than 300 cases were reviewed and 6% of the cases reviewed by the Sales Compliance Board were rejected. In 2014, at the request of the Sales Compli- ance Board, Human Rights Impact Assess- ments of Iran and Myanmar were conducted and still ongoing in Iran, in accordance with the UNGP. In the area of Occupational Health and Safety, 22 workplace fatalities were reported. Of these 1 was an Ericsson employee while suppliers reported 21, including 1 public fatality. Environment, energy and climate change Substantial greenhouse gas reductions can be achieved in a wide variety of ways by using ICT in different sectors. During 2014, Ericsson reduced societal carbon emission by imple- menting ICT-enabled solutions such as smart meters and smart transport solutions. Erics son’s second Energy and Carbon report, published in 2014, analyzes the ICT sector’s own environmental impact in terms of energy use and greenhouse gas emissions. The report shows that, while the expansion of ICT is stimulating economic growth and development, the result- ing increase in carbon emissions is expected to be marginal, compared to the substantial reduc- tion of greenhouse gases that can be achieved. Ericsson and UN-Habitat produced a report in 2014,“The Role of ICT in the New Urban Agenda,” describing how ICT supports the sus- tainable cities of the future and offered recom- mendations to policymakers on the creation of an ICT-enabling environment to bridge digital divides. The Company’s latest generation of network infrastructure equipment provides better per- formance than previous generations, while consuming less energy. The work on improving energy efficiency continues across the entire portfolio, to enable an increased connectivity of cities, industries and societies. The carbon 38 Ericsson | Annual Report 2014 refugee and Internally Displaced Persons (IDP) camps; and in Iraq, by deploying volunteers to facilitate communications for humanitarian workers in IDP camps. Ericsson and operators in the Middle East launched the Refugees United service for the nearly 1.4 million Syrian refugees residing in Iraq, Jordan and Turkey at the launch of service. Another key focus was Ebola infection-preven- tion in Guinea, Liberia and Sierra Leone. Ericsson worked with multiple partners to support community health workers with about 1,400 mobile devices, with specific health apps, and provided UN and humanitarian workers with emergency telecoms support through Ericsson Response. The Company also seeks to scale its impact in other key focus areas, including: > Education – as lead technology partner in Connect to Learn, a global education initiative with the Earth Institute at Columbia University and Millennium Promise. The program is now in 16 countries, engaging 12 mobile opera- tors, benefiting about 45,000 students. In 2014, the program was launched in Myanmar in partnership with the UK Department for International Development, through the Girls’ Education Challenge with the aim of reaching 14,000 marginalized girls over the next two years. > Financial inclusion – Ericsson’s m-commerce solutions can enable many of the approxi- mately 2.5 billion people who are unbanked globally to access financial services. In 2014, ASBANC, Peru’s National Bank Association, recognized Ericsson’s global scale and inte- grated solution as well as its commitment to Technology for Good, and selected Ericsson as a partner to design and implement its Mobile Money project, the country’s largest private initiative for financial inclusion. footprint of Ericsson’s own activities has steadily decreased. Progress is on track towards the five-year target of reducing CO2 emissions per employee by 30% and keeping absolute CO2 emissions at 2011 levels, despite forecast growth in sales and number of employees. Creating positive socio-economic impacts Mobility, broadband and the cloud can greatly enable socio-economic development. But for people to benefit, affordability and accessibility are key. Ericsson has been actively involved in advocating the role of ICT in the Sustainable Development Goals (SDGs) for the post-2015 agenda that seek to address such challenges. In 2014, the Task Force on Sustainable Devel- opment for the Broadband Commission on Digi- tal Development, chaired by Ericsson President and CEO Hans Vestberg, produced a report, “Means of Transformation,” offering practical guidance for governments on leveraging ICT in support of the SDGs. Ericsson’s objective to positively impact 2.5 million people directly through Technology for Good initiatives by 2016 was achieved in 2014. The bar has now been raised even higher, aiming to positively impact 4.8 million by the end of 2015. In 2014, Ericsson focused on using ICT to transform humanitarian response and scaling solutions for greater impact. Ericsson and the International Rescue Committee announced a partnership using mobile technology to improve the frontline response of humanitarian workers in health, natural disasters and conflict-driven humanitarian crisis. Ericsson Response is the global Ericsson employee volunteer initiative formed in the year 2000 to provide communications expertise, equipment and resources to assist humanitarian relief organizations. In 2014, active missions assisting the Emer- gency Telecommunications Cluster focused on: continuing support to the Philippines in the after- math of the 2013 typhoon; collaborating with the World Food Programme in war-torn South Sudan to provide communications and expertise to support long-term humanitarian efforts in Read more about Ericsson’s approach and initiatives in the Sustaina- bility and Corporate Resp- onsibility Report available at: www.ericsson.com. THE BUSINESS – Sustainability and Corporate Responsibility 39 Ericsson | Annual Report 2014 Addressing connectivity barriers with internet.org There are still many regions where connectivity is not taken for granted and where slow networks with insufficient capacity are a common issue. Ericsson is founding member of a Facebook initiative, internet. org, and together we have launched an Innovation Lab that enables developers to test their apps in a real-world environment and under conditions which are typical for growth markets. This enables the developers to develop apps that are optimized for customers who are commonly exposed to network capacity and accessibility issues. The ambition of the project is to make the internet more accessible, affordable and less data-consuming and remove the connectivity barriers, thereby enabling access to the two-thirds of the world not yet connected. LETTER FROM THE Chairman Dear shareholders For the fourth time, it is my pleasure, as Chair- man of the Board of Ericsson, to reflect on another year of performance and progress. As a Board, we are deeply involved both in helping develop a long-term strategic vision and responding to more immediate opportunities and challenges. The ability to balance today’s reality with a rapidly evolving future has always been part of Ericsson’s culture, and has sustained its suc- cess for more than a century. Never before has this culture been more important. Customers face numerous challenges, and by adapting the product and services portfolio to meet their needs, Ericsson can take advantage of the many business opportunities that are emerging. In a sense, business has always been this way, but the rate and scale of change in today’s macro environment are exceptional. The task of ensuring long-term development in this environment is both exciting and challeng- ing. As a Board, we must consider what this industry will look like 10 or perhaps 20 years from now, so that investments and resources can be allocated responsibly. Ericsson’s ambition is to lead future developments and it is satisfying to see Ericsson positioning itself effectively as a leader in the transformative Networked Society. In 2014, Ericsson and the Board concentra- ted on three major areas: strategy, governance and talent management. Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. In its strategic work, the Board always invests considerable time evaluating several strategic alternatives. In 2014, this led to an important decision: that Ericsson should exit the modem Dividend per share SEK 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 3.40 2010 2011 2012 2013 2014 1) 1) For 2014 as proposed by the Board of Directors. business – a long journey is now completed. To strengthen Ericsson’s position in its targeted areas, the Board decided on several strategic acquisitions. The Board is committed to maintaining Ericsson’s high standards of corporate gover- nance, sustainability and responsible business practice. Ericsson is a large global company and it is essential that high standards are met across markets. Ericsson aims high: every part of the company is required to meet demanding finan- cial, social and environmental standards. Ericsson works constantly to uphold these standards, and as a result has won and retains the trust of its stakeholders. Companies are only as good as the people they hire. The Board is appreciative of CEO and President Hans Vestberg and his leadership team for their dedication in attracting and developing some of the best talent in our industry, a vital component in securing Ericsson’s leading position. The Company is naturally interested in succession planning, particularly at executive levels but also in technology and commercial management. Ericsson’s values of respect, professionalism and perseverance require good talent management. Ericsson’s capital structure is another of the Board’s major responsibilities and an area of great interest to shareholders and the capital market. In approaching this responsibility, the Board carefully considers the previous year’s earnings and balance sheet, coming years’ business plans, and projections of economic development. Maintaining industry leadership requires significant R&D investment as well as continued focus on developing our core busi- ness, and expanding into new and targeted areas. With all this taken into account, the Board’s proposal is to increase the dividend from SEK 3.00 in 2013 to SEK 3.40 per share for 2014. As a leader in an industry that is leading change across all industries, Ericsson is an extraordinary company. It is a privilege to be part of Ericsson’s journey and a pleasure to serve as the Chairman. Leif Johansson Chairman of the Board of Directors 41 Ericsson | Annual Report 2014 FINANCIALS Board of Directors’ report Contents Business in 2014 Financial highlights Business results-Segments Business results-Regions Corporate Governance Material contracts Risk management Sourcing and supply Sustainability and Corporate Responsibility Legal proceedings Parent Company Post-closing events Board assurance 42 43 46 47 48 49 49 49 50 51 52 53 53 Full-year highlights 1) > Sales were SEK 228.0 (227.4) billion, flat compared with 2013. Sales, adjusted for com parable units and currency, decreased by –2%. > Operating income was SEK 16.8 (17.8) billion. with an operating margin of 7.4% (7.8%). Gross margin improved due to a higher share of capacity business, offset by increased operating expenses and currency hedge losses. > Segment Networks showed an operating margin of 12% (10%) driven by improved business mix and earlier actions to improve commercial and operational efficiency. > Cash flow from operating activities was SEK 18.7 (17.4) billion. Cash conversion was 84%, above the target of 70%. > The Board of Directors proposes a dividend for 2014 of SEK 3.40 (3.00) per share. Business in 2014 1) Obs! Stapel gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. In 2014, Ericsson showed stable sales develop- ment with a solid operating margin. A sales decline in North America of –8% was compen- sated by growth in the Middle East, Europe and Asia. Operating margin improved in the core business, driven by a higher share of capacity sales and efficiency enhancements. This was partly offset by currency hedge losses, invest- ments in targeted areas as well as losses related to the modems operations. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. The more than 100 IPR licensing agreements signed to date show the value of Ericsson’s R&D investments and enable industry players to con- tinue to innovate and bring exciting products to the market. In 2014, IPR revenues showed a steady positive development. Ericsson remains committed to licensing its standard-essential patents on fair, reasonable and non-discrimina- tory (FRAND) terms. At the Capital Markets Day (CMD) in Novem- Obs! Stapel gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. ber, Ericsson outlined the progress on its Net- worked Society strategy, with focus on market development, growth agenda, transformation and profitability. In line with the strategy, the Company has invested into the targeted areas: IP networks, Cloud, TV & Media, Industry & Society and OSS & BSS. Sales in targeted areas showed a growth of more than 10% in 2014. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Net sales SEK billion 250 200 150 100 50 0 228.0 2010 2011 2012 2013 2014 Operating income and operating margin SEK billion Percent 20 15 10 5 0 16.8 7.4 2010 2011 2012 2013 2014 16 12 8 4 0 Operating income Operating margin 42 Ericsson continues to proactively identify effi- ciency opportunities in the Company. The cost and efficiency program presented at the CMD, with the ambition to achieve savings of approxi- mately SEK 9 billion, with full effect during 2017, is progressing. Activities for the discontinuation of the modems business are included in the program and are ahead of plan. Ericsson improved the cash flow from operat- ing activities, and generated a cash flow of SEK 18.7 (17.4) billion. For the third consecutive year, the Company exceeded its cash conversion target of more than 70%. This resulted in a solid balance sheet, enabling Ericsson to continue to implement its strategy and to deliver consistent returns to its shareholders. The Board of Directors proposes a dividend for 2014 of SEK 3.40 (3.00) per share, an increase of 13%. 1) Comments based on non-IFRS figures. See Financial results of operations on page 43. Ericsson | Annual Report 2014 IPR revenues (net) SEK billion Financial highlights 9.9 Financial results of operations In this report, unless otherwise indicated, com- mentry on sales, gross margin, operating income and net income reflects adjustments made on full year 2013 for the initial payment from Samsung Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. following the January 2014 licensing agreement with Samsung. The table below presents the rec- onciliation between reported IFRS figures and the non-IFRS figures upon which the comments are based. 12 10 8 6 4 2 0 Percent 100 80 60 40 20 0 Software Hardware Services 2010 1) 2011 2012 2013 2014 1) One-off patent sales included Software, hardware and services: share of total sales 24 34 42 2010 2011 2012 2013 2014 Reconciliation IFRS – Non-IFRS measures Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Net sales Cost of sales Type–Options: 1 stapel: 76% 70% 2 staplar: 80% 80% Gross income Operating expenses Other operating income and expenses Share in earnings of associated companies Operating income Financial items Taxes IFRS 2014 228.0 –145.6 82.4 –63.4 –2.2 –0.1 16.8 –1.0 –4.7 11.1 2013 227.4 –151.0 76.4 –58.5 0.1 –0.1 17.8 –0.7 –4.9 12.2 Adjustment initial Samsung IPR payment 1) 2014 2013 –2.1 0.0 –2.1 0.0 0.0 –2.1 0.5 –1.6 Non-IFRS 2014 228.0 –145.6 82.4 –63.4 –2.2 –0.1 16.8 –1.0 –4.7 11.1 2013 225.3 –151.0 74.3 –58.5 0.1 –0.1 15.7 –0.7 –4.4 10.6 Net income Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. 1) The initial payment from Samsung in Q4 2013 was SEK 4.2 billion of which SEK 2.1 billion relates to 2013. The adjustment impacts segments Networks and Support Solutions. Sales, adjusted for comparable units and currency, decreased by –2%. Gör så här: Markera skiktade delar med vita pilen. Välj Object–Graph–Column. Där väljer man färg som ska vara på den översta rundade delen. Kolla särskilt att “Sliding” är valt på “Column type”. Då blir alla delar med rundad topp – inte bra ;). De nedre markeras då med vita pilen och i Column väljer man “none” och färglägger som vanligt från paletten swatches. Reported sales were flat and amounted to SEK 228.0 (227.4) billion. Strong sales growth in China, the Middle East and India was offset by lower sales in North America and Japan, where several larger mobile broadband cover- age projects were completed. During the year, the SEK has weakened towards a number of currencies, including the USD, which has had a gradual positive impact on sales. Segments Networks and Global Services sales were flat compared with 2013, while Support Solutions sales grew by 3%. IPR and licensing revenues amounted to SEK 9.9 (10.6) billion. For 2013, IPR revenues included an initial payment of SEK 4.2 billion from Samsung for patent licensing. The mix of sales by commodity was: Soft- ware 24% (24%), hardware 34% (34%) and services 42% (42%). Restructuring charges amounted to SEK 1.5 (4.5) billion and were mainly related to the continued implementation of the service delivery strategy. Implementation started on the cost and efficiency program announced in November 2014. As part of the continuous busi- ness transformation, annual restructuring normally generates charges of approximately SEK 2 billion. In addition, the cost and efficiency program is expected to generate approximately SEK 3–4 billion in restructuring charges in 2015–2017. With current visibility, total restructuring charges for 2015 are estimated at approximately SEK 3–4 billion. Gross margin increased to 36.2%, due to a business mix with a higher share of capacity sales, lower restructuring charges and efficiency enhancements. The Global Services share of Group sales was flat at 43%, where the share of Network Rollout sales declined to 12% (14%) as a result of fewer large coverage projects. Total operating expenses increased to SEK 63.4 (58.5) billion due to increased organic expenses in targeted areas and acquisitions such as Microsoft Mediaroom as well as inclu- sion of the modems operations. In line with the strategy to establish leadership in targeted areas, the Company has increased its R&D activities, primarily in IP and Cloud. In addition the modems operations were taken over from the ST-Ericsson joint venture. This resulted in total R&D expenses of SEK 36.3 (32.2) billion in 2014. Other operating income and expenses decreased to SEK –2.2 (0.1) billion of which Financials – Board of Directors’ report 43 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report SEK –2.8 (0.5) billion relates to negative currency hedge effects. They derive from the hedge con- tract balance in USD, which has further decreased in value. The SEK has weakened towards the USD between December 31, 2013 (SEK/USD rate 6.46) and December 31, 2014 (7.79). Operating income increased slightly to SEK 16.8 billion, positively impacted by an improved gross margin. Operating income was negatively impacted by higher operating expenses, and negative effects from hedge contracts. Operating margin was 7.4%. Financial net amounted to SEK –1.0 (–0.7) billion. The difference is mainly attributable to foreign currency revaluation effects. The tax rate for 2014 was 30% compared with 29% in 2013. Tax costs were SEK –4.7 (–4.9) billion. Net income increased to SEK 11.1 billion, for the same reasons as for the increase in operating income. EPS diluted was SEK 3.54. EPS, Non-IFRS, was SEK 4.80. Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Cash flow Cash flow from operating activities was positive at SEK 18.7 (17.4) billion. Total investing activities amounted to SEK 7.5 (11.1) billion. Investments in property, plant and equipment were SEK 5.3 (4.5) billion, representing 2% of sales. Acquisitions and divestments, net, were SEK 4.4 (2.7) billion. Th acquisitions are strategic investments made to strengthen the position in targeted areas. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. In 2014, approximately SEK 8 billion of debt outstanding was repaid: > A SEK 4 billion EIB loan, with original maturity in 2015, was repaid. > A USD 300 million bond, with original maturity in 2016, was repaid. > A EUR 219 million bond matured and was repaid in full. Working capital Days sales outstanding (DSO) increased to 105 (97) days mainly due to geographical mix and negative currency effects. Inventory turn over days increased to 64 (62) days due to a larger share of projects and negative currency effects. Accounts payable days increased to 56 (53) days. Provisions amounted to SEK 4.4 (5.4) billion at year end, reflecting implementation of previous years’ efficiency programs and headcount reductions. Financial position The average maturity of long-term borrowings as of December 31, 2014, was 5.7 years, compared with 5.1 years at the end of 2013. The net cash decreased from SEK 37.8 billion to SEK 27.6 billion as a result of increased post-employment benefits of SEK 10.6 billion due to lower discount rates. Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. Change in gross cash SEK billion Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. 22.3 100 95 Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. 90 85 77.1 80 75 70 65 60 Operating cash flow 18.7 –2.4 Investing activities* –11.3 Financing activities –18.2 FX on cash 5.9 –1.2 –5.3 –6.0 –8.4 –9.8 5.9 72.2 Change in gross cash –4.9 Gross cash opening balance Net income reconciled to cash Change net operating assets excl. restructuring Restruc- t uring CAPEX Acquisitions, divestments and other Other financing activities Dividend FX on cash Gross cash closing balance * 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. Working capital Days 120 100 80 60 40 105 9.0 64 56 2010 2011 2012 2013 2014 Days sales outstanding (Target is less than 90 days) Inventory days (Target is less than 65 days) Payable days (Target is more than 60 days) Net cash SEK billion 60 50 40 30 20 10 0 27.6 2010 2011 2012 2013 2014 Debt maturity, Parent Company SEK billion 8 7 6 5 4 3 2 1 0 7.7 1.3 5.3 4.7 0.8 0.8 2017 2018 2019 2020 2021 2022 Notes & bonds Nordic Investment Bank European Investment bank Swedish Export Credit Corporation MTN Bond 44 Ericsson | Annual Report 2014 Employees In 2014, the net number of employees increased by 3,715. At the end of 2014, the total number of employees was 118,055 (114,340) of which 19,251 joined Ericsson during the year. 15,536 employees left Ericsson, reflecting the natural attrition rate and ongoing Company transfor- mation. Research and development, patents and licensing In line with the strategy to establish leadership in targeted areas, the Company has increased its R&D activities, primarily in IP and Cloud. In addi- tion, the modems operations were taken over from the ST-Ericsson joint venture. This resulted in total R&D expenses of SEK 36.3 (32.2) billion. Research and development, patents and licensing Expenses (SEK billion) As percent of Net sales Employees within R&D as of December 31 1) Patents 1) IPR revenues, net (SEK billion) 2014 36.3 15.9% 2013 32.2 14.2% 2012 32.8 14.4% 25,700 37,000 25,300 35,000 24,100 33,000 9.9 10.6 6.6 1) The number of employees and patents are approximate. Seasonality The Company’s sales, income and cash flow from operations vary between quarters, and are 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. Most recent five-year average seasonality 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 material effect on the Company’s financial condition, rev- enues, expenses, result of operations, liquidity, capital expenditures or capital resources. Capital expenditures For 2014, capital expenditures were SEK 5.3 (4.5) billion, representing 2% of sales. Expenditures are largely related to test sites and equipment for R&D and network operation centers as well as manufacturing and repair operations. Investments are being made in three new global ICT centers. The centers will support R&D and services in developing and verifying solu- tions more efficiently and bringing innovation faster to the market. The first center, in Linköping, Sweden, was opened in 2014. Apart from these investments, Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs in most locations. Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals. As of December 31, 2014, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness. The Company believes it has sufficient cash and cash generation capacity to fund expected capital expenditures without external borrow- ings in 2015. Sequential change Share of annual sales First quarter Second quarter Third quarter Fourth quarter Capital expenditures 2010–2014 –22% 8% 0 23% SEK billion 2014 2013 2012 2011 2010 22% 24% 24% 30% Capital expenditures Of which in Sweden Share of annual sales 5.3 2.4 4.5 1.9 5.4 1.3 5.0 1.7 3.7 1.4 2.3% 2.0% 2.4% 2.2% 1.8% Financials – Board of Directors’ report 45 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report Business results – Segments Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Networks 1) Sales, adjusted for comparable units and cur- rency, decreased by –3%, primarily due to lower sales in North America, where two large LTE coverage projects were completed. In addition, operators in the US increased their focus on cash flow optimization during the second half of the year, with reduced network investments as a consequence. The decline in the North American business was partly offset by increased mobile broadband sales in the Middle East. Large LTE network deployments continued in mainland China. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. In 2014, operators increased their focus on improving network performance as a key differ- entiator. This, in combination with continued data traffic increase, and introduction of new services such as VoLTE, led to increased cap acity business in Radio, IMS and IP. Operating income improved significantly Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. compared with last year due to increased capacity business, earlier actions to improve commercial and operational efficiency and lower restructuring charges. This was partly offset by a negative effect from currency hedges of SEK –2.1 (0.5) billion and higher operating expenses, mainly in IP and Cloud. Restructuring charges amounted to SEK –0.4 (–2.2) billion. Gör så här: Markera skiktade delar med vita pilen. Välj Object–Graph–Column. Där väljer man färg som ska vara på den översta rundade delen. Kolla särskilt att “Sliding” är valt på “Column type”. Då blir alla delar med rundad topp – inte bra ;). De nedre markeras då med vita pilen och i Column väljer man “none” och färglägger som vanligt från paletten swatches. Global Services Sales for Global Services were flat compared with 2013. Sales, adjusted for comparable units and currency, declined by –2% despite strong development in Managed Services and in Network Design and Optimization. There was continued momentum for Profes- sional Services with double-digit sales growth during the second half of the year. Sales in tar- geted areas developed positively and in line with plan. Network Rollout sales declined, primarily due to a lower share of coverage projects. Professional Services operating margin declined to 12% (14%), partly due to negative currency hedge effects and partly due to the high share of managed services contracts in the trans- formation phase. Restructuring charges declined to SEK –0.8 (–2.0) billion. Implementation of the service delivery strategy, to move local service delivery resources to global centers continued, but at a slower pace during the first half of the year. Support Solutions 1) Sales adjusted for comparable units and cur- rency declined by –2% due to lower sales for legacy systems. Reported sales grew by 3%, driven by growth in OSS and in TV & Media through the Mediaroom acquisition. Regions North America and North East Asia showed strong growth while Latin America and Sub- Saharan Africa declined, primarily due to lower BSS sales. Operating income declined slightly, partly due to lower sales in legacy systems and partly due to acquired operating expenses. Modems Ericsson took over the LTE thin-modem opera- tions as part of the breakup of the joint venture with STMicroelectronics in 2013. Since the integration, the modems market developed in a direction that reduced the addressable market for thin modems. In addition, there is strong competition, price erosion and an accelerating pace of technology innovation. Success in this evolved market requires significant R&D invest- ments. In 2014, Ericsson announced the discon- tinuation of further development of modems and the shift of approximately 500 R&D resources to Networks to pursue growth opportunities in the radio business. Global Services operating income was flat Operating income was SEK –2.0 billion. The compared with 2013. The Network Rollout margin gradually improved during the year due to the declining dilutive effect from the European network modernization projects. Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. discontinuation of the modems business will lead to a significant reduction in costs. Good progress has been made in 2014, and activities are ahead of plan. End-of-life agreements have been signed with existing customers. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. 1) Comments based on non-IFRS figures. See Financial results of operations on page 43. Networks sales SEK billion 150 120 90 60 30 0 117.5 2011 2012 2013 2014 Global Services sales SEK billion 100 26.8 70.8 80 60 40 20 0 2011 2012 2013 2014 Professional services Network Rollout Support Solutions sales SEK billion 15 12 9 6 3 0 12.7 2011 2012 2013 2014 46 Ericsson | Annual Report 2014 Business results – Regions > North America: Sales declined, driven by lower network sales as a result of large mobile network coverage projects coming to an end, and increased operator focus on cash flow in the second half of the year. Sales in Support Solutions and Professional Ser- vices continued to grow, driven by OSS and BSS modernization. > Latin America: Sales increased, driven by mobile broadband coverage projects and network quality investments, partly offset by currency restrictions. > Northern Europe and Central Asia: Sales increased, driven primarily by mobile broad- band deployments in Russia with sales of SEK 6.7 (5.6) billion. Professional Services sales grew, driven by network design and optimization services. TV & Media business showed positive development. > Western and Central Europe: The Euro- pean modernization projects came to an end in 2014. Sales growth was increasingly driven by investments in network quality and capac- ity during the year. > Mediterranean: Sales decreased as the European modernization projects came to an end, while managed services contributed positively to sales. > Middle East: Sales growth was driven by mobile broadband investments related to new licenses and growth in data traffic in both advanced and developing markets. > Sub-Saharan Africa: Sales declined but recovered in the second half of the year, mainly driven by operator focus on network traffic and quality management. This resulted in a continued demand for managed ser- vices. > India: Sales growth was driven by mobile broadband infrastructure investments. Increased smartphone penetration drove growth in mobile data usage. > North East Asia: Sales increased in main- land China and Taiwan as a result of delivering on previously awarded 4G / LTE contracts. The increase was partly offset by reduced network investment levels in Korea and Japan. > South East Asia and Oceania: Sales remained flat in 2014. Growth in major roll- out projects in Australia compensated for a decline in Indonesia where major 3G projects peaked in 2013. > Other: Sales declined somewhat due to exit of the telecom and power cable businesses in 2013 and lower IPR revenues. Broadcast services grew, driven by the acquired Red Bee Media business that was fully consoli- dated in 2014. Sales per region and segment 2014 and percent change from 2013 Networks Global Services Support Solutions Total 2014 Change 2014 Change 2014 Change 2014 Change SEK billion North America Latin America Northern Europe and Central Asia Western and Central Europe Mediterranean Middle East Sub-Saharan Africa India North East Asia South East Asia and Oceania Other 1) Total Share of total 26.1 10.7 8.0 8.1 9.6 11.6 3.9 4.1 18.0 8.4 9.1 117.5 51% –9% –5% 10% 6% –11% 36% –21% 32% 8% –6% –10% 0% 25.0 10.8 4.1 11.0 12.6 8.5 4.3 3.1 8.9 7.0 2.3 97. 7 43% –12% 14% –1% 8% 0% 12% 3% 15% –14% 10% 61% 0% 3.5 1.0 0.3 0.6 0.8 1.2 0.6 0.5 0.7 0.5 3.1 12.7 6% 34% –10% 10% 1% 12% –11% –39% 55% 82% –4% –12% 3% 54.5 22.6 12.4 19.7 23.0 21.3 8.7 7.7 27.6 15.9 14.7 2) 228.0 100% 1) Region “Other” includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses. The power cable business was divested in 2013. 2) Total sales for Region “Other” includes SEK 0.2 billion for Modems. Financials – Board of Directors’ report –8% 3% 6% 7% –5% 22% –13% 25% 1% 0% –2% 0% 47 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report Corporate Governance In accordance with the Annual Accounts Act ((SFS 1995:1554), Chapter 6, Sections 6 and 8) and the Swedish Corporate Governance Code (the “Code”), a separate Corporate Governance Report, including an Internal Control section, has been prepared and attached to this Annual Report. Continued compliance with the Swedish Corporate Governance Code Ericsson is committed to complying with best- practice corporate governance standards on a global level wherever possible. For 2014, Ericsson does not report any deviations from the Code. Business integrity Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives govern- ing its relationships internally, with its stakehold- ers and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity. Board of Directors At the Annual General Meeting, held on April 11, 2014, Leif Johansson was re-elected Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Nora Denzel, Börje Ekholm, Alexander Izosimov, Ulf J. Johansson, Sverker Martin-Löf, Kristin Skogen Lund, Hans Vestberg, Jacob Wallenberg and Pär Östberg were re-elected members of the Board. Pehr Claesson, Kristina Davidsson and Karin Åberg were appointed employee representatives by the unions, with Rickard Fredriksson, Karin Lennartsson and Roger Svensson as deputies. Management Hans Vestberg has been President and CEO of the Group since January 1, 2010. The President and CEO is supported by the Group manage- ment, consisting of the Executive Leadership Team (ELT). A global management system is in place to ensure that Ericsson’s business is well con- trolled and has the ability to fulfill the objectives of major stakeholders within established risk limits. The management system also monitors internal control and compliance with applicable laws, listing requirements and governance codes. Remuneration Remuneration to the members of the Board of Directors and to Group management, as well as the Guidelines for remuneration to Group Management resolved by the Annual General Meeting 2014, are reported in Notes to the consolidated financial statements – Note C28, “Information regarding members of the Board of Directors, the Group management and employees”. The Board of Directors’ proposal for guide- lines for remuneration to Group management The Board of Directors proposes no material changes to the current guidelines for remuner- ation to Group management for the period up to the 2016 Annual General Meeting. Executive Performance Stock Plan The Company has a Long-Term Variable Com- pensation program (LTV). It builds on a common platform of investment in, and matching of, Ericsson shares. It consists of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior man- agers. The program is designed to encourage long-term value creation in alignment with share- holders’ interests. The aim of the plan for senior managers is to attract, retain and motivate exec- utives in a competitive market through perfor- mance-based share-related incentives and to encourage the build-up of significant equity stakes. The performance criteria for senior managers under the Executive Performance Stock Plan are approved by the Annual General Shareholder value creation Executive Performance Stock Plan 2012 targets for 2012–2014 Base year 2011 Executive Performance Stock Plan 2013 targets for 2013–2015 Base year 2012 Executive Performance Stock Plan 2014 targets for 2014–2016 Base year 2013 Net sales growth 2–8% CAGR Net sales growth 2–8% CAGR Net sales growth 2–8% CAGR 2) Operating income growth 5–15% CAGR including JV(s) and restructuring Operating income growth 5–15% CAGR including JV(s) and restructuring 1) Operating income growth 5–15% CAGR including JV(s) and restructuring 2) Cash conversion ≥ 70% annually Cash conversion ≥ 70% annually Cash conversion ≥ 70% annually 1) Base year 2012 excludes non-cash charge for ST-Ericsson. 2) Base year 2013 has been adjusted for the impact of the Samsung IPR agreement. 48 Ericsson | Annual Report 2014 Meeting. Performance criteria for the 2015 Exec- utive Performance Stock Plan will be communi- cated in the notice to the Annual General Meeting. The targets for the 2012, 2013 and 2014 Executive Performance Stock Plans are shown in the illustration on page 48. The performance criteria are: > Up to one-third of the award will vest if the target for compound annual growth rate of consolidated net sales is achieved. For the 2014 plan, net sales for base year 2013 has been adjusted by SEK 2.1 billion for the impact of the Samsung IPR agreement. > Up to one-third of the award will vest if the target for compound annual growth rate of consolidated operating income, including earnings in joint ventures and restructuring, is achieved. For the 2013 plan, base year 2012 excludes a non-cash charge of SEK 8.0 billion for ST-Ericsson. For the 2014 plan, operating income for the base year 2013 has been adjusted by SEK 2.1 billion for the impact of the Samsung IPR agreement. > Up to one-third of the award will vest if cash conversion is at or above 70% during each of the years and vesting one-ninth of the award for each year the target is achieved. The cash conversion target was reached in 2014, 2013 and 2012. Before the number of performance shares to be matched are finally determined, the Board of Directors shall examine whether the perfor- mance matching is reasonable considering the Company’s financial results and position, con- ditions on the stock market and other circum- stances, and if not, reduce the number of per- formance shares. Material contracts Material contractual obligations are outlined in Note C31, “Contractual obligations.” These were entered into in the ordinary course of business and were primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of compo- nents 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. Such provisions are not unusual for certain types of agreements, such as financing agree- ments and certain license agreements. How- ever, considering among other things the Com- pany’s strong financial position, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company. Risk management Risks are defined in both short-term and long- term perspective. They are categorized into industry and market risks, commercial risks, operational risks and compliance 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 own- ing and managing its risks according to poli- cies, 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 pro- cess, annual planning and target setting, continuous monitoring through monthly and quarterly steering group meetings and during operational processes (customer projects, customer bid/contract, acquisition, invest- ment and product development projects). They are subject to various controls such as decision tollgates and approvals. At least twice a year, in connection with the approval of strategy and targets, risks are reviewed by the Board of Directors. A central security unit coordinates manage- ment of certain risks, such as business interrup- tion, information security and physical security. The Crisis Management Council deals with events of a serious nature. For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, Notes C2, “Criti- cal 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. Sourcing and supply Ericsson’s hardware largely consists of electron- ics. 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, are produced in-house. The production of electronic modules and sub-assemblies is mostly outsourced to manu- facturing services companies, of which the vast majority are in low-cost countries. Final configu- ration of products is largely done in-house and on-demand. This consists of assembling and testing modules and integrating them into Financials – Board of Directors’ report 49 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report complete units. Final assembly and testing are concentrated to a few sites. Ericsson has 12 manufacturing sites in Brazil, China, Estonia, India, Italy, Mexico and Sweden. A number of suppliers design and manufac- ture highly specialized and customized compo- nents. The Company generally negotiates global supply agreements with its primary suppliers. Ericsson’s suppliers are required to comply with the requirements of Ericsson’s Code of Conduct. In general, Ericsson has alternative supply sources and seeks to avoid single source supply situations. Variations in market prices for raw materials generally have a limited effect on total cost of goods sold. For more information, see the chapter Risk factors. Sustainability and Corporate Responsibility Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. The Company has a strong focus on social, envi- ronmental and responsible business standards. This supports Ericsson’s ambition to be a rele- vant and responsible driver of positive change. The Company aims to create positive impacts Gör så här: Färglägg inte från and minimize risks. paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations throughout its value chain and performance is regularly measured and assessed. The Board of Directors is apprised of Sustainability and CR issues twice per year, or as needed on an ad hoc basis. Group policies and directives are implemented to ensure consistency across global operations. Ericsson publishes an annual Sustainability and Corporate Responsibility Report, which pro- vides additional information. Responsible business practices Since 2000, Ericsson has supported the UN Global Compact, and endorses its ten principles regarding human rights and labor standards, anti-corruption and environmental protection. Obs! Stapel gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Since 2012, Ericsson has reported its Communication on Progress at the Global Compact Advanced level. The Ericsson Group Management System (EGMS) includes a Code of Business Ethics, a Code of Conduct and a Sustainability Policy which reflect responsible business practices. These practices are reinforced by employee awareness training, workshops and monitoring, including a global assessment plan run by an external assurance provider. The Code of Conduct was updated in 2014 to include stronger human rights language in accordance with the UN Guiding Principles on Business and Human Rights as well as stronger labor standards. Ericsson has an anti-corruption program which focuses on prevention but also accountability. The program is reviewed and evaluated by the Audit Committee of the Board of Directors annu- ally. In 2014, a new anti-corruption e-learning was launched for suppliers. Human rights The Code of Business Ethics reflects the Com- pany’s ongoing commitment to respect human rights. Ericsson has actively worked to integrate United Nations Guiding Principles on Business and Human Rights into its governance frame- work since 2011. A Sales Compliance Board evaluates risk to human rights impacts with respect to four criteria: country, customer, product and purpose. Ericsson joined the Shift Business Learning Program in 2012 to further strengthen its framework on Human Rights. The learning included conducting Human Rights Impact Assessments in Myanmar and ongoing in Iran, in accordance with the UN Guiding Principles. Responsible sourcing All suppliers must comply with the requirements of Ericsson’s Code of Conduct. The Company has 197 employees, covering all regions, who are trained as Code of Conduct auditors. The Company uses a risk-based approach to ensure that the high risk portfolio areas, and highest risk markets, are targeted first. For prioritized areas, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements. Findings are followed up to ensure that improvements are made. Ericsson addresses the issue of conflict minerals, including compliance with the US Dodd-Frank Act and the disclosure rule adopted by the U.S. Securities and Exchange Commis- sion (SEC) through measures in its sourcing and product management processes. The Company also actively works with suppliers on this issue and engages in industry initiatives such as the Conflict-Free Sourcing Initiative (CFSI), driven by the Global e-Sustainability Initiative (GeSI), and the Electronic Industry Citizenship Coalition (EICC). Reducing environmental impact Continuously improving sustainability perfor- mance is fundamental to Ericsson’s strategy and a priority remains improving the life-cycle carbon footprint. The Company works to reduce negative environmental impacts while delivering solutions that enable a low-carbon economy. As energy use of products in operation remains the Company’s most significant environmental impact, Ericsson works proactively with mobile operators to encourage network and site energy optimization, through innovative products, soft- Supplier Code of Conduct Audits and assessments 600 500 400 300 200 100 0 444 197 151 2010 2011 2012 2013 2014 Number of auditors Number of audits Number of assessments Ericsson life-cycle assessment – carbon footprint 2014 Mtonnes CO2e ˜ 35 ˜ 5 ˜ 3 ˜ 0.8 ˜ – 0.3 35 30 25 20 15 10 5 0 –5 Activities in 2014 Supply chain Own activities Future (lifetime) operation of products delivered in 2014 Operator activities Products in operation End-of-life treatment ˜ Approximately 50 Ericsson | Annual Report 2014 Ericsson own activities Carbon footprint intensity target Tonnes CO2e/Employee Mtonnes 10 8 6 4 2 0 1.0 0.8 0.6 0.4 0.2 0.0 0.63 5.43 2011 2012 2013 2014 Carbon footprint intensity Tonnes CO2e/ Employee Carbon footprint absolute emission, Mtonnes ware, solutions and advisory services. Processes and controls are in place to ensure compliance with relevant product-related environmental, customer and regulatory requirements. An important aspect of Ericsson’s Design for Environment is materials management and efficiency. severe incidents internally and in the supply chain by further enhancing sub-contractor manage- ment, assessment criteria, inspections and consequence management. Occupational health and safety was significantly strengthened and prioritized by integrating it into the Sustainability and Corporate responsibility organization. In 2014, Ericsson strengthened its focus on providing solutions to help other sectors of the economy, primarily utilities and transport, to offset carbon emissions. In line with this focus area, Ericsson set a target for 2015; to reduce societal carbon emissions by a factor of 2 in relation to carbon emissions from Ericsson’s own activities in 2014, by implementing ICT- enabled solutions, such as smart meters and smart transport solutions. Ericsson has a long-term objective to main- tain absolute CO2e emissions from its own activ- ities for business travel, product transportation and facilities energy use in 2017 at the same level as in 2011. To achieve this long-term objec- tive, the Company aims to reduce CO2e emis- sions per employee by 30% over five years. The Company achieved a 10% reduction of CO2e emissions per employee in 2014. Ericsson Ecology Management is a program to take responsibility for products at the end of their life and to treat them in an environmentally preferable way. The program also ensures that Ericsson fulfills its producer responsibility and is offered to all customers globally free of charge, not only in markets where it is required by law. When taking back the Company’s products, more than 98% of the materials is recycled. Occupational health and safety Providing a safe and healthy workplace is of fun- damental importance to Ericsson. The ambition is zero fatalities and the long-term objective is based on continuous improvements in order to reduce the number and severity of Occupational Health and Safety (OHS) incidents. The OHS system helps to protect Ericsson’s employees and others engaged in company business. Certain operations undergo internal audits as well as regular third-party assurance audits according to the OHSAS 18001 standard. Ericsson has taken a comprehensive approach by not only reporting its own fatalities but also addressing partners and suppliers working with high-risk activities. This includes providing requirements and controls but also guidance and training. Competence and awareness is key to reducing major incidents and must be based on trust and transparency, in which reporting of incidents is encouraged. Key performance indicators are published in the Sustainability and Corporate Responsibility report. A program “Zero Incidents in High-Risk Environments” was established 2014 to reduce Radio waves and health Ericsson employs rigid product testing and installation procedures with the goal of ensuring that radio wave exposure levels from products and network solutions are below established safety limits. The Company also provides public information on radio waves and health, and sup- ports independent research to further increase knowledge in this area. Since 1996, Ericsson has co-sponsored over 100 studies related to electromagnetic fields and health, primarily through the Mobile Manufacturers Forum. To assure scientific independence, firewalls were in place between the industrial sponsors and the researchers conducting these studies. Independent expert groups and public health authorities, including the World Health Organiza- tion, have reviewed the total amount of research and have consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations. Reporting according to GRI 3.0 Ericsson publishes an annual Sustainability and Corporate Responsibility report and full key performance data is made available on the Ericsson website according to the Global Reporting Initiative (GRI). The performance data is assured by a third party. Legal proceedings In 2013, Adaptix Inc. (“Adaptix”) filed two law- suits against Ericsson, AT&T, AT&T Mobility and MetroPCS Communications in the US District Court for Eastern District of Texas alleging that certain Ericsson products infringe five US pat- ents purportedly assigned to Adaptix. The trial is currently anticipated to take place in May 2015 and Adaptix seeks damages and an injunction. On May 20, 2014, Adaptix filed three more patent infringement lawsuits against Ericsson in the same court regarding three US patents, all of which are also included in the 2013 lawsuit. One of the 2014 lawsuits accuses Ericsson’s LTE products and Sprint’s use thereof of infringe- ment, one accuses Ericsson’s LTE products and Verizon’s use thereof of infringement, and one accuses Ericsson’s LTE products and T-Mobile’s use thereof of infringement. Financials – Board of Directors’ report 51 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report In January 2015, Adaptix filed one more lawsuit in the same court alleging that Ericsson’s LTE products, and Sprint and Verizon’s use thereof, infringe one U.S. Patent. In addition to its complaint filed in 2013 with the Tokyo District Court, Adaptix filed another lawsuit in Japan in September 2014 alleging that Ericsson’s LTE products infringe another Japa- nese patent. In the lawsuits in Japan, Adaptix is also seeking damages and an injunction. In 2013, Ericsson filed a patent infringement lawsuit in the Delhi High Court against Indian handset company Micromax, seeking damages and an injunction. As part of its defense, Micro- max filed a complaint with the Competition Commission of India (CCI) and the CCI has decided to refer the case to the Director Gener- al’s Office for an in-depth investigation. In January 2014, the CCI opened another investigation against Ericsson based on claims made by Intex Technologies (India) Limited. Ericsson has made numerous attempts to sign a license agreement with both Micromax and Intex on Fair, Reasonable and Non-discrimina- tory (FRAND) terms. In 2012, Wi-LAN Inc., a Canadian patent licensing company, filed a complaint against Ericsson in the US District Court for the South- ern District of Florida alleging that Ericsson’s LTE products infringe three of Wi-LAN’s US patents. In June 2013, Ericsson’s motion for summary judgment was granted and in August 2014, the decision was reversed by the United States Court of Appeals for the Federal Circuit. As a result, the case is back before the Florida court. Trial is currently scheduled for May 2015. In 2011, TruePosition sued Ericsson, Qual- comm, Alcatel-Lucent, the European Telecom- munications Standards Institute (ETSI) and the Third Generation Partnership Project (3GPP) in the US District Court for the Eastern District of Pennsylvania for purported federal antitrust violations. The complaint alleged that Ericsson, Qualcomm and Alcatel-Lucent illegally con- spired to block the adoption of TruePosition’s proprietary technology into the new mobile posi- tioning standards for LTE, while at the same time ensuring that their own technology was included into the new standards. In July 2014, Ericsson and TruePosition reached an amicable settle- ment. As part of the settlement, Ericsson did not pay TruePosition any money to settle the case and TruePosition withdrew its allegations of wrongdoing against Ericsson. Parent Company 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 5 (5) branch offices. In total, the Group has 81 (81) branch and repre- sentative offices. Financial information Income after financial items was SEK 25.6 (7.2) billion. The Parent Company had no sales in 2014 or 2013 to subsidiaries, while 54% (30%) of total purchases of goods and services were from such companies. Major changes in the Parent Company’s financial position for the year included: > In 2012, a provision of SEK 3.3 billion was recognized, which provides for Ericsson’s share of obligations for the wind-down of ST-Ericsson. In 2013 and 2014, SEK 2.6 bil- lion has been utilized or reversed, which resulted in a net liability of SEK 0.7 billion. > Increased current and non-current receiv- ables from subsidiaries of SEK 9.6 billion. > Decreased other current receivables of SEK 0.2 billion. > Decreased cash, cash equivalents and short-term investments of SEK 3.5 billion. > Decreased current and non-current liabilities to subsidiaries of SEK 3.8 billion. > Increased other current liabilities of SEK 3.0 billion. At year-end, cash, cash equivalents and short- term investments amounted to SEK 55.0 (58.5) billion. Share information As of December 31, 2014, the total number of shares in issue was 3,305,051,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,043,295,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The two largest shareholders at year-end were Investor AB and AB Industrivärden holding 21.50% and 15.20% respectively of the voting rights in the Parent Company. In accordance with the conditions of the Long- Term Variable Compensation Program (LTV) for Ericsson employees, 10,517,620 treasury shares were sold or distributed to employees in 2014. The quotient value of these shares was SEK 5.00, totaling SEK 52.6 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 129.2 million. The holding of treasury stock at December 31, 2014 was 63,450,558 Class B shares. 52 Ericsson | Annual Report 2014 The quotient value of these shares is SEK 5.00, totaling SEK 317.3 million, representing 1.9% of capital stock, and the purchase price amounts to SEK 490.3 million. Proposed disposition of earnings The Board of Directors propose s that a dividend of SEK 3.40 (3.00) per share be paid to share- holders duly registered on the record date April 16, 2015, 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 divi- dend. Assuming that no treasury shares remain on the record date, the Board of Directors pro- poses that earnings be distributed as follows: Amount to be paid to the shareholders Amount to be retained by the Parent Company Total non-restricted equity of the Parent Company SEK 11,237,175,899 SEK 26,633,889,879 SEK 37,871,065,778 As a basis for its dividend proposal, the Board of Directors has made an assessment in accor- dance 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 liquid- ity, financial position in other respects and long- term ability to meet their commitments. The Group reports an equity ratio of 49.5% (53%) and a net cash amount of SEK 27.6 (37.8) billion. The Board of Directors has also considered the Parent Company’s result and financial posi- tion 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’ assess- ment that the proposed dividend is well-bal- anced considering the nature, scope and risks of the business activities as well as he capital requirements for the Parent Company and the Group in addition to coming years’ business plans and economic development. Post-closing events On January 12, 2015, Apple filed a lawsuit asking the United States District Court for the Northern District of California to find that it does not infringe a small subset of Ericsson’s patents. On January 14, 2015, following Apple’s legal action, Ericsson filed a complaint in the United States District Court for the Eastern District of Texas requesting a ruling on Ericsson’s pro- posed global licensing fees with Apple. During the past two years of negotiations, the compa- nies have not been able to reach an agreement on licensing of Ericsson’s patents that enable Apple’s mobile devices to connect with the world and power many of their applications. Ericsson filed the suit in order to receive an inde- pendent assessment on whether Ericsson’s global licensing offer complies with Ericsson’s FRAND commitment. The global license agreement for mobile tech- nology between Ericsson and Apple has expired and Apple has declined to take a new license on offered FRAND terms. On January 15, 2015, Ericsson announced that Johan Wibergh, Executive Vice President and Head of Segment Networks, will leave his position to take on a role outside of Ericsson. Wibergh joined Ericsson in 1996 and has since held a number of executive positions within the company. Since 2008, Wibergh has also been part of Ericsson’s Executive Leadership Team. Although stepping down from his position imme- diately, Johan Wibergh will remain available to Ericsson until April 30, 2015 when he formally leaves the company. Effective January 15, 2015, Hans Vestberg will, in addition to his role as President and CEO, assume the role as Head of Segment Networks. Rockstar Consortium LLC (Rockstar) is a company that was formed in 2011 by Apple, Blackberry, Ericsson, Microsoft, and Sony to purchase approximately 4,000 patent assets out of the original about 6000 from the Nortel bankruptcy estate. On December 23, 2014, it was agreed between the owners of Rockstar and RPX Corporation (RPXC) that RPX should purchase the remaining patents of Rockstar. The transaction occured in 2015 and the impact on income will not be material in 2015. Board assurance The Board of Directors and the President declare that the consolidated financial state- ments have been prepared in accordance with IFRS, as issued by the IASB and 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 pos ition and results of operations and describes material risks and uncertainties facing the Parent Com- pany and the companies included in the Group. Financials – Board of Directors’ report 53 Ericsson | Annual Report 2014 FINANCIALS – Board of Directors’ report Stockholm, February 20, 2015 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Leif Johansson Chairman Sverker Martin-Löf Deputy Chairman Jacob Wallenberg Deputy Chairman Roxanne S. Austin Member of the Board Sir Peter L. Bonfield Member of the Board Nora Denzel Member of the Board Börje Ekholm Member of the Board Alexander Izosimov Member of the Board Ulf J. Johansson Member of the Board Kristin Skogen Lund Member of the Board Hans Vestberg President, CEO and Member of the Board Pär Östberg Member of the Board Pehr Claesson Member of the Board Kristina Davidsson Member of the Board Karin Åberg Member of the Board 54 Ericsson | Annual Report 2014 FINANCIALS CONSOLIDATED FINANCIAL STATEMENTS with NOTES Contents Consolidated financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements C1 Significant accounting policies C2 Critical accounting estimates and judgments C3 Segment information C4 Net sales C5 Expenses by nature C6 Other operating income and expenses C7 Financial income and expenses C8 Taxes C9 Earnings per share C10 Intangible assets C11 Property, plant and equipment C12 Financial assets, non-current C13 Inventories C14 Trade receivables and customer finance C15 Other current receivables C16 Equity and other comprehensive income C17 Post-employment benefits C18 Provisions C19 Interest-bearing liabilities C20 Financial risk management and financial instruments C21 Other current liabilities C22 Trade payables C23 Assets pledged as collateral C24 Contingent liabilities C25 Statement of cash flows C26 Business combinations C27 Leasing C28 Information regarding members of the Board of Directors, the Group management and employees C29 Related party transactions C30 Fees to auditors C31 Contractual obligations C32 Events after the reporting period 56 57 58 59 60 63 69 70 74 74 74 74 75 76 76 78 79 80 80 82 82 83 87 88 89 92 92 92 92 92 93 95 96 101 101 101 101 Financials – Consolidated financial statements 55 Ericsson | Annual Report 2014 FINANCIALS – Consolidated financial statements CONSOLIDATED FINANCIAL STATEMENTS 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) 2) Earnings per share attributable to stockholders of the Parent Company, diluted (SEK) 2) 1) Includes gain on sale of Sony Ericsson of SEK 7.7 billion. 2) Based on Net income attributable to stockholders of the Parent Company. Notes C3, C4 C6 C3, C12 C3 C7 C7 C8 C9 C9 C9 2014 227,983 –145,556 82,427 36.2% –36,308 –27,100 –63,408 –2,156 16,863 7.4% –56 16,807 1,277 –2,273 15,811 –4,668 11,143 11,568 –425 3,237 3.57 3.54 2013 227,376 –151,005 76,371 33.6% –32,236 –26,273 –58,509 113 17,975 7.9% –130 17,845 1,346 –2,093 17,098 –4,924 12,174 12,005 169 3,226 3.72 3.69 2012 227,779 –155,699 72,080 31.6% –32,833 –26,023 –58,856 8,965 1) 22,189 9.7% –11,731 10,458 1,708 –1,984 10,182 –4,244 5,938 5,775 163 3,216 1.80 1.78 56 Ericsson | Annual Report 2014 Consolidated statement of comprehensive income January–December, SEK million Net income Other comprehensive income Items that will not be reclassified to profit or loss Remeasurements of defined benefits pension plans including asset ceiling Tax on items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss 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 Revaluation of other investments in shares and participations Fair value remeasurement Changes in cumulative translation adjustments Share of other comprehensive income of joint ventures and associated companies Tax on items that may be reclassified to profit or loss Total other comprehensive income, net of tax Total comprehensive income Total comprehensive income attributable to: Stockholders of the Parent Company Non-controlling interests 2014 11,143 2013 12,174 –10,017 2,218 3,214 –1,235 – – – 47 8,734 579 5 1,566 12,709 12,981 –272 251 –1,072 – 71 –1,687 –14 179 –293 11,881 11,712 169 2012 5,938 –451 –59 1,668 –568 92 6 –3,947 –486 –363 –4,108 1,830 1,716 114 Financials – Consolidated financial statements 57 Ericsson | Annual Report 2014 FINANCIALS – Consolidated financial statements 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 Property, plant and equipment 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 Total equity and liabilities 1) 1) Of which interest-bearing liabilities and post-employment benefits SEK 44,530 (39,280) million. 58 Notes C10, C26 C11, C26, C27 C12 C12 C12 C12 C8 C13 C14 C14 C15 C20 C25 C16 C17 C18 C8 C19, C20 C18 C19, C20 C22 C21 2014 2013 3,570 38,330 12,534 13,341 2,793 591 1,932 5,900 12,778 91,769 28,175 77,893 2,289 21,273 31,171 40,988 201,789 293,558 144,306 1,003 145,309 20,385 202 3,177 21,864 1,797 47,425 4,225 2,281 24,473 69,845 100,824 293,558 3,348 31,544 12,815 11,433 2,568 505 1,294 5,684 9,103 78,294 22,759 71,013 2,094 17,941 34,994 42,095 190,896 269,190 140,204 1,419 141,623 9,825 222 2,650 22,067 1,459 36,223 5,140 7,388 20,502 58,314 91,344 269,190 Ericsson | Annual Report 2014 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 Cash flow from operating activities Investing activities Investments in property, plant and equipment Sales of property, plant and equipment Acquisitions of subsidiaries and other operations Divestments of subsidiaries and other operations Product development Other investing activities Short-term investments Cash flow from investing activities Cash flow before financing activities Financing activities Proceeds from issuance of borrowings Repayment of borrowings Proceeds from stock issue Sale/repurchase of own shares Dividends paid Other financing activities Cash flow from financing activities Effect of exchange rate changes on cash Net change in cash Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period C25 1) Includes payment of external loan of SEK –6.2 billion attributable to the acquisition of Telcordia. Notes 2014 2013 2012 C25 C11 C25, C26 C25, C26 C10 11,143 11,200 22,343 –2,924 –710 1,182 1,265 –859 –1,595 –3,641 18,702 –5,322 522 –4,442 48 –1,523 –3,392 6,596 –7,513 11,189 1,282 –9,384 – – –9,846 –277 –18,225 5,929 –1,107 42,095 40,988 12,174 9,828 22,002 4,868 1,809 –8,504 –2,158 –3,298 2,670 –4,613 17,389 –4,503 378 –3,147 465 –915 –1,330 –2,057 –11,109 6,280 5,956 –5,094 – 90 –9,153 –1,307 –9,508 641 –2,587 44,682 42,095 5,938 13,077 19,015 2,752 –1,259 –1,103 –1,311 –1,920 5,857 3,016 22,031 –5,429 568 –11,529 1) 9,452 –1,641 1,540 2,151 –4,888 17,143 8,969 –9,670 159 –93 –8,632 –118 –9,385 –1,752 6,006 38,676 44,682 Financials – Consolidated financial statements 59 Ericsson | Annual Report 2014 FINANCIALS – Consolidated financial statements Consolidated statement of changes in equity Equity and Other comprehensive income 2014 SEK million January 1, 2014 Net income Group Joint ventures and associated companies Other comprehensive income Items that will not be reclassified to profit or loss Remeasurements related to post-employment benefits Group Tax on items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss Cash flow hedges Gains/losses arising during the year Group Reclassification adjustments for gains/losses included in profit or loss Revaluation of other investments in shares and participations Group Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items that may be reclassified to profit or loss 2) Total other comprehensive income, net of tax Total comprehensive income Transactions with owners Stock issue Sale/repurchase of own shares Stock purchase plans Group Joint ventures and associated companies Dividends paid Transactions with non-controlling interest December 31, 2014 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Capital stock Addi tional paid in capital 16,526 24,731 Retained earnings 98,947 Stock holders’ equity Non-control ling interest 140,204 1,419 Total equity 141,623 11,624 –56 11,624 –56 –425 – 11,199 –56 –10,014 2,218 –10,014 2,218 – – 47 8,578 579 5 1,413 12,981 – 106 717 – –9,702 – – – 47 8,578 1) 579 5 1,413 12,981 – 106 717 – –9,702 3) – 144,306 –3 – – – – 156 – – 153 –272 – – – – –144 – 1,003 –10,017 2,218 – – 47 8,734 579 5 1566 12,709 – 106 717 – –9,846 – 145,309 16,526 24,731 103,049 1) Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK 4,794 million (SEK –204 million in 2013 and SEK 1,400 million in 2012), and realized gain/losses net from sold/liquidated companies, SEK 3 million (SEK –20 million in 2013 and SEK –461 million in 2012). 2) For further disclosures, see Note C8, “Taxes.” 3) Dividends paid per share amounted to SEK 3.00 (SEK 2.75 in 2013 and SEK 2.50 in 2012). 60 Ericsson | Annual Report 2014 Equity and Other comprehensive income 2013 SEK million January 1, 2013 Net income Group Joint ventures and associated companies Other comprehensive income Items that will not be reclassified to profit or loss Remeasurements related to post-employment benefits Group Tax on items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss Cash flow hedges Gains/losses arising during the year Group Reclassification adjustments for gains/losses included in profit or loss Revaluation of other investments in shares and participations Group Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items that may be reclassified to profit or loss Total other comprehensive income, net of tax Total comprehensive income Transactions with owners Stock issue Sale/repurchase of own shares Stock purchase plans Group Joint ventures and associated companies Dividends paid Transactions with non-controlling interest December 31, 2013 Capital stock Addi tional paid in capital 16,526 24,731 Retained earnings 95,626 Stock holders’ equity Non-control ling interest 136,883 1,600 Total equity 138,483 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 16,526 24,731 12,135 –130 12,135 –130 169 – 12,304 –130 3,214 –1,235 3,214 –1,235 251 251 –1,072 –1,072 71 71 –1,687 –14 179 –293 11,712 – 90 388 – –8,863 –6 98,947 –1,687 –14 179 –293 11,712 – 90 388 – –8,863 –6 140,204 – – – – – 0 – – – 169 – – – – –290 –60 1,419 3,214 –1,235 251 –1,072 71 –1,687 –14 179 –293 11,881 – 90 388 – –9,153 –66 141,623 Financials – Consolidated financial statements 61 Ericsson | Annual Report 2014 FINANCIALS – Consolidated financial statements Equity and Other comprehensive income 2012 SEK million January 1, 2012 Net income Group Joint ventures and associated companies Other comprehensive income Items that will not be reclassified to profit or loss Remeasurements related to post-employment benefits Group Joint ventures and associated companies Tax on items that will not be reclassified to profit or loss Items that may be reclassified to profit or loss 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 Adjustment for amounts transferred to initial carrying amount of hedged items Revaluation of other investments in shares and participations Group Changes in cumulative translation adjustments Group Joint ventures and associated companies Tax on items that may be reclassified to profit or loss Total other comprehensive income, net of tax Total comprehensive income Transactions with owners Stock issue Sale/repurchase of own shares Stock purchase plans Group Joint ventures and associated companies Dividends paid Transactions with non-controlling interest December 31, 2012 Capital stock Addi tional paid in capital 16,367 24,731 Retained earnings 102,007 Stock holders’ equity Non-control ling interest 143,105 2,165 Total equity 145,270 – – – – – – – – – – – – – – – 159 – – – – – – – – – – – – – – – – – – – – – – – – – – 16,526 24,731 17,411 –11,636 17,411 –11,636 163 – 17,574 –11,636 –451 50 –59 1,668 –25 –568 92 6 –3,898 –511 –363 –4,059 1,716 – –93 405 – –8,033 –376 95,626 –451 50 –59 1,668 –25 –568 92 6 –3,898 –511 –363 –4,059 1,716 159 –93 405 – –8,033 –376 136,883 – – – – – – – – –49 – – –49 114 – – – – –599 –80 1,600 –451 50 –59 1,668 –25 –568 92 6 –3,947 –511 –363 –4,108 1,830 159 –93 405 – –8,632 –456 138,483 62 Ericsson | Annual Report 2014 FINANCIALS notes to the CONSOLIDATED FINANCIAL STATEMENTS C1 Significant accounting policies Introduction The consolidated financial statements comprise Telefonaktie bolaget 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 S weden at Torshamnsgatan 21, SE-164 83 Stockholm. The consolidated financial statements for the year ended December 31, 2014 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 2014, the Company has applied IFRS as issued by the IASB (IFRS effective as per December 31, 2014). There is no difference between IFRS effective as per December 31, 2014, 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 con- flict with IFRS, for all periods presented. The financial statements were approved by the Board of Directors on February 20, 2015. The balance sheets and income statements are subject to approval by the Annual General Meeting of shareholders. New standards, amendments of standards and interpretations, effective as from January 1, 2014 are as follows: > Amendment to IAS 32, “Financial instruments: Presentation,” on asset and liability offsetting. This amendment is related to the application of guidance in IAS 32, ‘Financial instruments: Presentation,’ and clarifies some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. > IFRIC 21, “Levies.” This sets out the accounting for an obligation to pay a levy that is not income tax. The interpretation addresses what the obligating event is that gives rise to the need to pay a levy and when a liability should be recognized. None of the new or amended standards and interpretations have had any significant impact on the financial result or position nor on the disclosure of the Company. For information on “New standards and interpretations not yet adopted,” refer to the end of this Note. 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 finan- cial instruments, financial instruments held for trading, financial instru- ments classified as available-for-sale and plan assets related to defined benefit pension plans. Financial information in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity with related notes are presented with two comparison years while for the consolidated balance sheet financial information with related notes is presented with only one comparison year. Basis of consolidation and composition of the group 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 for which Telefonaktiebolaget LM Ericsson, directly or indirectly, is the parent. To be classified as a parent, Telefonaktiebolaget LM Ericsson, directly or indirectly, must control another company which requires that the Parent Company has power over that other company, is exposed to variable returns from its involve- ment and has the ability to use its power over that other company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that such control ceases. Intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consoli- dated 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. The Company is composed of a parent company, Telefonaktie bolaget LM Ericsson, with generally fully-owned subsidiaries in many countries of the world. The largest operating subsidiaries are the fully-owned telecom vendor companies Ericsson AB, incorporated in Sweden and Ericsson Inc., incorporated in the US. 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 interests 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 previ- ously 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 invest- ment 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. Financials – Notes to the consolidated financial statements 63 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements If the Company’s interest in an associated company or joint venture is nil, the Company shall not, as prescribed by IFRS, recognize its part of any future losses. Provisions related to obligations for such an interest shall, however, be recognized in relation to such an interest. JVs are classed as ownership interests under which the Company has joint control of another company. Investments in associated companies, i.e., when the Company has significant influence and the power to participate in the financial and operating policy decisions of the associated company, but is not in control or joint control over those policies. Normally, this is the case in voting stock interest, including effective potential voting rights, which stand at at least 20% but not more than 50%. The Company’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies,” included in Operating Income. This reflects the fact 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 asso- ciated 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 value 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 influ- ence 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,” further dis- closure 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 each respective trans- actions. 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 comprehen- sive income under the hedge accounting practices as described below. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation dif- ferences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in OCI. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Group companies The results and financial position of all the group entities that have a func- tional 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 64 > Income and expenses for each income statement are translated at average exchange rates > 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 any 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 support 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’s products and services are disclosed in more detail as per operating segment. The Company’s products and services are generally sold under deliv- ery-type or multi-year recurring services contracts. The delivery type con- tracts often contain 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 > The customer has received and activation has been made of separately sold software > Collection is reasonably assured Estimations of contractual performance criteria impact the timing and amounts of revenue recognized and may therefore defer revenue recogni- tion 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. Allocation and/or timing criteria specific to each type of contract are: > Delivery-type contracts – These contracts relate to delivery, installation, integration of products and provision of related services, normally under multiple elements contracts. Under multiple elements contracts, account- ing 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 Support Solutions have contracts that relate to this type of arrangement. > Contracts for services – These relate to multi-year service contracts such as support- and managed service contracts and other types of recurring 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 arrangement. Ericsson | Annual Report 2014 > Contracts generating license fees from third parties for the use of the Company’s intellectual property rights – License fees are normally measured as a percentage of sales or currency amount per unit and recognized over the license period as the amount of the consideration becomes reasonably certain. Networks and Support Solutions have contracts that relate to this type of arrangement. 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 uncer- tainty and (ii) the decision made in relation to accounting policies applied. Earnings per share Basic earnings per share are calculated by dividing net income attribut- able 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 attrib- utable to stockholders of the Parent Company, when appropriately 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. 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. 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 rec- ognized 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 the 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 state- ment 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 sub- sequently 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 customers 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 for- eign currency and 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 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 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 cur- rent 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 carry- ing amount and the present value of estimated future cash flows, dis- counted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling expenses. When a trade receivable is finally established as uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited to selling expenses in the income statement. Financial liabilities Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument. Financial liabilities are derecognized when they are extinguished, i.e., when the obligation specified in the contract is discharged, cancelled or expires. Borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the Financials – Notes to the consolidated financial statements 65 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements 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. Hedge accounting When applying hedge accounting, 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 hedges: a hedge of the fair value of recognized liabilities; b) Net investment hedges: 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 man- agement objectives and strategy for undertaking various hedging trans- actions. 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 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. 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 attrib- utable to the hedged risk, when hedge accounting is applied. The Com- pany 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. Net investment hedges Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in the cumulative translation adjustment (CTA). 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 CTA are included in the income statement when the foreign operation is partially disposed of or sold. 66 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 comprising 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 cus- tomer acceptance of new products. A significant part of Inventories is Contract work in progress (CWIP). Recognition and derecognition 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. In Note C2, “Critical accounting estimates and judgments,” further dis- closure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. Intangible assets Intangible assets other than goodwill Intangible assets other than goodwill comprise acquired intangible assets, such as patents, customer relations, trademarks and software, as well as capitalized development expenses and separately acquired intan- gible assets, mainly consisting of software. At initial recognition, acquired intangible assets related to business combinations are stated at fair value and capitalized development expenses and software are stated at cost. Subsequent to initial recognition, separately acquired intangible assets, mainly software and capitalized development expenses, are stated at initially recognized amounts less accumulated amortization and any impairment. Amortization and any impairment losses are included in Research and development expenses, which mainly consists of capital- ized development expenses and patents; in Selling and administrative expenses, which mainly consists of expenses relating to customer relations and brands; and in Cost of sales. Costs incurred for development of products to be sold, leased or other- wise marketed or intended for internal use are capitalized as from when technological and economic feasibility has been established until the product is available for sale or use. 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, trademarks 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 by higher amounts in the beginning of its 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 pos- sible 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 dis- count 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 discount rate applied by the Company is not Ericsson | Annual Report 2014 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 rela- tion 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 recover- able 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. In Note C2, “Critical accounting estimates and judgments,” further dis- closure is presented in relation to (i) key sources of estimation uncertainty and (ii) the decision made in relation to accounting policies applied. Goodwill As from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (CGU) of the Company expected to benefit from the synergies of the combination. The Company’s four operating segments have been identified as CGUs. Goodwill is assigned to three of them: Networks, Global Services and Support Solutions. 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 good- will” 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 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 accumu- lated 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 gen- eral, 25–50 years for real estate and 3–10 years for machinery and equip- ment. 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 les- see, and otherwise as operating leases. Under a finance lease, a receiv- able is recognized at an amount equal to the net investment in the lease and revenue is recognized in accordance with the revenue recognition principles. Under operating leases the equipment is recorded as property, plant and equipment and revenue as well as depreciation is recognized on a straight-line basis over the lease term. Income taxes Income taxes in the consolidated financial statements include both cur- rent and deferred taxes. Income taxes are reported in the income state- ment 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 tempo- rary 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 regard- ing 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 car- ry-forwards relate to Sweden, which have an indefinite period of utiliza- tion. In Note C2, “Critical accounting estimates and judgments,” further dis- closure 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, dis- counting 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, restructur- ing, 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. Financials – Notes to the consolidated financial statements 67 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Project-related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. For losses on customer con- tracts, a provision equal to the total estimated loss is recorded when a loss from a contract is anticipated and possible to estimate reliably. These contract loss estimates include any probable penalties to a customer under a loss contract. Other provisions include provisions for unresolved tax issues, litiga- tions, supplier claims, customer finance and other provisions. The Com- pany provides for estimated future settlements related to patent infringe- ments 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 infringe- ment 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 proceed- ings, 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 rec- ognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individ- ual 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 reli- ability. Such obligations are reported as contingent liabilities. For further detailed information, see Note C24, “Contingent liabilities.” In Note C2, “Critical accounting estimates and judgments,” 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 con- tribution 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 con- tributions 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 for- mer 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 deter- mine the cost of providing the benefits. When using actuarial assump- tions, 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, remeasure- ment of plan assets and changes in the discount rate. Actuarial gains and losses are recognized in OCI in the period in which they occur. The Com- pany’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 rec- ognized net on the balance sheet. When the result is a net benefit to the 68 Company, the recognized asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan. Interest cost on the defined benefit obligation and interest income on plan assets is calculated as a net interest amount by applying the discount rate to the net defined benefit liability. All past service costs are recog- nized immediately. Swedish special payroll tax is accounted for as a part of the pension cost and the pension liability respectively. Payroll taxes related to actuarial gains and losses are included in deter- mining actuarial gains and losses, reported under OCI. In Note C2, “Critical accounting estimates and judgments,” further dis- closure is presented in relation to key sources of estimation uncertainty. 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 would be 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 IFRS accounting principle 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 the 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 consid- ered 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. 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 per- formance targets will be 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 match- ing 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 compens- ation program as a part of the remuneration to the Board of Directors. The program gives non-employee 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 dis- closed 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 Ericsson | Annual Report 2014 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. The President and the Chief Executive Officer is defined as the CODM function in the Company. 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 the country in which transfer of risks and rewards occur. New standards and interpretations not yet adopted A number of issued new standards, amendments to standards and inter- pretations are not yet effective for the year ended December 31, 2014 and have not been applied in preparing these consolidated financial statements. Below is a list of applicable standards/interpretations, that have been issued and are effective for periods as described per standard. > IFRS 9, “Financial instruments.” The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary mea- surement categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. This standard is effec- tive as from January 1, 2018. The EU has not yet endorsed IFRS 9, ‘Financial instruments.’ The Company has not yet finalized the evalua- tion of any impact on financial result or position. > IFRS 15, “Revenue from Contracts with Customers,” Revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of prom- ised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective as from January 1, 2017. The EU has not yet endorsed IFRS 15, “Revenue from Contracts with Customers.” The Company has not yet finalized the evaluation of any impact on financial result or position. Revenue recognition Key sources of estimation uncertainty Examples of estimates of total contract revenue and cost that are nec- essary 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 have taken place to determine if revenue and costs should be recognized in the current period, degree of comple- tion 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, 2014, were SEK 1.5 (1.2) billion or 1.8% (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. Esti- mates 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, 2014, amounted to SEK 2.3 (2.5) billion or 8% (10%) of gross inventory. Deferred taxes Key sources of estimation uncertainty Deferred tax assets and liabilities are recognized for temporary differ- ences 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. The largest amounts of tax loss carry-forwards are reported in Sweden, 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, 2014, the value of deferred tax assets amounted to SEK 12.8 (9.1) billion. The deferred tax assets related to loss carry- forwards are reported as non-current assets. 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 liabil- ity affected. 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. Accounting for income tax, value added tax, 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 the Company per- forms 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 in the case of goodwill for which impairment testing is performed at least Financials – Notes to the consolidated financial statements 69 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements once per year. Negative deviations in actual cash flows compared to esti- mated cash flows as well as new estimates that indicate lower future cash flows might result in recognition of impairment charges. For further discussion on goodwill, see Note C1, “Significant account- ing policies” and Note C10, “Intangible assets.” Estimates related to acquired intangible assets are based on similar assumptions and risks as for goodwill. At December 31, 2014, the amount of acquired intellectual property rights and other intangible assets amounted to SEK 50.9 (44.4) billion, including goodwill of SEK 38.3 (31.5) billion. Judgments made in relation to accounting policies applied At initial recognition and subsequent remeasurement, management judg- ments 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 judg- ments 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 regarding 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, 2014, amounted to SEK 0.8 (0.9) billion. Provisions other than warranty provisions Key sources of estimation uncertainty Provisions, other than warranty provisions, mainly comprise amounts related to contractual obligations and penalties to customers and estimated losses on customer contracts, restructuring, risks associated with patent and other litigations, supplier or subcontractor claims and/or disputes, as well as provisions for unresolved income tax and value added tax issues. The estimates related to the amounts of provisions for penalties, claims or losses receive special attention from the management. At December 31, 2014, provisions other than warranty commitments amounted to SEK 3.6 (4.5) 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 applied As disclosed under Note C1, “Significant accounting policies” a potential obligation that is not likely to result in an economic outflow is classified as a contingent liability, with no impact on the Company’s financial state- ments. However, should an obligation in a later period be deemed to be probable, then a provision shall be recognized, impacting the financial statements. Pension and other post-employment benefits Key sources of estimation uncertainty Accounting for the costs of defined benefit pension plans and other appli- cable post-employment benefits is based on actuarial valuations, relying on key estimates for discount rates, 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. At December 31, 2014, defined benefit obligations for pensions and other post-employ- ment benefits amounted to SEK 73.8 (52.9) billion and fair value of plan assets to SEK 56.9 (46.6) billion. For more information on estimates and assumptions, see Note C17, “Post-employment benefits.” Foreign exchange risks Key sources of estimation uncertainty Foreign exchange risk impacts the financial results of the Company: see further disclosure in Note C20, “Financial Risk Management and Financial Instruments,” under Foreign Exchange Risk. 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 develop- ment has also been taken into account. To best reflect the business focus and to facilitate comparability with peers, four operating segments are reported: > Networks > Global Services > Support Solutions > Modems Networks delivers products and solutions for mobile access, IP and transmission networks, core networks and cloud. The offering includes: > Radio access solutions that interconnect with devices such as mobile phones, tablets and PCs. The RBS 6000 supports all major standard- ized mobile technologies > IP routing and transport solutions based on the smart services routers, (the SSR 8000 family of products), Ericsson’s evolved IP network as well as backhaul including microwave (MINI-LINK) and optical trans- mission solutions for mobile and fixed networks > Core networks are based on the Ericsson Blade Server platform and include solutions such as the IMS > A cloud platform that can handle all types of workloads for all clouds; telecom cloud, IT cloud and commercial cloud. > Operations Support Systems (OSS), supporting operators’ manage- ment of existing networks and introduction of new technologies and services. Global Services delivers managed services, product-related services, consulting and systems integration services as well as broadcast and media services. The offering includes: > Managed Services: Services for designing, building, operating and managing the day-to-day operations of the customer’s network or solu- tion; maintenance; network sharing solutions; plus shared solutions such as hosting of platforms and applications. Ericsson also offers managed services of IT environments. > Product-related services: Services to expand, upgrade, restructure or migrate networks; network-rollout services; customer support; network design and optimization services. 70 Ericsson | Annual Report 2014 > Consulting and Systems Integration: Technology and operational consulting; integration of multi-vendor equipment; design and integra- tion of new solutions and transforming programs. > Broadcast Services: Services include responsibility for technical platforms and operational services related to TV content management, playout and service provisioning. > Industry and Society; All above types of services for industry-specific solutions, primarily in the areas of utilities, transport & public safety. Support Solutions provides software suites for operators. The offering includes: > Operations Support Systems: plan, build and optimize, service fulfill- ment and service assurance. > Business Support Systems: revenue management (prepaid, post-paid, convergent charging and billing), mediation and customer care solu- tions. > TV & Media solutions: a suite of open, standards-based solutions and products for the creation, management and delivery of TV on any device over any network, including a TV platform for content creation, content management, on-demand video delivery, advanced video compression and video-optimized delivery network infrastructure. > M-Commerce solutions for money transfer: payment transactions and services between mobile subscribers and operators or other service providers. Modems performs design, development and sales of the LTE multimode thin modems solutions, including 2G, 3G and 4G interoperability. Modems was consolidated into Ericsson in late 2013. Since the integration, the addressable market for thin modems has been reduced. In addition, there is strong competition, price erosion and an accelerating pace of technology innovation. As a consequence, Ericsson announced, on September 18, 2014, the discontinuation of further development of modems. Modems will have no impact on Group profit and loss from the second half of 2015. Former segments ST-Ericsson was a joint venture between Ericsson and STMicroelectron- ics. In 2013, the joint venture was closed and all business was either split up between parents or divested. As of January 1, 2013, ST-Ericsson is no longer reported as a separate segment. Ericsson acquired the LTE thin-modem operations which was consoli- dated in a new segment entitled “Modems.” As of December 31, 2012 there were no remaining investments related to ST-Ericsson on the Company’s balance sheet. For more information, see Note C12, “Financial assets.” Sony Ericsson was, up until 2012, a joint venture delivering mobile phones and accessories. In February 2012, Ericsson completed the divestment of its 50% stake in Sony Ericsson to Sony. The sale resulted in a gain of SEK 7.7 billion. Sony Ericsson was not consolidated by the Company during 2012. 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 georaphi- cal regions: > North America > Latin America > Northern Europe & Central Asia > Western and Central Europe > Mediterranean > Middle East > Sub-Saharan Africa > India > North East Asia > South East Asia & Oceania > Other. Region “Other” includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses. 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 2014, 2013 or 2012. Ericsson derives most of its sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 500, mainly consisting of network operators, the 10 largest customers accounted for 47% (44%) of net sales. The largest customer accounted for approximately 8% (8%) of sales in 2014. For more information, see Risk Factors, “Market, Technology and Business Risks.” Marketing channels Marketing in a business-to-business environment is expanding, from being primarily conducted through personal meetings, to on-line forums, expert blogs and social media. Ericsson performs marketing through: > Customer engagement with a consultative approach > Selective focus on events and experience centers for customer experi- ence and interaction > Continuous dialogue with customers and target audiences through social and other digital media (including virtual events) > Activation of the open social and digital media landscape to strengthen message reach and impact > Execution of solutions-driven programs, aligned globally and regionally. Financials – Notes to the consolidated financial statements 71 Ericsson | Annual Report 2014 0 0 –748 – –69 5 – – – – –36 – – –570 – 23 – – – – –88 51 Group 227,983 227,983 16,807 7% 1,277 –2,273 15,811 –4,668 11,143 –56 –5,598 –4,329 –37 19 –1,456 –36 Group 227,376 227,376 17,845 8% 1,346 –2,093 17,098 –4,924 12,174 –130 –5,928 –4,227 –7 25 –4,453 –841 FINANCIALS – Notes to the consolidated financial statements Operating segments 2014 Segment sales Net sales Operating income Operating margin (%) Financial income Financial expenses Income after financial items Taxes Net income Networks 117,487 117,487 13,544 12% Global Services 97,659 97,659 6,067 6% Support Solutions 12,655 12,655 –31 0% Modems 182 182 –2,025 – Other segment items Share in earnings of JV and associated companies Amortization Depreciation Impairment losses Reversals of impairment losses Restructuring expenses Gains/losses from divestments 33 –3,497 –3,225 –34 14 –443 32 –1,036 –820 –1 4 –835 –52 –902 –124 –2 0 –146 0 –168 –160 0 1 –32 13 –5,603 –4,329 –37 19 –1,456 Total Segments Unallocated 227,983 227,983 17,555 8% Operating segments 2013 Segment sales Net sales Operating income Operating margin (%) Financial income Financial expenses Income after financial items Taxes Net income Networks 117,699 117,699 11,318 10% Global Services Support Solutions Modems Total Segments Unallocated 97,443 97,443 6,185 6% 12,234 12,234 1,455 12% – – –543 – 227,376 227,376 18,415 8% 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 –155 –4,237 –3,243 –5 19 –2,182 –621 60 –925 –788 –2 5 –1,997 –166 –58 –722 –135 0 1 –186 –105 – –44 –61 – – – – –153 –5,928 –4,227 –7 25 –4,365 –892 72 Ericsson | Annual Report 2014 Operating segments 2012 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 Write-down of investment Restructuring expenses Gains/losses from divestments Networks 117,185 100 117,285 7,057 6% Global Services Support Solutions Sony Ericsson ST- Ericsson Total Segments Unallocated Eliminations 1) 97,009 34 97,043 6,226 6% 13,445 6 13,451 1,150 9% – – – 8,457 634 9,091 8,026 2) – –15,447 3) –170% 236,096 774 236,870 7,012 3% – – – –267 – –8,457 –634 –9,091 3,713 – –59 –3,832 –3,035 –385 39 – –1,253 –59 45 –853 –727 –9 9 – –1,930 1 –20 –809 –290 –1 4 – –246 216 – – – – – – – 8,026 2) –11,734 3) –322 –741 – 4) – –4,684 –624 – –11,768 –5,816 –4,793 –395 52 –4,684 –4,053 8,184 37 – – – – – –18 152 – 322 741 – – – 624 – 1) All segment sales are presented, but as ST-Ericsson sales are accounted for in accordance with the equity method, their sales are eliminated in the Eliminations column. 2) Includes a gain from the divestment of Sony Ericsson of SEK 7.7 billion. 3) Includes a write-down of SEK –4.7 billion of the ST-Ericsson investment, a provision of SEK –3.3 billion and the Company’s share in ST-Ericsson’s operating loss of SEK –3.7 billion. 4) Impairment losses included in Write-down of investment. Revenue from the acquired Telcordia business operation is reported 50/50 between segments Global Services and Support Solutions. Regions North America 3) Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India North East Asia 4) South East Asia & Oceania Other 1) 2) 3) 4) Total 1) Of which in Sweden 6) 2) Of which in EU 6) 3) Of which in the United States 6) 4) Of which in China 6) Net sales Non-current assets 5) 2014 54,509 22,570 12,373 19,706 23,003 21,277 8,749 7,702 27,572 15,858 14,664 227,983 4,144 45,101 55,722 14,335 2013 59,339 21,982 11,618 18,485 24,156 17,438 10,049 6,138 27,398 15,787 14,986 227,376 4,427 43,544 59,085 11,799 2012 56,749 22,006 11,345 17,478 23,299 15,556 11,349 6,460 36,196 15,068 12,273 227,779 5,033 44,230 56,698 12,637 2014 16,148 1,749 43,868 4,227 1,389 100 54 471 2,217 345 – 70,568 43,298 48,881 13,116 1,370 2013 13,290 1,742 38,522 3,539 1,089 46 32 439 2,667 342 – 61,708 38,049 42,239 11,173 1,344 5) Total non-current assets excluding financial instruments, deferred tax assets, and post-employment benefit assets. 6) Including IPR revenue reported under Other above. For employee information, see Note C28, “Information regarding members of the Board of Directors, the Group management and employees.” Group 227,639 140 227,779 10,458 5% 1,708 –1,984 10,182 –4,244 5,938 –11,731 –5,494 –4,052 –395 52 –4,684 –3,447 8,336 2012 15,058 2,084 38,335 2,922 1,099 32 119 460 3,371 301 – 63,781 37,718 41,546 13,003 1,399 Financials – Notes to the consolidated financial statements 73 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements C4 Net sales Net sales Sales of products and network rollout services 1) Professional Services sales License revenues Net sales Export sales from Sweden 1) Entirely delivery-type contracts. 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 increase/decrease (–/+) 1) Additions to capitalized development 2014 2013 2012 147,235 70,831 9,917 227,983 113,734 150,429 66,395 10,552 227,376 108,944 154,068 67,092 6,619 227,779 106,997 2014 2013 2012 126,401 75,950 9,927 1,138 2,273 4,668 220,357 –2,929 –1,523 129,453 65,064 10,155 537 2,093 4,924 212,226 5,220 –915 137,769 64,100 9,546 1,999 1,984 4,244 219,642 2,782 –1,641 Expenses charged to the income statement 215,905 216,531 220,783 1) The inventory changes are based on changes of gross inventory values prior to obsolescence allowances. C7 Financial income and expenses Financial income and expenses Total restructuring charges in 2014 were SEK 1.5 (4.5) billion and were mainly related to the continued implementation of the service delivery strategy. 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 2014 1,029 304 123 1,456 2013 2,657 872 924 4,453 2012 2,225 852 370 3,447 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 2014 843 –935 8 –44 2013 172 –307 69 –910 Capital gains/losses, net Other operating revenues/expenses –128 –2,028 2) –976 1,089 2) Total other operating income and expenses –2,156 113 2012 12 –261 8,462 1) –126 8,087 878 8,965 1) Includes a gain from the divestment of Sony Ericsson of SEK 7.7 billion. 2) Includes revaluation of cash flow hedges of SEK –2.8 (0.5) billion. For more information, see Note C1, “Significant accounting policies.” Contractual interest on financial assets Of which on financial assets at fair value through profit or loss Contractual interest on financial liabilities Net gains/losses 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 2014 2013 2012 Financial income Financial expenses Financial income Financial expenses Financial income Financial expenses 713 297 – 624 – –70 – 10 – – –1,376 –651 –123 – –32 –214 971 597 – 447 – –75 – 3 – – –1,412 –601 –196 – 196 –276 1,277 –2,273 1,346 –2,093 1,685 1,308 – 142 – –127 – 8 1,708 – – –1,734 54 –129 – –133 –171 –1,984 1) Excluding net loss from operating assets and liabilities, SEK 143 million (net gain of SEK 49 million in 2013, SEK 1,299 million in 2012), reported as Cost of sales. 74 Ericsson | Annual Report 2014 C8 Taxes The Company’s tax expense for 2014 was SEK –4,668 (–4,924) million or 29.5% (28.8%) of income after financial items. The tax rate may vary between years depending on business and geographical mix. Income taxes recognized in the income statement Current income taxes for the year Current income taxes related to prior years Deferred tax income/expense (+/–) Subtotal Share of taxes in joint ventures and associated companies Tax expense 2014 –5,714 –66 1,112 –4,668 2013 –3,985 –26 –913 –4,924 2012 –5,795 –241 1,697 –4,339 – – 95 –4,668 –4,924 –4,244 A reconciliation between reported tax expense for the year and the theoretical tax expense that would arise when applying statutory tax rate in Sweden, 22.0%, 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 22.0% Effect of foreign tax rates Of which joint ventures and associated companies Current income taxes related to prior years Remeasurement of tax loss carry- forwards 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 Effective tax rate 2014 2013 2012 –3,479 –856 –3,762 –935 –2,678 –581 –2 –66 –51 –459 –2,125 2,383 –15 –4,668 29.5% – –26 165 86 –620 199 –31 –4,924 28.8% –778 –241 134 468 –3,430 2,573 –489 –4,244 41.7% 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 2014 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 2013 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 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 517 2,720 4,024 1,729 2,478 3,279 14,747 –1,969 12,778 300 1,958 2,008 997 2,416 3,578 11,257 –2,154 9,103 3,645 197 1,013 63 228 – 5,146 –1,969 3,177 3,143 164 1,033 293 171 – 4,804 –2,154 2,650 2014 6,453 1,112 2,223 –377 190 9,601 9,601 9,601 6,453 6,453 2013 9,201 –913 –1,056 –663 –116 6,453 Tax effects reported directly in Other comprehensive income amount to SEK 2,223 (–1,056) million, of which actuarial gains and losses related to pensions constituted SEK 2,218 (–1,231) million, cash flow hedges SEK 0 (179) million and deferred tax on gains/losses on hedges on investments in foreign entities SEK 5 (–4) million. Deferred tax assets are only recognized in countries where the Com- pany 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 3,279 (3,578) million recognized deferred tax assets related to tax loss carry-forwards, SEK 2,336 (2,177) million relates to Sweden with indefinite periods of utilization. Due to the Company’s strong current financial position and taxable income during 2014, the Company has been able to utilize part of its tax loss carry-forwards during the year. The assessment is that the Company will be able to generate sufficient income in the coming years to also utilize the remaining part of the recognized amounts. Financials – Notes to the consolidated financial statements 75 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements 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, 2014, the recognized tax loss carry-forwards amounted to SEK 13,503 (14,093) 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 2015 2016 2017 2018 2019 2020 or later Total Tax loss carry-forwards Tax value 516 214 41 24 41 12,667 13,503 182 79 16 8 14 2,980 3,279 In addition to the table above there are loss carry-forwards of SEK 4,572 (3,518) million at a tax value of SEK 1,216 (1,019) million that have not been recognized due to judgments of the possibility they will be used against future taxable profits in the respective jurisdictions. The majority of these loss carry-forwards have an expiration date in excess of five years. C9 Earnings per share Earnings per share Basic Net income attributable to stockholders of the Parent Company (SEK million) Average number of shares outstanding, basic (millions) Earnings per share, basic (SEK) Diluted Net income attributable to stockholders of the Parent Company (SEK million) Average number of shares outstanding, basic (millions) Dilutive effect for stock purchase plans (millions) Average number of shares outstanding, diluted (millions) Earnings per share, diluted (SEK) 2014 2013 2012 11,568 12,005 5,775 3,237 3.57 3,226 3.72 3,216 1.80 11,568 12,005 5,775 3,237 33 3,270 3.54 3,226 31 3,257 3.69 3,216 31 3,247 1.78 C10 Intangible assets Intangible assets 2014 Cost Opening balance Acquisitions/capitalization Balances regarding acquired/divested businesses 1) Sales/disposals Reclassification Translation difference Capitalized development expenses Goodwill For internal use To be marketed Acquired costs Internal costs Total Total 10,681 1,523 2,213 – 1,478 – 14,372 1,523 31,562 – – – – – – – – – – – – – – – – – 2,014 –22 – 4,794 Intellectual property rights (IPR), trade marks and other intangible assets Trademarks, customer rel ation ships and similar rights Patents and acquired R&D 19,289 107 1,597 –71 – 2,440 28,777 0 943 –22 – 1,307 Total 48,066 107 2,540 –93 – 3,747 Closing balance 12,204 2,213 1,478 15,895 38,348 23,362 31,005 54,367 Accumulated amortization Opening balance Amortization Sales/disposals Translation difference Closing balance Accumulated impairment losses Opening balance Impairment losses Closing balance Net carrying value –5,349 –1,267 – – –6,616 –1,987 –31 –2,018 3,070 –2,157 –1 – – –2,158 –55 – –55 0 –1,439 –2 – – –1,441 –37 – –37 0 –8,945 –1,270 – – –10,215 –2,079 –31 –2,110 3,570 – – – – – –18 – –18 38,330 –9,543 –2,502 73 –1,472 –13,444 – – – 9,918 –20,377 –1,826 16 –871 –23,058 –5,331 – –5,331 2,616 –29,920 –4,328 89 –2,343 –36,502 –5,331 – –5,331 12,534 1) For more information on acquired/divested businesses, see Note C26, “Business combinations.” 76 Ericsson | Annual Report 2014 Intangible assets 2013 Cost Opening balance Acquisitions/capitalization Balances regarding acquired/divested businesses 1) Sales/disposals Reclassification Translation difference Capitalized development expenses Goodwill For internal use To be marketed Acquired costs Internal costs Total Total 9,766 915 2,213 – 1,478 – 13,457 915 30,422 – – – – – – – – – – – – – – – – – 1,646 –302 – –204 Intellectual property rights (IPR), trade marks and other intangible assets Trademarks, customer rel ation ships and similar rights Patents and acquired R&D 18,595 587 200 –113 – 20 27,416 60 1,351 – – –50 Total 46,011 647 1,551 –113 – –30 Closing balance 10,681 2,213 1,478 14,372 31,562 19,289 28,777 48,066 Accumulated amortization Opening balance Amortization Sales/disposals Translation difference Closing balance Accumulated impairment losses Opening balance Impairment losses Closing balance Net carrying value –4,027 –1,322 – – –5,349 –1,987 – –1,987 3,345 –2,106 –51 – – –2,157 –55 – –55 1 –1,405 –34 – – –1,439 –37 – –37 2 –7,538 –1,407 – – –8,945 –2,079 – –2,079 3,348 – – – – – –18 – –18 31,544 –7,277 –2,322 92 –36 –9,543 – – – 9,746 –18,201 –2,199 – 23 –20,377 –5,331 – –5,331 3,069 –25,478 –4,521 92 –13 –29,920 –5,331 – –5,331 12,815 1) For more information on acquired/divested businesses, see Note C26, “Business combinations.” Goodwill is allocated to the operating segments Networks, at the sum of SEK 20.1 (16.7) billion, Global Services, at the sum of SEK 5.6 (4.5) billion and Support Solutions, at the sum of SEK 12.6 (10.3) billion. The recoverable amounts for cash-generating units are established as the present value of expected future cash flows. Estimation of future cash flows includes assumptions mainly for the following key financial parameters: > Sales growth > Development of operating income (based on operating margin or cost of goods sold and operating expenses relative to sales) > Development of working capital and capital expenditure requirements. The assumptions regarding industry-specific market drivers and market growth are approved by Group management and each operating seg- ment’s management. These assumptions are based on industry sources as input to the projections made within the Company for the development 2014–2019 for key industry parameters: > The number of global mobile subscriptions is estimated to grow from around 7.1 billion by the end of 2014 to around 9 billion by the end of 2019. Of these, around 7.5 billion will be mobile broadband subscrip- tions. Around 700 million of these mobile broadband subscriptions will use mobile PC/tablets/mobile routers, but the vast majority will still use mobile phones to access the internet. > Fixed broadband subscriptions are estimated to grow from around 700 million by the end of 2014 to around 850 million in 2019. Fixed broadband includes Fiber, Cable and xDSL. > Mobile data traffic volume is estimated to increase by around six times in the period 2014–2019, while fixed internet traffic is estimated to increase around three times over the same timeframe, but from a much larger base. The growth in network equipment is mainly driven by a shift in investments from voice to data. The end user requirements for “app-coverage” drives deployment of heterogeneous networks and small cells. broadband. There is strong IPTV subscriber growth, plus rapid growth in digital viewing and on-demand services. As a consequence, service providers and network owners need solutions to make networks efficient for video delivery. 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 plan to provi- sion, implementation and systems integration services as well as real time payment systems. The Business Support Systems’ growth is driven by the introduction of new services, new business models and price plans. The demand for professional services is also driven by an increasing business and technology complexity. Therefore, operators review their business models and look for vendor partners that can take on a broader responsibility, including the 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 busi- ness 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. An after-tax discount rate of 9.0% (9.5%) has been applied for all cash-generating units for the discounting of projected after-tax cash flows. In addition, when a higher discount rate has been applied in the impairment tests it has not resulted in any impairment. The assumptions for 2013 are disclosed in Note C10, “Intangible assets” in the Annual Report of 2013. 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 The demand for support solutions is driven by the opportunities for new types of service offerings enabled by IP technology and high-speed accounting estimates and judgments,” further disclosures are given regarding goodwill impairment testing. Financials – Notes to the consolidated financial statements 77 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements C11 Property, plant and equipment Property, plant and equipment 2014 Real estate Machinery and other technical assets Other equipment, tools and installations Construction in progress and advance payments Cost Opening balance Additions Balances regarding acquired/divested businesses Sales/disposals Reclassifications Translation difference Closing balance Accumulated depreciation Opening balance Depreciation Sales/disposals Reclassifications Translation difference Closing balance Accumulated impairment losses Opening balance Impairment losses Reversals of impairment losses Sales/disposals Reclassifications Translation difference Closing balance Net carrying value 6,120 218 – –483 –217 740 6,378 –2,492 –461 75 219 –321 –2,980 –40 – – 62 –52 –2 –32 3,366 4,232 180 308 –842 935 460 5,273 –3,182 –539 720 –736 –337 –4,074 –123 – 19 75 14 –5 –20 1,179 24,060 2,452 119 –1,911 316 1,990 27,026 –17,945 –3,329 1,890 517 –1,539 –20,406 –62 –6 – 20 38 –4 –14 865 2,472 – –218 –1,034 105 2,190 – – – – – – – – – – – – – Contractual commitments for the acquisition of property, plant and equipment as per December 31, 2014, amounted to SEK 192 (203) million. 6,606 2,190 13,341 Real estate Machinery and other technical assets Other equipment, tools and installations Construction in progress and advance payments Property, plant and equipment 2013 Cost Opening balance Additions Balances regarding acquired/divested 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 Reclassifications Translation difference Closing balance Net carrying value 78 4,985 975 –29 –185 404 –30 6,120 –2,355 –479 – 399 –75 18 –2,492 –45 – – 4 – 1 –40 3,588 4,746 175 –564 –341 165 51 4,232 –3,489 –558 450 386 80 –51 –3,182 –124 –7 2 6 1 –1 –123 927 23,033 2,113 315 –1,677 627 –351 24,060 –16,623 –3,190 147 1,493 –5 233 –17,945 –86 – 23 – –1 2 –62 6,053 Total 35,277 5,322 427 –3,454 0 3,295 40,867 –23,619 –4,329 2,685 0 –2,197 –27,460 –225 –6 19 157 0 –11 –66 Total 34,215 4,503 –297 –2,801 – –343 35,277 –22,467 –4,227 597 2,278 – 200 –23,619 –255 –7 25 10 – 2 –225 1,451 1,240 –19 –598 –1,196 –13 865 – – – – – – – – – – – – – – 865 11,433 Ericsson | Annual Report 2014 C12 Financial assets, non-current Equity in joint ventures and associated companies Opening balance Share in earnings Contributions to joint ventures and associated companies OCI Dividends Divestments Closing balance 1) Goodwill, net, amounts to SEK 15 (11) million. 2014 2,568 –56 –2 579 –249 –47 2013 2,842 –130 –2 –14 –128 – 2,793 1) 2,568 1) The major holdings in joint ventures and associated companies are specified below. All companies apply IFRS in the reporting to the Company as issued by IASB. Ericsson’s share of assets, liabilities and income in associated company Rockstar Consortium Ericsson’s share of assets, liabilities and income in joint venture ST-Ericsson 1) Percentage in ownership interest Total assets Total liabilities Net assets (100%) Company’s share of net assets (21.26%) Net sales Income after financial items Net income and total comprehensive income (100%) Company’s share of net income and other comprehensive income (21,26%) 2014 2013 2012 21.26% 21.26% 21.26% 7,342 6,429 28 53 7,348 196 7,152 1,520 – –484 6,376 1,356 – –897 7,314 1,555 – –376 –484 –897 –376 –103 –191 –80 Rockstar Consortium LLC (Rockstar) is a company that was formed in 2011 by Apple, Blackberry, Ericsson, Microsoft, and Sony to purchase approximately 4,000 patent assets out of the original about 6000 from the Nortel bankruptcy estate. On December 23, 2014 it was agreed between the owners of Rockstar and RPX Corporation (RPXC) that RPX shall pur- chase the remaining patents of Rockstar. The transaction occured in 2015 and the impact on income will not be material in 2015. Percentage in ownership interest Non-current assets Current assets Non-current liabilities Current liabilities Net assets (100%) Company’s share of net assets (50%) Net sales Income after financial items Income taxes Net income and total comprehensive income (100%) Company’s share of net income and other comprehensive income (50%) Assets pledged as collateral Contingent liabilities 2014 50% – – – – – – – – – – – – – 2013 50% 6 1,435 104 1,204 133 67 3,127 –726 –64 2012 50% 2,194 2,012 740 2,678 788 394 9,090 –5,006 –800 –790 –5,806 –395 2) –2,903 – – – – 1) The table consists of amounts considered by the Company when applying the equity method in relation to ST-Ericsson. 2) Reported losses has not been recognized in the result for the Company, due to IFRS principles disclosed in Note C1, “Significant accounting policies.” The joint venture ST-Ericsson, equally owned by the Company and STMicroelectronics, is winding down. Since December 2012, there are no remaining investments related to ST-Ericsson recognized in the Com- pany’s balance sheet. The result in ST-Ericsson for 2014 and 2013 has therefore not been recognized due to losses in previous periods, as per IFRS principles disclosed in C1 “Significant accounting policies.” For more information, see Note C3, “Segment information.” Financials – Notes to the consolidated financial statements 79 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Financial assets, non-current Cost Opening balance Additions 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 Other investments in sha- res and participations Customer finance, non- current Derivatives, non-current Other assets, non-current 2014 2013 2014 2013 2014 2013 2014 2013 1,905 – –1 – 47 164 2,115 –1,400 – 27 –151 –1,524 591 1,758 85 –20 – 71 11 1,905 –1,372 – –14 –14 –1,400 505 1,484 1,452 –963 – – 38 2,011 –190 –79 190 – –79 1,538 3,070 –3,070 – – –54 1,484 –248 9 47 2 –190 613 – – – –62 – 551 – – – – – 825 – –30 – –182 – 613 – – – – – 1,932 1,294 551 613 6,387 327 –1,238 –38 – 183 5,621 –1,316 –5 1,076 –27 –272 5,349 4,414 1,215 –130 951 – –63 6,387 –1,275 – –12 –29 –1,316 5,071 1) This amount includes asset ceiling. For further information, see Note C17, “Post-employment benefits.” 2014 2013 78,727 –1,123 77,604 289 77,893 4,629 –408 4,221 2,289 12,018 71,850 –880 70,970 43 71,013 3,693 –305 3,388 2,094 6,402 C13 Inventories Inventories Raw materials, components, consumables and manufacturing work in progress Finished products and goods for resale Contract work in progress Inventories, net C14 Trade receivables and customer finance 2014 2013 6,880 11,117 10,178 28,175 5,747 7,743 9,269 22,759 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 Contract work in progress includes amounts related to delivery-type contracts and service contracts with ongoing work in progress. Reported amounts are net of obsolescence allowances of SEK 2,326 (2,496) million. Trade receivables, total Customer finance credits Allowances for impairment Customer finance credits, net Of which current Movements in obsolescence allowances Credit commitments for customer finance Opening balance Additions, net Utilization Translation difference Balances regarding acquired/ divested busines- ses Closing balance 2014 2,496 691 –979 204 –86 2,326 2013 3,473 308 –1,308 12 11 2,496 2012 3,343 1,403 –1,140 –133 – 3,473 The amount of inventories recognized as expense and included in Cost of sales was SEK 53,722 (56,781) million. Days sales outstanding (DSO) were 105 (97) in December 2014. Movements in allowances for impairment Opening balance Additions Utilized Reversal of excess amounts Reclassification Translation difference Closing balance Trade receivables Customer finance 2014 880 316 –136 –8 –43 114 1,123 2013 655 417 –127 –72 42 –35 880 2014 305 121 –4 –5 – –9 408 2013 422 38 –13 –136 – –6 305 80 Ericsson | Annual Report 2014 Aging analysis as per December 31 Total Of which neither impaired nor past due Of which impaired, not past due less than 90 days 90 days or more less than 90 days 90 days or more Of which past due in the following time intervals: Of which past due and impaired in the following time intervals: 2014 Trade receivables, excluding associated companies and joint ventures Allowances for impairment Customer finance credits Allowances for impairment 2013 Trade receivables, excluding associated companies and joint ventures Allowances for impairment Customer finance credits Allowances for impairment 78,727 –1,123 4,629 –408 71,850 –880 3,693 –305 71,601 – 1,602 – 66,414 – 2,851 – 35 –21 1,981 –120 25 –11 98 –82 3,412 – 1 – 3,134 – 60 – 2,577 – 677 – 1,400 – 459 – 16 –16 21 –5 23 –19 149 –139 1,086 –1086 347 –283 854 –850 76 –84 Credit risk 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 to 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 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 includes an internal pricing of the risk. This is expressed as a risk margin per annum over funding cost. The reference pricing for political and com- mercial 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 mar- gin shall reflect the assessed risk and that the pricing is as close as possi- ble to the current market pricing. A reassessment of the credit rating for each customer finance facility is made on a regular basis. of non-payment and/or delayed payments from customers Risk provisions related to customer finance risk exposures are only > Ensure efficient credit management within the Company and thereby improve Days sales outstanding and Cash flow > Ensure payment terms are commercially justifiable > Define escalation path and approval process for payment terms and customer credit limits. The credit worthiness of all customers is regularly assessed and a credit limit is set. Through credit management system functionality, credit checks are performed every time a sales order or an invoice is generated in the source system. These are based on the credit risk set on the cus- tomer. 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 environments. By having banks con- firming the letters of credit, the political and commercial credit risk expo- sures to the Company are mitigated. Trade receivables amounted to SEK 78,727 (71,850) million as of December 31, 2014. Provisions for expected losses are regularly assessed and amounted to SEK 1,123 (880) million as of December 31, 2014. 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 repre- sented 30% (25%) of the total trade receivables in 2014. Customer finance credit risk All major commitments to finance customers are made only after 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 rat- ing is identical to the rating used by all Export Credit Agencies within the 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 out- standing debt. These events can be political (normally outside the control of the borrower) or commercial, e.g. a borrower’s deteriorated creditwor- thiness. As of December 31, 2014, the Company’s total outstanding exposure related to customer finance was SEK 4,631 (3,693) million. As of Decem- ber 31, 2014, the Company also had unutilized customer finance commit- ments of SEK 12,018 (6,402) million. Customer finance is arranged for infrastructure projects in different geographic markets and for a large number of customers. As of December 31, 2014, there were a total of 88 (73) customer finance arrangements originated by or guaranteed by the Company. The five largest facilities represented 56% (52%) of the total credit exposure in 2014. Total outstanding customer finance exposure per region as of December 31 Percent North America Latin America Northern Europe & Central Asia Western & Central Europe Mediterranean Middle East Sub-Saharan Africa India North East Asia South East Asia and Oceania Total 2014 2013 8 3 2 3 15 30 24 1 6 8 10 3 9 1 11 22 26 5 9 4 100 100 The effect of risk provisions and reversals for customer finance affecting the income statement amounted to a net negative impact of SEK 70 mil- lion in 2014 compared to a negative impact of SEK 55 million in 2013. Credit losses amounted to SEK 4 (13) million in 2014. Financials – Notes to the consolidated financial statements 81 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements 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. 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 cover from a third party may also be issued by an insurance company. 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. 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, 2014 and 2013. Outstanding customer finance Total customer finance Accrued interest Less third-party risk coverage Ericsson’s risk exposure 2014 4,631 173 –649 4,154 2013 3,693 155 –222 3,626 Transfers of financial assets Transfers where the Company has not derecognized the assets in their entirety As per December 31, 2014 there existed certain customer financing assets that the Company had transferred to third parties where the Com- pany did not derecognize the assets in their entirety. The total carrying amount of the original assets transferred was SEK 811 (899) million; the amount of the assets that the Company continues to recognize was SEK 168 (210) million; and the carrying amount of the associated liabilities was SEK 0 (0) million. C15 Other current receivables Other current receivables Prepaid expenses Accrued revenues Advance payments to suppliers Derivatives with a positive value 1) Taxes Other Total 2014 4,592 3,166 746 1,000 9,853 1,916 2013 2,766 2,846 877 1,532 7,950 1,970 21,273 17,941 1) See also Note C20, “Financial risk management and financial instruments.” C16 Equity and other comprehensive Income Capital stock 2014 Capital stock at December 31, 2014, consisted of the following: Capital stock Parent Company Class A shares Class B shares Total Number of shares 261,755,983 3,043,295,752 3,305,051,735 Capital stock (SEK million) 1,309 15,217 16,526 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, 2014, the total number of treasury shares was 63,450,558 (73,968,178 in 2013 and 84,798,095 in 2012) Class B shares. Ericsson did not repurchase shares in 2014 in relation to the Stock Pur- chase Plan. Reconciliation of number of shares Number of shares Jan 1, 2014 3,305,051,735 16,526 Number of shares Capital stock (SEK million) Number of shares Dec 31, 2014 3,305,051,735 16,526 For further information about the number of shares, see the chapter Share Information. Dividend proposal The Board of Directors will propose to the Annual General Meeting 2015 a dividend of SEK 3.40 per share (SEK 3.00 in 2014 and SEK 2.75 in 2013). Additional paid in capital This relates to payments made by owners and includes share premiums paid. 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 also include: Remeasurements related to post-employment benefits Actuarial gains and losses resulting from experience-based events and changes in actuarial assumptions, fluctuations in the effect of the asset ceiling, and adjustments related to the Swedish special payroll taxes. Revaluation of other investments in shares and participations The fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets. Cash flow hedges The cash flow hedge reserve comprises the effective portion of the cumu- lative net change in the fair value of cash-flow-hedging instruments related to hedged transactions that have not yet occurred. Cumulative translation adjustments The cumulative translation adjustments comprise all foreign currency differences arising from the translation of the financial statements of for- eign 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. 82 Ericsson | Annual Report 2014 C17 Post-employment benefits Ericsson sponsors a number of post-employment benefit plans through- out the Company, which are in line with market practice in each country. The year 2014 was characterized by significant decreases in discount rates in most plans resulting in actuarial losses on defined benefit obliga- tions of SEK 14 billion. This was partly offset by positive development of plan assets resulting in actuarial gains of SEK 4 billion. Swedish plans Sweden has both defined benefit and defined contribution plans based on collective agreement between the parties in the Swedish labor market: > A defined benefit plan, known as ITP 2 (occupational pension for sala- ried employees in manufacturing industries and trade), complemented by a defined contribution plan, known as ITPK (supplementary retire- ment benefits). This is a final salary-based plan. > A defined contribution plan, known as ITP 1, for employees born in 1979 or later. > A defined contribution plan ITP 1 or alternative ITP, for employees earn- ing more than 10 income base amount and who have opted out of the defined benefit plan ITP 2, where rules are set by the Company and approved by each employee selected to participate. The Company has by far most of its Swedish pension liabilities under defined benefit plans which are funded to 56% (73%) through Ericsson Pensionsstiftelse (a Swedish Pension Foundation). The Pensionsstiftelse covers the liability up to the value of the defined benefit obligation based on Swedish GAAP calculations. There are no funding requirements for the Swedish plans. The disability- and survivors’ pension part of the ITP-plan is secured through an insurance solution with the company Alecta, see section about Multi-employer plans. The benefit payments are done from the Company since the liability is growing and the necessary surplus therefore is not yet reached. For the unfunded plans the Company meets the payment obligation when it falls due. The responsibility for governance of the plans and the plan assets lies with the Company and the Pensionsstiftelse. The Swedish Pensionss- tiftelse is managed on the basis of a capital preservation strategy and the risk profile is set accordingly. Traditional asset-liability matching (ALM) studies are undertaken on a regular basis to allocate within different asset classes. The plans are exposed to different risks, i.e., a sudden decrease in the bond yields, which would lead to an increase in the plan liability. A sudden instability in the financial market might also lead to a decrease in fair value of plan assets held by the Pensionsstiftelse, as the holdings of plan assets partly are exposed to equity markets; however, this may be partly offset by higher values in fixed income holdings. Swedish plans are linked to infla- tion and higher inflation will lead to a higher liability. For the time being, inflation is a low risk factor to the Swedish plans as actual rate of inflation has not reached the ceiling target set by the Central Bank of Sweden. Multi-employer plans As before, the Company has secured the disability and survivors’ pension part of the ITP Plan through an insurance solution with the insurance com- pany Alecta. Although this part of the plan is classified as a multi-em- ployer defined benefit plan, it is not possible to get sufficient information to apply defined benefit accounting, as for most of the accrued pension benefits in Alecta, information is missing on the allocation of earnings pro- cess between employers. Full vesting is instead registered on the last employer. Alecta is not able to calculate a breakdown of assets and provi- sions for each respective employer, and therefore, the disability and survi- vors’ pension portion of the ITP Plan has been accounted for as a defined contribution plan. Alecta has a collective funding ratio which acts as a buffer for its insur- ance 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 mea- sured in accordance with Alecta’s actuarial assumptions, which are differ- ent from those in IAS 19R. Alecta’s collective funding ratio was 143% (148%) as of December 31, 2014. The Company’s share of Alecta’s saving premiums is 0.6%; the total share of active members in Alecta are 2.3%. The expected contribution to the plan is SEK 107 million for 2015. Contingent liabilities / Assets pledged as collateral 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 the instance that PRI Pensionsga- ranti has consumed all of its assets, and it amounts to a maximum of 2% of the Company’s pension liability in Sweden. The Company has a pledged business mortgage of SEK 2 billion to PRI Pensionsgaranti. US plans The Company operates defined benefit pension plans in the US, which are a combination of final salary pension plans and contribution-based arrangements. The final salary pension plans provide benefits to mem- bers in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members’ length of service and their sal- ary in the final years leading up to retirement. Retirees generally do not receive inflationary increases once in payment. The other type of plan is a contribution-based pension plan, which pro- vides a benefit determined using a “cash balance” approach. The balance is credited monthly with interest credits and contribution credits, based on a combination of current year salary and length of service. The majority of benefit payments are from trustee-administered funds; however, there are also a number of unfunded plans where the Company meets the benefit payment obligation as it falls due. In the US, the Com- pany’s policy is at least to meet or exceed the funding requirements of federal regulations. The funded level in the US Pension Plan is above the point at which minimum funding would be required for fiscal year 2014. Plan assets held in trusts are governed by local regulations and prac- tice, as is the nature of the relationship between the Company and the trustees (or equivalent) and their composition. Responsibility for gover- nance of the plans – including investment decisions and contribution schedules – lies with the Plan Administrative Committee (PAC). The PAC is composed of representatives from the Company. The Company’s plans are exposed to various risks associated with pension plans, i.e., a sudden decrease in bond yields would lead to an increase in the present value of the defined benefit obligation. A sudden instability in the financial markets might also lead to a decrease in the fair value of plan assets held by the trust. Pension benefits in the US are not linked to inflation; however, higher inflation poses the risk of increased final salaries being used to determine benefits for active employees. There is also a risk that the duration of payments to retirees will exceed the life expectancy in mortality tables. Other plans The Company also sponsors plans in other countries. The main plans are in Brazil, Ireland and the United Kingdom. The plan in Brazil is a pension plan wholly funded with a net surplus of assets. The plans in Ireland and the UK are final salary pension plans and are partly or wholly funded. The plans are managed by corporate trustees with directors appointed partly by the local company and partly by the plan members. The trustees are independent from the local company and subject to the specific country’s pension laws. Financials – Notes to the consolidated financial statements 83 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Amount recognized in the Consolidated balance sheet Amount recognized in the Consolidated balance sheet 2014 Defined benefit obligation (DBO) Fair value of plan assets Deficit/surplus (+/–) Plans with net surplus, excluding asset ceiling 1) Provision for post-employment benefits 2) 2013 Defined benefit obligation (DBO) Fair value of plan assets Deficit/surplus (+/–) Plans with net surplus, excluding asset ceiling 1) Provision for post-employment benefits 2) Sweden US Other Total 32,885 18,412 14,473 – 14,473 23,088 16,818 6,270 – 6,270 18,281 19,665 –1,384 2,057 673 14,387 16,174 –1,787 2,307 520 22,586 18,785 3,801 1,438 5,239 15,444 13,575 1,869 1,166 3,035 73,752 56,862 16,890 3,495 20,385 52,919 46,567 6,352 3,473 9,825 1) 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.” The asset ceiling increased during the year by SEK 60 million from SEK 525 million in 2013 to SEK 585 million in 2014. 2) Plans with net liabilities are reported in the balance sheet as Post-employment benefits, non-current. Total pension cost recognized in the Consolidated income statement The costs for post-employment benefits within the Company 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 2014 Pension cost for defined contribution plans Pension cost for defined benefit plans Total Total pension cost expressed as a percentage of wages and salaries 2013 Pension cost for defined contribution plans Pension cost for defined benefit plans Total Total pension cost expressed as a percentage of wages and salaries 2012 Pension cost for defined contribution plans Pension cost for defined benefit plans Total Total pension cost expressed as a percentage of wages and salaries Sweden 953 1,039 1,992 1,088 1,581 2,669 977 936 1,913 US 562 39 601 502 85 587 404 –454 –50 Other 713 651 1,364 778 392 1,170 701 198 899 Total 2,228 1,729 3,957 6.8% 2,368 2,058 4,426 9.1% 2,082 680 2,762 5.7% 84 Ericsson | Annual Report 2014 Change in the net defined benefit obligation Change in the net defined benefit obligation Opening balance Reclassification 1) Included in the income statement: Current service cost Past service cost and gains and losses on settlements Interest cost/ income (+/–) Taxes and administrative expenses Other Remeasurements: Return on plan assets excluding amounts in interest expense/income Actuarial gains/losses (–/+) arising from changes in demographic assumptions Actuarial gains/losses (–/+) arising from changes in financial assumptions Experience-based gains/losses (–/+) Other changes: Translation difference Contributions and payments from: Employers 2) Plan participants Payments from plans: Benefit payments Settlements Business combinations and divestments 4) Closing balance Present value of obligation 2014 3) 52,919 – Fair value of plan assets 2014 –46,567 – 1,476 31 2,347 54 31 3,939 – – –2,244 31 3 –2,210 Total 2014 6,352 – 1,476 31 103 85 34 1,729 Present value of obligation 2013 Fair value of plan assets 2013 51,958 1,799 –44,642 – 1,351 363 2,046 129 –4 3,885 – – –1,846 16 3 –1,827 Total 2013 7,316 1,799 1,351 363 200 145 –1 2,058 – –3,643 –3,643 – –550 –550 549 12,746 305 13,600 – – – –3,643 549 12,746 305 9,957 4,949 –5,059 –110 –574 43 –1,282 –1,013 1,171 73,752 –775 –26 1,282 1,016 –880 –1,349 17 0 3 291 –56,862 16,890 46 –3,629 611 –2,972 –115 –554 55 –1,181 –116 160 52,919 – – – –550 190 –971 –44 1,181 96 – 46 –3,629 611 –3,522 75 –1,525 11 0 –20 160 –46,567 6,352 1) The provision for the Swedish special payroll taxes which was previously included in Other current liabilities, was in 2013 re-classified as a pension liability in line with the implementation of the revised IAS 19R on January 1, 2013. 2) The expected contribution to the plan is SEK 1,092 million during 2015. 3) The weighted average duration of DBO is 19.4 years. 4) Business combinations in 2014 are mainly related to the acquisition of Red Bee Media. In 2013 business combinations are related to the acquisition of Modems. Present value of the defined benefit obligation 2014 DBO, closing balance Of which partially or fully funded Of which unfunded 2013 DBO, closing balance Of which partially or fully funded Of which unfunded Sweden US Other Total 32,885 32,348 537 23,088 22,598 490 18,281 17,608 673 14,387 13,867 520 22,586 20,005 2,581 15,444 13,396 2,048 73,752 69,961 3,791 52,919 49,861 3,058 Financials – Notes to the consolidated financial statements 85 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Asset allocation by asset type and geography 2014 Cash and cash equivalents Equity securities Debt securities Real estate Investment funds Assets held by insurance company Other Total Of which real estate occupied by the Company Of which securities issued by the Company 2013 Cash and cash equivalents Equity securities Debt securities Real estate Investment funds Assets held by insurance company Other Total Of which real estate occupied by the Company Of which securities issued by the Company Sweden US Other Total Of which unquoted 2,118 4,598 6,815 2,383 2,498 – – 18,412 – – 592 2,112 3,601 1,649 8,864 – – 16,818 – 25 509 1,003 14,993 – 2,309 – 851 19,665 – – 218 2,081 6,934 – 6,512 – 429 16,174 – – 483 4,389 11,455 134 557 770 997 18,785 – – 261 4,459 6,982 76 414 633 750 13,575 – – 3,110 9,990 33,263 2,517 5,364 770 1,848 56,862 – – 1,071 8,652 17,517 1,725 15,790 633 1,179 46,567 – 25 24% 10% 83% 100% 67% 100% 71% 35% 31% 61% 100% 60% 100% 65% Actuarial assumptions Financial and demographic actuarial assumptions 1) Financial assumptions Discount rate, weighted average Demographic assumptions Life expectancy after age 65 in years, weighted average 2014 2013 3.4% 4.5% 22 22 1) Weighted average for the Group for disclosure purposes only. Country-specific assumptions were used for each actuarial calculation. 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 Actuarial assumptions are assessed on a quarterly basis. See also Notes C1 and C2. Total remeasurements in Other comprehensive income related to post- employment benefits 2014 5,219 9,957 129 15,305 2013 8,696 –3,522 45 5,219 2014 –8,322 –60 –1,635 –10,017 2013 3,128 –308 394 3,214 Actuarial gains and losses (+/–) The effect of asset ceiling Swedish special payroll taxes 1) Total 1) Swedish payroll taxes are included in recognized gain/loss during the year in OCI. Sensitivity analysis of significant actuarial assumptions Impact on DBO, SEK billion 2014 2013 2014 Discount rate +0.5% Discount rate –0.5% –7 +8 –5 +5 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 the revised IAS 19 requirements. US The defined benefit obligation has been calculated using a discount rate based on yields of high-quality corporate bonds, where “high-quality” has been defined as a rating of AA and above. 86 Ericsson | Annual Report 2014 C18 Provisions Provisions 2014 Opening balance Additions Reversal of excess amounts Negative effect on Income Statement Utilization/Cash out Reclassifications Translation differences Closing balance 2013 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 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. Under certain circumstances, provisions are no longer required due to outcomes being more favorable 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 2014, new or additional provisions amounting to SEK 2.7 billion were made, and SEK 0.9 billion of provisions were reversed. The actual cash outlays for 2014 were SEK 3.1 billion compared with the estimated SEK 4.2 billion. The total cash out for 2014 was made up of warranty pro- visions of SEK 0.9 billion, restructuring provisions of SEK 1.2 billion and other provisions of SEK 0.9 billion. The expected total cash outlays in 2015 are approximately SEK 3.2 billion. Of the total provisions, SEK 202 (222) million is classified as non-cur- rent. For more information, see Note C1, “Significant accounting policies” and Note C2, “Critical accounting estimates and judgments.” Warranty 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. Provisions amounting to SEK 1.0 billion were made and due to more favorable out comes in certain cases reversals of SEK 0.3 billion were made. The actual cash outlays for 2014 were SEK 0.9 billion, in line with the expected SEK 0.7 billion. The cash outlays of warranty provisions during year 2015 are estimated to total approximately SEK 0.9 billion. Warranty Restruc turing Other Total 909 1,050 –319 –921 2 103 824 1,595 924 –588 –948 –2 1 –73 909 1,345 708 –195 –1,202 51 94 801 1,218 2,439 –237 –2,089 0 –3 17 1,345 3,108 968 –424 –938 –16 104 2,802 5,825 1,336 –736 –2,984 –10 –184 –139 3,108 5,362 2,726 –938 1,788 –3,061 37 301 4,427 8,638 4,699 –1,561 3,138 –6,021 –12 –186 –195 5,362 Restructuring provisions In 2014, SEK 0.7 billion in provisions were made and SEK 0.2 billion were reversed due to a more favorable outcome than expected. The cash out- lays were SEK 1.2 billion for the full year, in line with the expected SEK 1.1 billion. The cash outlays for 2015 for these provisions are estimated to total approximately SEK 0.6 billion. Other provisions Other provisions include provisions for probable contractual penalties, tax issues, litigations, supplier claims, and other. During 2014, new provisions amounting to SEK 1.0 billion were made and SEK 0.4 billion were reversed due to a more favorable outcome. The cash outlays were SEK 0.9 billion in 2014 compared to the estimate of SEK 2.4 billion. For 2015, the cash out- lays are estimated to total approximately SEK 1.7 billion. Financials – Notes to the consolidated financial statements 87 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements C19 Interest-bearing liabilities As of December 31, 2014, the Company’s outstanding interest-bearing liabilities stood at SEK 24.1 (29.5) billion. Interest-bearing liabilities Borrowings, current Current part of non-current borrowings 1) Other current borrowings Total current borrowings Borrowings, non-current Notes and bond loans Other borrowings, non-current Total non-current interest-bearing liabilities Total interest-bearing liabilities 1) Including notes and bond loans of SEK 0 (1.966) million. 2014 2013 946 1,335 2,281 14,346 7,518 21,864 24,145 6,037 1,351 7,388 14,522 7,545 22,067 29,455 To secure long term funding the Company uses notes and bond programs together with bilateral research and development loans. All outstanding notes and bond loans are issued by the Parent Company under its Euro Medium-Term Note (EMTN) program or under its U.S. Securities and Exchange Commission (SEC) Registered program. Bonds issued at a fixed interest rate could be swapped to a floating interest rate using inter- est rate swaps, and normally a maximum of 50% of all outstanding loans are at fixed interest rates. Total weighted average interest rate cost during the year was 3.45% (3.27%). Outstanding notes and bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. In January 2014, the Company repaid the SEK 4 billion EIB loan with original maturity in July 2015. In February 2014, the Company repaid the USD 300 million note from the Swedish Export Credit Corporation with original maturity in 2016. In June 2014, the Company repaid the EUR 220 million note. In June 2014, the Company exercised the option to extend the maturity of the USD 2 billion multi-currency revolving credit facility with one year to June 2019. One extension option of one year remains. Notes, bonds, bilateral loans and committed credits Issued–maturing Notes and bond loans 2007–2017 2010–2020 2) 2012–2022 Total notes and bond loans Bilateral loans 2012–2019 3) 2012–2021 4) 2013–2020 5) Total bilateral loans Committed credit Long-term committed credit facility 6) Total committed credit Nominal amount Coupon Currency Book value (SEK m.) Maturity date 5.375% 4.125% 500 170 1,000 98 98 684 2,000 EUR USD USD USD USD USD USD 5,277 1) 1,325 7,744 14,346 763 764 5,332 6,859 0 0 June 27, 2017 December 23, 2020 May 15, 2022 September 30, 2019 September 30, 2021 November 6, 2020 June 27, 2019 Unrealized hedge gain/loss (included in book value) –551 –551 1) Interest rate swaps are designated as fair value hedges. 2) Private Placement, Swedish Export Credit Corporation (SEK). 3) Nordic Investment Bank (NIB), R&D project financing. 4) Nordic Investment Bank (NIB), R&D project financing. 5) European Investment Bank (EIB), R&D project financing. 6) Multi-currency revolving credit facility. Unutilized. One extension option of one year remains. 88 Ericsson | Annual Report 2014 C20 Financial risk management and financial instruments The Company’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 finan- cial management of the Company and approving certain matters (such as investments, customer finance commitments, guarantees and borrowing) and continuously monitors the exposure to financial risks. The Company defines its managed capital as the total Company equity. For the Company, a robust financial position with a strong equity ratio, solid 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. The Company’s overall capital structure should support the financial targets: to grow faster than the market, deliver best-in-class margins and generate a healthy cash flow. The capital structure is managed by balanc- ing equity, debt financing and liquidity in such a way that the Company can 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. The Company strives to finance growth, normal capital expenditures and dividends to shareholders by generating cash flows from operating activities. The Company’s capital objectives are: > To maintain 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, SEK billion Capital Equity ratio Cash conversion Positive net cash Credit rating Moody’s Standard & Poor’s 2014 145 50% 84% 27.6 2013 142 53% 79% 37.8 Baa1, stable BBB+, stable A3, negative BBB+, negative The Company has a treasury function with the principal role to ensure that appropriate financing is in place through loans and committed credit facil- ities, actively managing the Company’s liquidity as well as financial assets and liabilities, and managing and controlling 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. The Company also has a customer finance function with the main objective to find suitable third-party financing solutions for customers and to minimize recourse to the Company. To the extent that 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. The Company classifies financial risks as: > Foreign exchange risk > Interest rate risk > Credit risk > Liquidity and refinancing risk > Market price risk in own and other equity instruments. The Board of Directors has established risk limits for defined exposures to foreign exchange and interest rate risks as well as to political risks in certain countries. For further information about accounting policies, see Note C1, “Significant accounting policies.” Foreign exchange risk The Company is a global company with sales mainly outside Sweden. Sales and incurred costs are to a large extent denominated in currencies other than SEK and therefore the financial results of the Company are impacted by currency fluctuations. The Company reports the financial statements in SEK. Movements in exchange rates between currencies that affect these statements are impacting the comparability between periods. Line items, primarily sales, are impacted by translation exposure incurred when converting foreign entities’ financial statements into SEK. Line items and profitability, such as operating income are impacted by transaction exposure incurred when financial assets and liabilities, pri- marily, trade receivables and trade payables, are initially recognized and subsequently remeasured due to change in foreign exchange rates. The table below presents the net exposure for the eight largest cur- rencies impact on sales and also net transaction exposure of these currencies on profitability. Currency exposure, SEK billion Exposure currency Sales translation exposure Sales transaction exposure Sales net exposure Incurred cost transaction exposure 1) Net transaction exposure USD EUR CNY JPY INR BRL GBP MXN 53.5 30.5 14.2 9.4 7.6 7.1 7.1 3.8 51.1 13.1 –0.3 0.0 0.0 0.0 –1.6 –4.0 104.6 43.6 13.9 9.4 7.6 7.1 5.5 –0.2 –19.6 –4.4 –2.0 5.0 0.5 1.4 0.8 1.4 31.5 8.7 –2.3 5.0 0.4 1.3 –0.8 –2.6 1) Transactions in foreign currency – internal sales, internal purchases, external purchases. Translation exposure Translation exposure relates to sales and cost incurred in foreign entities when converted into SEK upon consolidation. These exposures cannot be addressed by hedging, but as the income statement is translated using average rate, the impact of volatility in foreign currency rates is reduced. Transaction exposure Transaction exposure relates to sales and cost incurred in non-reporting currencies in individual group companies. Foreign exchange risk is as far as possible concentrated in Swedish group companies, primarily Ericsson AB. Sales to foreign subsidiaries are normally denominated in the func- tional currency of the customers, and so tend to be denominated in USD or another foreign currency. In order to limit the exposure toward exchange rate 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. By this way, the Company will have hedged 84% of the next month and 7% of the 12th month of an average forecast of the individual month at any given reporting date. This corre- sponds to approximately 5-6 months of an average forecast. Outstanding derivatives contracts that are hedging future sales and costs incurred are revalued against “Other operating income and expense.” The sensitivity in “Other operating income and expense” in relation to this revaluation is dependent on changes in foreign exchange rates, forecasts, seasonality and hedging policy. USD is the Company’s largest exposure and at year-end a change by 0.25 SEK/USD would impact profit and loss with approximately SEK 0.5 billion. Revaluation results of these derivative contracts amounted to SEK –2 billion in 2014. 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. Financials – Notes to the consolidated financial statements 89 Ericsson | Annual Report 2014 Sensitivity analysis The Company uses the VaR methodology to measure foreign exchange and interest rate risks in portfolios managed by the Treasury. This statisti- cal 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, the Company 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 2014 was SEK 12.2 (16.3) million for the combined mandates. No VaR-limits were exceeded during 2014. 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. The Company 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-2/P-2 or equivalents, and long-term ratings of AAA. Separate credit limits are assigned to each counterpart in order to minimize risk concen- tration. All derivative transactions are covered by ISDA netting agree- ments to reduce the credit risk. At December 31, 2014, the credit risk in financial cash instruments was equal to the instruments’ carrying value. Credit exposure in derivative instruments was SEK 1.6 (2.1) billion. Liquidity risk The Company minimizes the liquidity risk by maintaining a sufficient cash position, centralized cash management, investments in highly liquid inter- est-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 as well as non-current borrowings. Cash, cash equivalents and short-term investments SEK billion Banks Type of issuer/counterpart Governments Corporates Mortgage institutes 2014 2013 Remaining time to maturity < 3 months 3–12 months 38.2 0.3 1–5 years 0.0 >5 years 0.0 1.0 2.9 0.0 42.1 42.5 5.6 0.0 1.0 6.9 4.4 12.3 0.0 10.2 22.5 26.5 0.6 0.0 0.1 0.7 3.7 Total 38.5 19.5 2.9 11.3 72.2 77.1 The instruments are either classified as held for trading or as assets avail- able-for-sale with maturity less than one year and are therefore short-term investments. Cash, cash equivalents and short-term investments are mainly held in SEK unless offset by EUR-funding. FINANCIALS – Notes to the consolidated financial statements Interest rate risk The Company is exposed to interest rate risk through market value fluct- uations in certain balance sheet items and through changes in interest revenues and expenses. The net cash position was SEK 27.6 (37.8) billion at the end of 2014, consisting of cash, cash equivalents and short-term investments of SEK 72.2 (77.1) billion and interest-bearing liabilities and post-employment benefits of SEK 44.5 (39.3) billion. The Company manages the interest rate risk by i) matching fixed and floating interest rates in interest-bearing balance sheet items and ii) avoid- ing significant fixed interest rate exposure in the Company’s net cash position. The policy is that interest-bearing assets shall have an average interest duration of between 10 and 14 months, taking derivative instru- ments into consideration. Interest-bearing liabilities do not have a firm target for the duration, nor a firm target for fixed/floating interest rate, as duration and interest mix are decided based on market conditions when the liabilities are issued. Group Treasury has a mandate to deviate from the asset management benchmark given by the Board and take foreign exchange positions up to an aggregated risk of VaR SEK 45 million given a confidence level of 99% and a 1-day horizon. Interest duration, SEK billion Interest-bearing trading Interest-bearing assets Interest-bearing liabilities < 3M 3–12M 1–3Y 3–5Y –2.0 36.5 –31.7 0.2 7.2 0.0 2.1 9.9 –4.7 0.0 20.6 –0.6 >5Y –0.3 –2.0 –7.5 Total 0 72.2 –44.5 When managing the interest rate exposure, the Company 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. Outstanding derivatives Outstanding derivatives 1) Fair value Asset Liability Asset Liability 2014 2013 Currency derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity between 1 and 3 years Total 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 between 1 and 3 years Maturity between 3 and 5 years Maturity of more than 5 years 221 90 – 311 – – – 72 937 85 146 –1,132 –933 – –2,065 – – –5 –896 –656 –285 –211 Total 1,240 2) –2,053 512 293 8 813 – – – 158 9 – 167 – – – 186 382 663 101 1,332 2) 269 688 163 36 1,156 Of which designated in fair value hedge relations 669 – 724 – 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 551 (613) million is reported as non-current assets. 90 Ericsson | Annual Report 2014 Refinancing risk Refinancing risk is the risk that the Company is unable to refinance out- standing debt under reasonable terms and conditions, or at all, at a given point in time. fair value. When a market price is not readily available and there is insign i- ficant interest rate exposure and credit spreads affecting the value, the carrying value is considered to represent a reasonable estimate of fair value. Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets. Bank financing is used for certain subsidiary funding and to obtain committed credit facilities. Funding programs 1) Euro Medium-Term Note program (USD million) SEC Registered program (USD million) Amount Utilized Unutilized 5,000 2) 778 1,000 4,223 – 1) There are no financial covenants related to these programs. 2) Program amount indeterminate. Fair valuation of the Company’s financial instruments The Company’s financial instruments accounted for at fair value generally meet the requirements of level 1 valuation due to the fact that they are based on quoted prices in active markets for identical assets. Exceptions to this relates to: > OTC derivatives with an amount of gross SEK 2.9 (5.2) billion in relation to assets and gross SEK 5.5 (4.4) billion in relation to liabilities were val- ued based on references to other market data as currency or interest rates. These valuations fall under level 2 valuation as defined by IFRS. > Ownership in other companies where the Company neither has control nor significant influence. The amount recognized in these cases was SEK 0.5 (0.5) billion. These assets, classified as level 3 assets for valua- tion purposes, have been valued based on value in use technique. Financial instruments carried at other than fair value The fair value of the Company’s financial instruments, recognized at fair value, is determined based on quoted market prices or rates. For further information about valuation principles, see Note C1, “Significant account- ing policies.” Financial instruments, such as trade receivables, borrowings and payables, are carried at amortized cost which is deemed to be equal to Market price risk in own shares and other listed equity investments Risk related to the Company’s own share price The Company is exposed to fluctuations in its own share price through stock purchase plans for employees and synthetic share-based compen- sations 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 rep- resents 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, which also cover social security payments. Synthetic share-based compensations to the Board of Directors In the case of these plans, the Company is exposed to risks in relation to own share price, both with regards 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 cov- ered by a liability in the balance sheet. For further information about the stock purchase plan and synthetic share-based compensations to the Board of Directors, see note C28, “Information regarding members of the Board of Directors, the Group management and employees.” Offsetting financial assets and liabilities As required by IFRS, the Company has off set financial instruments under ISDA agreements. The related assets amounted to SEK 2.9 (5.2) billion, prior to offsetting of SEK 1.4 (3.1) billion, with a net amount of SEK 1.5 (2.1) billion recognized in the balance sheet. The related liabilities amounted to SEK 5.5 (4.4) billion, prior to offsetting of SEK 1.4 (3.1) billion, with a net amount of SEK 4.1 (1.3) billion recognized in the balance sheet. Financial instruments, book value SEK billion Note Assets at fair value through profit or loss Loans and receivables Financial liabilities at amortized cost Total Customer finance Trade receiv ables Short-term invest ments Cash equiva lents Borrow ings Trade payables Other financial assets Other current receiv ables Other current l iabilities C14 – 4.2 – 4.2 C14 – 77.9 – 77.9 C19 C22 C12 C15 31.2 – – 31.2 8.9 2.4 – 11.3 – – – – –24.1 –24.1 –24.5 –24.5 0.6 5.3 – 5.9 1.0 – – 1.0 C21 –4.1 – – –4.1 2014 2013 37.6 89.8 –48.6 78.8 46.9 81.9 –50.0 78.8 Financials – Notes to the consolidated financial statements 91 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements C21 Other current liabilities C24 Contingent liabilities Other current liabilities Income tax liabilities Advances from customers Accrued interest Accrued expenses Of which employee-related Of which supplier-related Of which other 1) Deferred revenues Derivatives with a negative value 2) Other 3) Total 2014 3,225 10,076 212 35,805 13,762 13,863 8,180 11,057 4,118 5,352 69,845 2013 2,805 5,471 208 32,810 11,532 11,478 9,800 9,887 1,323 5,810 58,314 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 the related invoice has not yet been received. C22 Trade payables Trade payables Payables to associated companies Other Total C23 Assets pledged as collateral Assets pledged as collateral Chattel mortgages 1) Bank deposits Total 1) See also Note C17, “Post-Employment benefits.” 2014 288 24,185 24,473 2013 333 20,169 20,502 2014 2,222 303 2,525 2013 2,177 379 2,556 Contingent liabilities Contingent liabilities Total 2014 737 737 2013 657 657 Contingent liabilities assumed by Ericsson include guarantees of loans to other companies of SEK 25 (23) million. Ericsson has SEK 33 (37) 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 Judg- ments.” 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 parties amounted to SEK 81 (116) million as of December 31, 2014. The maturity date for the majority of the issued guarantees occurs in 2018 at the latest. C25 Statement of cash flows Interest paid in 2014 was SEK 1,120 million (SEK 1,233 million in 2013 and SEK 1,650 million in 2012) and interest received in 2014 was SEK 1,369 million (SEK 1,266 million in 2013 and SEK 1,883 million in 2012). Taxes paid, including withholding tax, were SEK 6,114 million in 2014 (SEK 6,537 million in 2013 and SEK 5,750 million in 2012). Cash and cash equivalents include cash of SEK 29,650 (28,618) million and temporary investments of SEK 11,338 (13,477) million. For more infor- mation regarding the disposition of cash and cash equivalents and unuti- lized credit commitments, see Note C20, “Financial risk management and financial instruments.” Cash and cash equivalents as of December 31, 2014, include SEK 5.4 billion (4.9) in countries where there exist significant cross-border conver- sion restrictions due to hard currency shortage or strict government con- trols. This amount is therefore not considered available for general use by the Parent Company. 92 Ericsson | Annual Report 2014 Adjustments to reconcile net income to cash Property, plant and equipment Depreciation Impairment losses/reversals of impairments Total Intangible assets Amortization Capitalized development expenses Intellectual Property Rights, brands and other intangible assets Total amortization Impairments Capitalized development expenses Intellectual Property Rights, brands and other intangible assets 2014 2013 2012 4,329 –13 4,316 4,227 –18 4,209 4,052 –40 4,012 1,270 1,407 1,058 4,328 5,598 31 4,521 5,928 – – 4,436 5,494 266 117 5,877 Total 5,629 5,928 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 3) Total adjustments to reconcile net income to cash 9,945 10,137 9,889 –1,235 –1,323 –1,140 249 56 128 2,057 128 133 130 11,636 976 –220 –8,087 646 11,200 9,828 13,077 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. Acquisitions/divestments of subsidiaries and other operations Acquisitions Divestments 2014 Cash flow from business combinations 1) Acquisitions/divestments of other investments Total 2013 Cash flow from business combinations 1) Acquisitions/divestments of other investments Total 2012 Cash flow from business combinations 1) Acquisitions/divestments of other investments Total 1) See also Note C26, “Business combinations.” –4,410 –32 –4,442 –3,054 –93 –3,147 –11,575 46 –11,529 42 6 48 448 17 465 9,502 –50 9,452 C26 Business combinations Acquisitions and divestments Acquisitions Acquisitions 2012–2014 Total consideration, including cash 2014 4,767 2013 3,176 2012 12,564 1) Acquisition-related costs 2) 50 101 150 Net assets acquired Cash and cash equivalents Property, plant and equipment Intangible assets Investments in joint ventures and associated companies Other assets Provisions, including post-employment benefits Other liabilities Total identifiable net assets Operating expenses Non-controlling interest Goodwill Total 407 427 2,540 – 817 –288 –1,150 2,753 – – 2,014 4,767 223 597 1,551 – 850 –463 –1,705 1,053 410 67 1,646 3,176 1,139 480 6,672 – 2,105 714 –3,214 7,896 – 375 4,293 12,564 1) The cash transaction includes payment of external loan of SEK 6.2 billion and investment in subsidiary of SEK 2.5 billion. 2) Acquisition-related costs are included in Selling and administrative expenses in the consolid- ated income statement. In 2014, Ericsson made acquisitions with a negative cash flow effect amounting to SEK 4,410 (3,054) million. The acquisitions presented below are not material but the Company gives the information to provide the reader a summarized view of the content of the acquisitions made. The acquisitions consist primarily of: Apcera: On October 10, 2014, the Company acquired a majority stake of the shares in Apcera, a U.S.- based enterprise services company and creator of Continuum™- a next-generation platform as-a-service (PaaS). The move strengthens Ericsson’s position in the cloud market by extend- ing the company’s network approach into operator and enterprise cloud. Balances to facilitate the purchase price allocation are preliminary. Azuki: On February 14, 2014, the Company acquired 100% of the shares in Massachusetts-based Azuki Systems, Inc., a provider of TV Anywhere delivery platforms for service providers, content owners and broadcast- ers. Azuki Systems extends Ericsson’s leading TV and media portfolio which includes the recent addition of Mediaroom from Microsoft. Through the acquisition, Ericsson will accelerate the availability of new and com- pelling viewing experiences across a variety of devices and screens. In addition, Ericsson will gain additional key functionality related to the deployment of TV Anywhere services, including adaptive bit rate and con- tent protection technologies. Balances to facilitate the purchase price allocation are final. Fabrix: On October 8, 2014, the Company acquired 100% of the shares in Fabrix Systems, a leading provider of cloud storage, computing and network delivery for video applications that today power some of the most advanced cable and telecom cloud DVR deployments. Fabrix Systems further extends Ericsson’s leading TV and media portfolio with a cloud based scale out storage and computing platform focused on providing a simple, tightly integrated solution optimized for media storage, processing and delivery applications such as cloud DVR and video-on-demand (VOD) expansion. The approach takes advantage of the latest advances in clustered storage; grid computing; virtualization and video processing technologies enabling a wide range of applications. Balances to facilitate the purchase price allocation are preliminary. Financials – Notes to the consolidated financial statements 93 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements MetraTech: On September 15, 2014, the Company acquired assets from US-based MetraTech Corp., a provider of metadata-based billing, com- merce and settlement solutions uniquely adaptable to multiple business models and industries. The acquisition includes all 140 employees and contractors comprising a team of highly-skilled software experts. It will further build upon Ericsson’s expertise in billing and expands its geo- graphic presence in the US. The deal was structured as an asset deal. Balances to facilitate the purchase price allocation are preliminary. Red Bee Media: On May 9, 2014, the Company acquired 100% of the shares in Red Bee Media a leading media services company headquar- tered in the UK. Ericsson looks forward to working with Red Bee Media’s extensive list of high-profile broadcast services customers, including the BBC, BSkyB, BT Sport, Canal Digital, Channel 4, EE, UKTV, UPC, Virgin Media, and many more. Divestments Divestments 2012–2014 Proceeds Net assets disposed of Property, plant and equipment Investments in joint ventures and associated companies Other assets Other liabilities Net gains/losses from divestments Less Cash and cash equivalents In addition, Ericsson has gained 1,500 highly skilled employees as well Cash flow effect 2014 42 2013 655 2012 9,502 – 32 46 – 78 –36 – 42 297 – – 1,326 –127 1,496 –841 –207 448 1,353 296 –483 1,166 8,336 – 9,502 as media services and operations facilities in the UK, France, Germany, Spain and Australia. This will further strengthen Ericsson’s broadcast services business. Balances to facilitate the purchase price allocation are final. In order to finalize a purchase price allocation all relevant information needs to be in place. Examples of such information are final consideration and final opening balances, which may remain preliminary for a period of time due to for example adjustments of working capital, tax items or decisions from local authorities. In 2014, the Company made some minor divestments with a cash flow effect amounting to SEK 42 (448) million. Description Transaction date Acquisitions 2012–2014 Company Apcera Fabrix MetraTech Red Bee Media Azuki Airvana Mediaroom Telcocell Modems Devoteam ConceptWave Technicolor BelAir Ericsson-LG Telcordia The acquisition of a majority stake in Apcera strengthens Ericsson’s position in enterprise cloud. The acquisition of Fabrix Systems extends Ericsson’s overall leadership position in TV & Media. The acquisition of MetraTech accelerates Ericsson’s cloud and enterprise billing capabilities within BSS. A leading media services company headquartered in the UK with an extensive list of high-profile broadcast services customers. A provider of TV Anywhere delivery platforms for service providers, content owners and broadcasters. A Massachusetts-based company and supplier of EVDO software to Ericsson. The leading platform for video distribution deployed with the world’s largest IPTV operators. A consulting and systems integration company specializing in Business Support Systems (BSS). Ericsson has taken on the design, development and sales of the LTE multimode thin modem solutions, including 2G, 3G and 4G interoperability. A leader in Information and Communications Technology consulting with 5,000 employees in Europe, the Mid- dle East and Africa. A Canadian OSS and BSS company. A technology company in the media and entertainment sector. A telecom-grade Wi-Fi company based in Canada. Increase of ownership from 50% plus one share, to 75%. A US company developing software and services for OSS and BSS. Divestments 2012–2014 Company Description Telecom cable business Divestment of the telecom cable business in Hudiksvall, Sweden, to Hexatronic. It resulted in a loss of SEK –0.5 billion. Power cables operation Applied Communication Sciences IPX EDA 1500 GPON Sony Ericsson Divestment of the power cables operation to NKT Cables. The transaction resulted in a loss of SEK –0.1 billion. Sale of Applied Communication Sciences (ACS), the former research and engineering arm of Telcordia Technologies. This resulted in a loss of SEK –0.3 billion. Sale of IPX to Gemalto, with a positive cash flow effect of SEK 260 million. Capital asset sale of EDA 1500 GPON portfolio with a positive cash flow effect of SEK 80 million. Sale of the Company’s share in Sony Ericsson (50%) to Sony, with a positive cash flow effect of SEK 9.1 billion. 94 Oct 2014 Oct 2014 Sep 2014 May 2014 Feb 2014 Sep 2013 Sep 2013 Sep 2013 Aug 2013 Apr 2013 Sep 2012 Jul 2012 Apr 2012 Mar 2012 Jan 2012 Transaction date Dec 2013 Jul 2013 May 2013 Sep 2012 Aug 2012 Feb 2012 Ericsson | Annual Report 2014 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 2014 2013 650 – 650 –212 – –212 – – 1,774 3 1,777 –610 –3 –613 –25 –25 Expenses in 2014 for leasing of assets were SEK 2,662 (2,517) million, of which variable expenses comprised SEK 19 (18) million. The leasing contracts vary in length from 1 to 24 years. The Company’s lease agreements normally do not include any contin- gent 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 facil- ities contain purchase options. Only a very limited number of the Com- pany’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 con- tracts vary in length from 1 to 17 years. At December 31, 2014, future minimum payment receivables were distributed as follows: Net carrying value 438 1,139 Future minimum payment receivables As of December 31, 2014, future minimum lease payment obligations were distributed as follows: Future minimum lease payment obligations 2015 2016 2017 2018 2019 2020 and later Total Future finance charges 1) Present value of finance lease liabilities 1) Average effective interest rate on lease payables is 8.20%. Finance leases Operating leases 71 69 68 67 67 516 858 –256 602 2,352 1,931 1,355 1,035 878 3,924 11,475 n/a n/a 2015 2016 2017 2018 2019 2020 and later Total Unearned financial income Uncollectible lease payments Net investments in financial leases Leasing income in 2014 was SEK 74 (165) million. Finance leases Operating leases 26 27 1 1 – – 55 n/a n/a n/a 30 16 15 6 0 2 69 n/a n/a n/a Financials – Notes to the consolidated financial statements 95 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements 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 Number of synthetic shares/portion of Board fee Value at grant date of synthetic shares allocated in 2014 Number of previously allocated synthetic shares outstanding Net change in value of synthetic shares 1) B Committee fees Total fees paid in cash 2) Total remuner ation 2014 C (A+B+C) SEK Board fees Board member Leif Johansson Sverker Martin–Löf Jacob Wallenberg Roxanne S. Austin Sir Peter L. Bonfield Nora Denzel Börje Ekholm Alexander Izosimov Ulf J. Johansson Kristin Skogen Lund Hans Vestberg Pär Östberg Employee Representatives Pehr Claesson Kristina Davidsson Karin Åberg Rickard Fredriksson Karin Lennartsson Roger Svensson 3,975,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 – 950,000 13,500 13,500 13,500 13,500 12,000 10,500 0/0% 0/0% 2,976/25% 2,976/25% 0/0% 2,976/25% 8,929/75% 2,976/25% 0/0% 2,976/25% – 0/0% – – – – – – A – – 237,455 237,455 – 237,455 712,445 237,455 – 237,455 – – – – – – – – – – 12,050 23,147 7,944 – 32,249 6,296 6,571 2,804 – – – – – – – – – – 301,555 673,905 217,687 43,331 941,756 171,613 263,274 96,186 – – – – – – – – 400,000 175,000 175,000 175,000 250,000 – 175,000 – 350,000 – – 250,000 4,375,000 3) 1,125,000 4) 887,500 887,500 1,200,000 712,500 412,500 712,500 5) 1,300,000 6) 712,500 – 1,200,000 4,375,000 1,125,000 1,426,510 1,798,860 1,417,687 993,286 2,066,701 1,121,568 1,563,274 1,046,141 – 1,200,000 – – – – – – 13,500 13.500 13,500 13,500 12,000 10,500 13,500 13,500 13,500 13,500 12,000 10,500 18,210,527 7) Total Total 13,551,500 13,551,500 23,809 23,809 1,899,720 1,899,720 91,061 2,709,307 1,950,000 13,601,500 99,966 8) 3,000,694 8) 9) 1,950,000 13,601,500 18,501,914 7) 1) The difference in value as of the time for payment, compared to December 31, 2013, for synthetic shares allocated in 2009 (for which payment was made in 2014). The difference in value as of December 31, 2014, compared to December 31, 2013, for synthetic shares allocated in 2010, 2011, 2012 and 2013. Calculated on a share price of SEK 94.35. The difference in value as of December 31, 2014, compared to grant date for synthetic shares allocated in 2014. The value of synthetic shares allocated in 2010, 2011, 2012 and 2013 includes respectively SEK 2.25, SEK 2.50, SEK 2.75 and SEK 3.00 per share in compensation for dividends resolved by the Annual General Meetings 2011, 2012, 2013 and 2014 and the value of the synthetic shares allocated in 2009 includes dividend compensation for dividends resolved in 2010, 2011, 2012 and 2013. 2) Committee fee and cash portion of the Board fee. 3) In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced through a company was paid, amounting to SEK 1,374,625. 4) In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced through a company was paid, amounting to SEK 114,863. 5) In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced through a company was paid, amounting to SEK 223,868. 6) In addition, an amount corresponding to statutory social charges in respect of the part of the fee that has been invoiced through a company was paid, amounting to SEK 132,730. 7) Excluding social security charges to the amount of SEK 4,942,427. 8) Including synthetic shares previously allocated to the former Director Nancy McKinstry. 9) Including synthetic shares previously allocated to the former Director Michelangelo Volpi, where the difference in value is the difference as of the time for payment, compared to December 31, 2013. Comments to the table > The Chairman of the Board was entitled to a Board fee of SEK 3,975,000 and a fee of SEK 200,000 for each Board Committee on which he served as Chairman. > The other Directors elected by the Annual General Meeting were enti- tled to a fee of SEK 950,000 each. In addition, the Chairman of the Audit Committee was entitled to a fee of SEK 350,000 and the other non- employee 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-employee members of the Finance and the Remuneration Com- mittees 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 termi- nation benefits. > Members and deputy members of the Board who are Ericsson employ- ees received no remuneration or benefits other than their entitlements as employees and a fee to the employee representatives and their deputies of SEK 1,500 per attended Board meeting. > Board members invoicing for the amount of the Board and Committee fee through a company may add to the invoice an amount correspond- ing 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, i.e., the cash por- tion of the Board fee and the Committee fee, including social charges, constitutes the invoiced Board fee. > The Annual General Meeting 2014 resolved that non-employee Direc- tors 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. 96 Ericsson | Annual Report 2014 The number of synthetic shares allocated is based on a volume-weighted average of the market price of Ericsson Class B shares on Nasdaq Stock- holm during the five trading days immediately following the publication of Ericsson’s interim report for the first quarter 2014: SEK 79.79. 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 state- ment during the fifth year following the Annual General Meeting which resolved on the synthetic share program, i.e., in 2019. The amount pay- able shall be determined based on the volume-weighted 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 and have been allocated annually since then on equal terms and conditions. Payment based on synthetic shares allocated in 2009 occurred in 2014. In 2014, advance payment was also made to the former Director Michelangelo Volpi with respect to his synthetic shares, all in accordance with the terms and conditions for the synthetic shares. The amounts paid in 2014 under the synthetic share programs were deter- mined based on the volume-weighed average price for shares of Class B on Nasdaq Stockholm during the five trading days immediately following the publication of the year-end financial statements for 2013: SEK 80.06 and totalled SEK 3,302,811, excluding social security charges. The pay- ments made do not constitute a cost for the Company in 2014. The Com- pany’s costs for the synthetic shares have been disclosed each year and the net change in value of the synthetic shares for which payment was made in 2014, is disclosed in the table “Remuneration to members of the Board of Directors” on page 96. 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 of December 31, 2014, the total outstanding number of synthetic shares under the pro- grams is 123,775 and the total accounted debt is SEK 12,380,400 (includ- ing synthetic shares previously allocated to the former Director Nancy McKinstry). 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. The 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 compensa- tion, pension and other benefits. These remuneration elements are based on the guidelines for remuneration to Group management as approved by the Annual General Meeting held in 2014: see the approved guidelines in section “Guidelines for remuneration to Group management 2014.” Remuneration costs for the President and CEO and other members of Executive Leadership Team (ELT) SEK Salary Cost for annual variable remuneration earned 2014 to be paid 2015 Long-term variable compensation provision Pension costs Other benefits Social charges and taxes Total The Pres ident and CEO 2014 The Pres ident and CEO 2013 Other members of ELT 2014 Other members of ELT 2013 Total 2014 Total 2013 13,617,013 13,177,080 87,958,871 90,320,536 101,575,884 103,497,616 13,342,079 6,733,294 8,909,314 72,188 12,750,392 55,424,281 3,256,151 8,184,603 6,847,596 68,704 9,368,485 38,584,082 8,644,039 26,308,223 6,315,568 26,880,902 22,880,144 9,066,127 22,971,876 5,370,876 26,838,704 51,926,161 15,377,333 35,217,537 6,387,757 39,631,293 26,136,295 17,250,731 29,819,473 5,439,579 36,207,190 40,902,620 194,691,685 177,448,263 250,115,966 218,350,883 Comments to the table > During 2014, there were three Executive Vice Presidents, who have been 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: Per Borgklint, Bina Chaurasia, Ulf Ewaldsson, Jan Frykhammar, Douglas L. Gilstrap (left Ericsson August 1), Nina Macpherson, Magnus Mandersson, Helena Norrman, Mats H. Olsson, Rima Qureshi, Angel Ruiz, Anders Thulin, Johan Wibergh and Jan Wäreby. Outstanding balances The Company has recognized the following liabilities relating to unpaid remunerations in the Balance sheet: > Ericsson’s commitments for defined benefit based pensions as of December 31, 2014 under IAS 19 amounted to SEK 7,610,562 for the President and CEO which includes ITP plan and early retirement. For other members of the ELT the Company’s commitments amounted to SEK 36,220,736 of which SEK 33,456,584 refers to the ITP plan, Ericsson US Pension Plan and early retirement and the remaining SEK 2,764,152 to survivor’s pensions. > The salary stated in the table for the President and CEO and other members of the ELT includes vacation pay paid during 2014 as well as other contracted compensation expensed in 2014. > 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. > “Long-term variable compensation provision” refers to the compensa- > Deferred salary, earned in 2014 or earlier, to be paid 12 months after tion costs during 2014 for all outstanding share-based plans. period end or later, amounts to SEK 12,263,575. > 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 the 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 payable from the age of 60 years. These pension plans are not conditional upon future employment at Ericsson. Financials – Notes to the consolidated financial statements 97 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Maximum outstanding matching rights As of December 31, 2014 Number of Class B shares The President and CEO Other members of the ELT Stock Purchase Plans 2011-2014 Executive Performance Stock Plans 2011-2014 268,462 354,218 Comments to the table > For the definition of matching rights, see the description in section “Long-term variable compensation.” > Matching result of 22.2% is included for the 2011 plan. > Cash conversion target for 2012, 2013 and 2014 was reached. > During 2014, the President and CEO received 178,918 matching shares and other members of the ELT 177,339 matching shares. Guidelines for remuneration to Group management 2014 For Group Management consisting of the Executive Leadership Team, including the President and CEO, total remuneration consists of fixed salary, short- and long-term variable compensation, pension and other benefits. The following guidelines apply for the remuneration to the Executive Leadership Team: > 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 Group or unit level, operational targets, employee engagement targets and customer satisfaction targets. > All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. > By way of exception, additional arrangements can be made when deemed necessary. An additional arrangement can be renewed but each such arrangement shall be limited in time and shall not exceed a period of 36 months and twice the remuneration that the individual would have received had no additional arrangement been made. > The mutual notice period may be no more than six months. Upon termi- nation 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 condi- tions for the position, is equated with notice of termination served by the Company. Executive Performance Stock Plans Matching share vesting range 2) Maximum opportunity as percentage of fixed salary 3) Long-Term Variable compensation The Stock Purchase Plan The Stock Purchase Plan is designed to offer an incentive for all employ- ees to participate in the Company where practicable, which is consistent with industry practice and with Ericsson’s ways of working. For the 2014 plan, employees are able to save up to 7.5% of their gross fixed salary (The President and CEO can save up to 10% of their gross fixed salary and short-term variable remuneration) for purchase of Class B contribu- tion shares at market price on Nasdaq Stockholm or American Depositary Shares (ADSs) on NASDAQ New York (contribution shares) during a 12-month period (contribution period). If the contribution shares are retained by the employee for three years after the investment and their 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 102 countries participate in the plans. The table below shows the contribution periods and participation details for ongoing plans as of December 31, 2014. Stock purchase plans Plan Stock Purchase plan 2011 Stock Purchase plan 2012 Stock Purchase plan 2013 Stock Purchase plan 2014 Contribution period August 2011 – July 2012 August 2012 – July 2013 August 2013 – July 2014 August 2014 – July 2015 Number of participants at launch Take-up rate – percent of eligible employees 24,000 27,000 29,000 32,000 30% 28% 29% 30% 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 invest- ment, 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 manage- ment strategy and is designed to give recognition for performance, critical skills and potential as well as to encourage retention of key employees. Under the program, up to 10% of employees (2014 plan: up to 10,000 employees) are selected through a nomination process that identifies indi- viduals 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 12-month period. Executive Performance Stock Plan 2014 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 2013 1) 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 2012 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 2011 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 2010 0.67 to 4 1 to 6 1.5 to 9 30% 45% 162% 1) Targets for Executive Performance Stock Plans 2012 to 2014 are described in the next table. 2) 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. 3) At full investment, full vesting and constant share price. Excludes Stock Purchase Plan matching. 98 Ericsson | Annual Report 2014 Executive Performance Stock Plan targets Base year value SEK billion Year 1 Year 2 Year 3 225.3 Compound annual growth rate of 2–8% 15.7 Compound annual growth rate of 5–15% ≥70% ≥70% ≥70% – 227.8 Compound annual growth rate of 2–8% 18.5 Compound annual growth rate of 5–15% ≥70% ≥70% ≥70% – The Executive Performance Stock Plan The Executive Performance Stock Plan is designed to focus management on driving earnings and provide competitive remuneration. Senior manag- ers, 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 (2014 plan: up to 450 executives) are offered participation in the plan. The President and CEO can save up to 10% of gross fixed salary and short-term variable compensation, and may obtain up to nine performance-matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance targets changed from EPS targets to targets linked to the business strategy as from 2011. To support the long-term strategy and value creation of the company, performance targets are from since linked to growth on Net Sales, Operating Income and Cash Conversion. The tables above show ongoing Executive Performance Stock Plans 226.9 Compound annual growth rate of 2–8% as of December 31, 2014. 17.9 Compound annual growth rate of 5–15% ≥70% ≥70% ≥70% – 2014 Growth (Net sales growth) 1) Margin (Operating income growth) 1) Cash Flow (Cash conversion) 2013 Growth (Net sales growth) Margin (Operating income growth) 2) Cash Flow (Cash conversion) 2012 Growth (Net sales growth Margin (Operating income growth) Cash Flow (Cash conversion) 1) Base year 2013 has been adjusted for the impact of the Samsung IPR agreement. 2) Base year 2012 excludes a non-cash charge for ST-Ericsson. Shares for all plans Stock Purchase Plan, Key Contributor Retention Plan and Executive Performance Stock Plans Plan (million shares) 2014 2013 2012 2011 2010 Originally designated Outstanding beginning of 2014 Awarded during 2014 Exercised/matched during 2014 Forfeited/expired during 2014 Outstanding end of 2014 1) Compensation costs charged during 2014 (SEK million) A B C D E F=B+C–D–E G 22.8 0.0 3.6 0.0 0.0 3.6 10 2) 26.6 3.2 9.8 0.2 0.4 12.4 219 2) 26.2 12.5 – 0.4 0.4 11.7 241 2) 19.4 12.4 – 2.8 1.7 7.9 195 2) 19.4 6.0 – 6.0 0.0 0.0 52 2) Total 114.4 34.1 13.4 9.4 2.5 35.6 717 2) 1) Shares under the Executive Performance Stock Plans were based on the fact that the 2010 plan was fully vested and that the 2011 plan vested for 22% and lapsed for 78%. For the other ongoing plans, cost is estimated. 2) 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 makes a forecast for the fulfillment of the financial targets for all ongoing plans except for 2009 and 2010 plans as disclosed under 1) when calculating the compensation cost. Fair value of the Class B share at each investment date during 2014 was: February 15 SEK 72.37, May 15 SEK 71.98, August 15 SEK 74.07 and November 15 SEK 79.39. 3) Total compensation costs charged during 2013: SEK 388 million, 2012: SEK 405 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 Stock- holm to cover social security payments when arising due to matching of shares. During 2014, 1,129,800 shares were sold at an average price of SEK 85.49. Sales of shares are recognized directly in equity. If, as of December 31, 2014, 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 exer- cise and the matching, approximately 60 million Class B shares would be transferred, corresponding to 1.9% of the total number of shares out- standing, or 3,242 million not including treasury stock. As of December 31, 2014, 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 out- standing plans. From up to down the table includes (A) the number of shares originally approved by the Annual General Meeting; (B) the number of originally designated shares that were outstanding at the beginning of 2014; (C) the number of shares awarded during 2014; (D) the number of shares matched during 2014; (E) the number of shares forfeited by partici- pants or expired under the plan rules during 2014; and (F) the balance left as outstanding at the end of 2014, 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 row (G) shows the compensation costs charged to the accounts during 2014 for each plan, calculated as fair value in SEK. For a description of compensation cost, including accounting treat- ment, see Note C1, “Significant accounting policies,” section Share- based compensation to employees and the Board of Directors. Financials – Notes to the consolidated financial statements 99 Ericsson | Annual Report 2014 FINANCIALS – Notes to the consolidated financial statements Employee numbers, wages and salaries Employee numbers Average number of employees North America Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India North East Asia South East Asia & Oceania Total 1) Of which in Sweden 2) Of which in EU Number of employees by region at year-end North America Latin America Northern Europe & Central Asia 1) 2) Western & Central Europe 2) Mediterranean 2) Middle East Sub-Saharan Africa India North East Asia South East Asia & Oceania Total 1) Of which in Sweden 2) Of which in EU 2014 2013 Women 3,173 2,517 5,312 1,746 2,899 491 448 3,184 4,028 1,211 25,009 3,944 9,438 Men 12,228 10,169 15,159 9,541 10,053 3,323 1,925 16,699 9,523 3,527 92,147 12,584 32,842 Total 15,401 12,686 20,471 11,287 12,952 3,814 2,373 19,883 13,551 4,738 117,156 16,528 42,280 Women 3,234 2,216 5,523 3,802 2,865 566 364 2,586 4,308 1,061 26,525 4,118 11,703 Men 12,060 9,562 15,519 8,263 9,793 4,820 1,704 15,042 10,108 3,234 90,105 12,972 31,729 Total 15,294 11,778 21,042 12,065 12,658 5,386 2,068 17,628 14,416 4,295 116,630 17,090 43,432 Employee wages and salaries Wages and salaries and social security expenses (SEK million) Wages and salaries Social security expenses Of which pension costs 2014 58,006 17,944 3,957 2013 48,533 16,531 4,426 Amounts related to the President and CEO and the Executive Leadership Team are included. Remuneration to Board members and Presidents in subsidiaries 2014 15,516 11,066 21,633 12,617 13,387 3,858 2,406 19,971 13,464 4,137 2013 14,931 11,445 21,892 11,530 12,314 3,752 2,084 17,622 14,503 4,267 (SEK million) 118,055 17,580 45,202 114,340 17,858 43,421 Salary and other remuneration Of which annual variable remuneration Pension costs 2014 2013 288 72 21 294 40 23 Number of employees by gender and age at year-end 2014 Under 25 years old 25–35 years old 36–45 years old 46–55 years old Over 55 years old Percent of total Women 2,680 9,557 7,777 4,410 1,399 22% Men 2,683 36,316 30,062 18,072 5,099 78% Percent of total 5% 39% 32% 19% 5% 100% Board members, Presidents and Group management by gender at year end Parent Company Board members and President Group Management Subsidiaries Board members and Presidents 2014 2013 Women Men Women Men 30% 29% 70% 71% 25% 29% 75% 71% 30% 70% 27% 73% Employee movements Head count at year-end Employees who have left the Company Employees who have joined the Company Temporary employees 2014 2013 118,055 15,536 19,251 776 114,340 13,025 17,110 493 100 Ericsson | Annual Report 2014 C29 Related party transactions During 2014, 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 informa- tion regarding transactions with senior management, see Note C28, “Information regarding members of the Board of Directors, the Group management and employees.” ST-Ericsson ST-Ericsson was formed in 2009 as a joint venture, equally owned by Ericsson and STMicroelectronics. In early 2013 the parents agreed to split up and close the joint venture. The company ST-Ericsson is winding down and all business has been transferred to parents or divested during 2013. Ericsson has taken over assets and liabilities in the design, development and sales of the thin LTE multi-mode modem solution with a net value of SEK 1.1 billion. The acquired business was during 2013 consolidated in the segment Modems. In 2014, the Company announced the discontinu- ation of further development of modems and the shift of approximately 500 employees to Networks research and development organization to pursue growth opportunities in the radio business. During 2014 and 2013 Ericsson had no sales and purchases in the course of ordinary business, only transactions related to the winding down described above. Therefore, the descriptions below refer to the year 2012. The major transactions in 2012 were 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. ST-Ericsson Related party transactions Sales Purchases Related party balances Receivables Liabilities 1) See text above for further information. 2014 1) 2013 1) 2012 – – – – – – – – 138 634 127 – Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees towards ST-Ericsson. C30 Fees to Auditors Fees to auditors 2014 Audit fees Audit-related fees Tax fees Other fees Total 2013 Audit fees Audit-related fees Tax fees Other fees Total PwC Others Total 83 11 15 18 127 75 12 12 15 114 7 0 4 1 12 7 – 3 1 11 90 11 19 19 139 82 12 15 16 125 Note C30, cont. 2012 Audit fees Audit-related fees Tax fees Other fees Total PwC Others Total 82 15 16 10 123 5 – 3 10 18 87 15 19 20 141 During the period 2012–2014, 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, SSAE 16 reviews and services in connection with the issuing of certificates and opinions and consultation on financial accounting. The tax services include general expatriate services and corporate tax compliance work. Other services include, work related to acquisitions, operational effective- ness and assessments of internal control. Audit fees to other auditors largely consist of local statutory audits. C31 Contractual obligations Contractual obligations 2014 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 finance 5) Total Payment due by period <1 year 1–3 years 3–5 years >5 years 0.5 0.1 2.4 0.0 5.1 24.5 12.0 44.6 6.0 0.2 3.3 0.2 0.0 0.0 9.7 1.1 0.1 1.9 0.1 0.0 0.0 3.2 15.5 0.5 3.9 1.5 0.0 0.0 21.4 Total 23.1 0.9 11.5 1.8 5.1 24.5 12.0 78.9 1) Including interest payments. 2) See Note C19, “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 finance.” For information about financial guarantees, see Note C24, “Contingent liabilities.” Except for those transactions described in this report, the Company 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. C32 Events after the reporting period Rockstar Consortium LLC (Rockstar) is a company that was formed in 2011 by Apple, Blackberry, Ericsson, Microsoft, and Sony to purchase approximately 4,000 patent assets out of the original about 6000 from the Nortel bankruptcy estate. On December 23, 2014, it was agreed between the owners of Rockstar and RPX Corporation (RPXC) that RPX should purchase the remaining patents of Rockstar. The transaction occured in 2015 and the impact on income will not be material in 2015. Financials – Notes to the consolidated financial statements 101 Ericsson | Annual Report 2014 FINANCIALS Parent company FINANCIAL STATEMENTS with NOTES Contents Parent Company financial statements Parent Company income statement and statement 103 of comprehensive income 104 Parent Company balance sheet Parent Company statement of cash flows 106 Parent Company statement of changes in stockholders’ equity 107 Intangible assets Notes to the Parent Company financial statements P1 Significant accounting policies P2 Other operating income and expenses P3 Financial income and expenses P4 Taxes P5 P6 Property, plant and equipment P7 Financial assets Investments P8 P9 Inventories P10 Trade receivables and customer finance P11 Receivables and liabilities – subsidiary companies P12 Other current receivables P13 Equity and other comprehensive income P14 Untaxed reserves P15 Post-employment benefits P16 Other provisions P17 Interest-bearing liabilities P18 Financial risk management and financial instruments P19 Other current liabilities P20 Trade payables P21 Assets pledged as collateral P22 Contingent liabilities P23 Statement of cash flows P24 Leasing P25 Information regarding employees P26 Related party transactions P27 Fees to auditors 108 108 108 109 109 110 111 112 113 113 114 115 115 116 116 117 117 118 119 119 119 119 119 119 120 120 120 102 Ericsson | Annual Report 2014 Parent company FINANCIAL STATEMENTS Parent Company income statement January–December, SEK million Notes 2014 2013 2012 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 Changes in depreciation in excess of plan Contributions to subsidiaries, net Taxes Net income Parent Company statement of comprehensive income January–December, SEK million Net income Other comprehensive income Items that may be reclassified to profit and loss Cash flow hedges Gains/losses arising during the period Adjustments for amounts transferred to initial carrying amount of hedged items Revaluation of other investments in shares and participations Fair value remeasurement Total other comprehensive income, net of tax Total comprehensive income P2 P3 P3 P14 P14 P4 – – – –262 –947 –1,209 3,088 1,879 26,912 –3,228 25,563 – –1,700 23,863 –263 23,600 – – – –210 –1,170 –1,380 2,768 1,388 8,321 –2,465 7,244 288 –430 7,102 –247 6,855 – – – –241 –690 –931 2,534 1,603 11,932 –18,392 –4,858 388 –2,034 –6,504 –289 –6,793 2014 23,600 2013 6,855 2012 –6,793 – – 46 46 – – 69 69 23,646 6,924 –64 –139 – –203 –6,996 Financials – Parent Company financial statements 103 Ericsson | Annual Report 2014 Notes P5 P6 P7, P8 P7, P8 P7 P7, P11 P7, P10 P4 P7 P9 P10 P10 P11 P12 P18 P18 2014 2013 1,193 470 81,265 337 496 13,290 1,475 227 811 99,564 646 571 80,756 337 410 11,024 1,064 233 917 95,958 27 7 8 1,343 21,130 164 2,173 30,577 24,443 79,865 34 901 13,833 123 2,356 34,520 23,954 75,728 179,429 171,686 FINANCIALS – Parent Company financial statements Parent Company balance sheet December 31, SEK million Assets Fixed assets Intangible assets Tangible assets Financial assets Investments Subsidiaries Joint ventures and associated companies Other investments Receivables from subsidiaries Customer finance, non-current Deferred tax assets Other financial assets, non-current Current assets Inventories Receivables Trade receivables Customer finance, current Receivables from subsidiaries Current income taxes Other current receivables Short-term investments Cash and cash equivalents Total assets 104 Ericsson | Annual Report 2014 December 31, SEK million Stockholders’ equity, provisions and liabilities Stockholders’ equity Capital stock Revaluation reserve Statutory reserve Restricted equity Retained earnings Net income Fair value reserves Non-restricted equity Provisions Post-employment benefits Other provisions Non-current liabilities Notes and bond loans Other borrowings, non-current Liabilities to subsidiaries Other non-current liabilities Current liabilities Borrowings, current Trade payables Liabilities to subsidiaries Other current liabilities Total stockholders’ equity, provisions and liabilities Assets pledged as collateral Contingent liabilities Notes P13 P15 P16 P17 P17 P11 P17 P20 P11 P19 P21 P22 2014 2013 16,526 20 31,472 48,018 14,156 23,600 115 37,871 85,889 390 1,081 1,471 14,346 6,859 24,034 273 45,512 – 615 40,687 5,255 46,557 16,526 20 31,472 48,018 16,874 6,855 69 23,798 71,816 407 1,690 2,097 14,522 5,686 24,034 249 44,491 6,005 611 44,444 2,222 53,282 179,429 171,686 525 20,906 553 15,999 Financials – Parent Company financial statements 105 Ericsson | Annual Report 2014 FINANCIALS – Parent Company financial statements Parent Company 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 Cash flow from operating activities Investing activities Investments in property, plant and equipment Investments in intangible assets 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 Cash flow before financing activities Financing activities Changes in current liabilities to subsidiaries Proceeds from issuance of borrowings Repayment of borrowings Stock issue Sale/repurchase 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 Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period P18 106 Notes 2014 2013 2012 P23 23,600 2,057 25,657 –20 –853 –1,083 –74 –425 2,360 –95 25,562 –223 –902 153 –979 201 –7,918 – 3,435 –6,233 19,329 –5,016 – –7,982 – 106 –9,702 –431 –619 6,855 956 7,811 48 54 –2,662 279 –1,803 901 –3,183 4,628 –245 –15 – –883 300 9,047 – –2,537 5,667 10,295 –2,547 4,436 –2,916 – 90 –8,863 –2,673 –1,324 –23,644 –13,797 4,804 489 23,954 24,443 1,510 –1,992 25,946 23,954 –6,793 14,436 7,643 6 201 –39 –261 –91 –2,837 –3,021 4,622 –224 – – –1,807 9,792 –2,668 1 5,043 10,137 14,759 2,795 8,132 –7,296 159 –93 –8,033 –543 –158 –5,037 –1,064 8,658 17,288 25,946 Ericsson | Annual Report 2014 Parent Company statement of changes in stockholders’ equity SEK million January 1, 2014 Total comprehensive income Transactions with owners Stock issue Sale of own shares Stock purchase plans Repurchase of own shares Dividends paid December 31, 2014 January 1, 2013 Total comprehensive income Transactions with owners Stock issue Sale of own shares Stock purchase plans Repurchase of own shares Dividends paid December 31, 2013 Capital stock Revaluation reserve Statutory reserve Total restric- ted equity Disposition reserve Fair value reserves 16,526 20 31,472 48,018 100 – – – – – – 16,526 16,526 – – – – – – – – – – – – 20 20 – – – – – – – – – – – – – – – – – – 31,472 48,018 31,472 48,018 – – – – – – – – – – – – – – – – – – 100 100 – – – – – – 16,526 20 31,472 48,018 100 69 46 – – – – – 115 – 69 – – – – – 69 Other retai- ned ear- nings Non- restricted equity 23,629 23,798 Total 71,816 23,600 23,646 23,646 – 106 23 – –9,702 37,656 – 106 23 – –9,702 37,871 – 106 23 – –9,702 85,889 25,524 25,624 73,642 6,855 6,924 6,924 – 90 23 – –8,863 23,629 – 90 23 – –8,863 23,798 – 90 23 – –8,863 71,816 Financials – Parent Company financial statements 107 Ericsson | Annual Report 2014 FINANCIALS notes to the Parent Company FINANCIAL STATEMENTS P1 Significant accounting policies P2 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 2014 2013 2012 2,882 207 –1 3,088 2,639 135 –6 2,768 2,488 49 –3 2,534 P3 Financial Income and Expenses Financial income and expenses Financial income Result from participations in subsidiary companies Dividends Net gains on sales Result from participations in joint ventures and associated companies Dividends Net gains on sales Result from other securities and receivables accounted for as fixed assets 2014 2013 2012 24,644 91 7,054 8 5,031 61 249 200 126 195 132 4,768 Net gains on sales – 6 62 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 Net loss from joint ventures and associated companies Write–down of participations in other companies Interest expenses and similar profit/loss items Subsidiary companies Other Other financial expenses Total Financial net 740 988 357 575 472 1,406 26,912 8,321 11,932 –1 –137 –36 –317 –500 – – – –103 –1,121 –1,686 –3,228 23,684 – – –154 –977 –697 –16,972 –47 –189 –1,089 –59 –2,465 –18,392 5,856 –6,460 Interest expenses on pension liabilities are included in the interest expenses shown above. 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. Contributions to/from subsidiaries and shareholders’ contributions are accounted for according to RFR 2. Contributions from/to Swedish subsidiaries are reported net in the income statement. Shareholders’ contributions increase the Parent Company’s invest- ments. 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 The Parent Company has had one rental agreement up until 2014 which was accounted for as a finance lease in the consolidated statements and as an operating lease in the Parent Company financial statements. Deferred taxes The accounting of untaxed reserves in the balance sheet results in differ- ent 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 standalone finan- cial 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 19R shall be adopted regarding supplementary disclosures when applicable. Borrowing costs All borrowing costs in relation to qualifying assets are expensed as incurred. Business combinations Transaction costs attributable to the acquisition are included in the cost of acquisition in the Parent Company statements compared to Group State- ments where these costs are expensed 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.” 108 Ericsson | Annual Report 2014 P4 Taxes P5 Intangible assets Income taxes recognized in the income statement Patents, licenses, trademarks and similar rights 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 2014 2013 4,161 902 – 5,063 –2,570 –355 – –2,925 –945 – –945 1,193 4,146 15 – 4,161 –2,352 –218 – –2,570 –945 – –945 646 The balances relate mainly to the Marconi trademark acquired during 2006 and RF technology and IPR’s acquired during 2014. The useful life and amortization period for this trademark has been set to 10 years. Current income taxes for the year Current income taxes related to prior years Deferred tax income/expense (+/–) Tax expense 2014 –87 –170 –6 –263 2013 –100 –183 36 –247 2012 –125 –112 –52 –289 A reconciliation between actual tax expense for the year and the theoreti- cal tax expense that would arise when applying the statutory tax rate in Sweden, 22.0% (22.0% in 2013 and 26.3% in 2012), on the income before taxes is shown in the table below. Reconciliation of Swedish income tax rate with actual tax Expected tax expense at Swedish tax rate 22.0% 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 invest- ments in subsidiary companies Tax effect of change in deferred tax rate Actual tax expense 2014 2013 2012 –5,250 –170 –326 5,554 –71 – –263 –1,567 –183 –23 1,636 –110 – –247 1,711 –112 –29 2,655 –4,476 –38 –289 Deferred tax balances Tax effects of temporary differences have resulted in deferred tax assets as follows: Deferred tax assets Deferred tax assets 2014 227 2013 233 Deferred tax assets refer mainly to costs related to customer finance and post–employment benefits. Financials – Notes to the Parent Company financial statements 109 Ericsson | Annual Report 2014 Land and buildings Other equipment and instal lations Construction in process and advance payments – – – – – – – – – – – – – – – – – – – – 1,482 33 –89 143 1,569 –1,073 –171 81 –1,163 406 1,267 15 –77 277 1,482 –941 –203 71 –1,073 409 162 190 –145 –143 64 – – – – 64 209 230 – –277 162 – – – – 162 Total 1,644 223 –234 – 1,633 –1,073 –171 81 –1,163 470 1,476 245 –77 – 1,644 –941 –203 71 –1,073 571 FINANCIALS – Notes to the Parent Company financial statements P6 Property, plant and equipment Property, plant and equipment 2014 Accumulated acquisition costs Opening balance Additions Sales/disposals Reclassifications Closing balance Accumulated depreciation Opening balance Depreciation Sales/disposals Closing balance Net carrying value 2013 Accumulated acquisition costs Opening balance Additions Sales/disposals Reclassifications Closing balance Accumulated depreciation Opening balance Depreciation Sales/disposals Closing balance Net carrying value 110 Ericsson | Annual Report 2014 P7 Financial assets Investments in subsidiary companies, joint ventures and associated companies Opening balance Acquisitions and stock issues Shareholders’ contribution Reclassifications Repayment of shareholders’ contribution Write-downs Disposals Closing balance Other financial assets Accumulated acquisition costs Opening balance Additions Disposals/repayments/deductions Reclassifications Fair value remeasurement Translation difference Closing balance Accumulated write-downs/allowances Opening balance Write-downs/allowances Disposals/repayments/deductions Reclassifications Translation difference Closing balance Net carrying value Subsidiary companies Associated companies 2014 80,756 820 115 2 – –199 –229 81,265 2013 80,839 282 518 – – –500 –383 80,756 2014 2013 337 – – – – – – 337 337 – – – – – – 337 Other investments in shares and participations Receivables from subsidiaries, non-current Customer finance, non-current Other financial assets, non-current 2014 2013 2014 2013 2014 2013 2014 2013 466 42 –45 –2 46 – 507 –56 – 45 – – –11 496 323 74 – – 69 – 466 –56 – – – – –56 410 11,024 – – – – 2,266 13,290 – – – – – – 15,737 1,405 –6,000 –630 – 512 11,024 – – – – – – 1,119 1,333 –570 –334 – 6 1,554 –55 –9 4 –13 –6 –79 1,065 345 –49 –226 – –16 1,119 –66 – 6 3 2 –55 917 17 –61 –62 – – 811 – – – – – – 1,153 42 –66 –212 – – 917 – – – – – – 13,290 11,024 1,475 1,064 811 917 Financials – Notes to the Parent Company financial statements 111 Ericsson | Annual Report 2014 FINANCIALS – Notes to the Parent Company financial statements P8 Investments The following listing shows certain shareholdings owned directly and indirectly by the Parent Company as of December 31, 2014. A complete listing of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Companies Registra- tion 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 Company Subsidiary companies Ericsson AB Ericsson Shared Services AB Netwise AB Datacenter i Rosersberg AB Datacenter i Mjärdevi Aktiebolag 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. L M Ericsson Limited Ericsson Telecomunicazioni S.p.A. Ericsson Holding International B.V. Ericsson A/S Ericsson Television AS Ericsson Corporatia AO Ericsson España S.A. Ericsson AG Ericsson Holdings Ltd. Other (Europe, excluding Sweden) Ericsson Holding II Inc. Companía Ericsson S.A.C.I. Ericsson Canada Inc. Belair Networks 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 Fabrix Systems Ltd Ericsson-LG CO 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 Joint ventures and associated companies ST-Ericsson SA Rockstar Consortium Group Ericsson Nikola Tesla d.d. Total Reg. No. Domicile Percentage of ownership Par value in local currency, million Carrying value, SEK million 556056-6258 556251-3266 556404-4286 556895-3748 556366-2302 556030-9899 556326-0552 Sweden Sweden Sweden Sweden Sweden Sweden Sweden Austria Denmark Finland France Germany Hungary Ireland Ireland Italy The Netherlands Norway Norway Russia Spain Switzerland United Kingdom United States Argentina Canada Canada Mexico Australia China China India India Israel Korea Malaysia Singapore South Africa Taiwan Thailand Switzerland Canada Croatia 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 95 1) 100 100 100 – 100 100 100 100 100 100 75 70 100 75 90 49 2) – 50 21 49 50 361 2 – 10 14 5 – 4 90 13 26 – 1,301 2 – 44 222 75 161 5 43 – 328 – 2,896 41 – – – – 20 2 65 725 389 – 600 2 2 – 270 90 – 137 1 65 20,731 2,216 306 88 69 6 5 1,640 65 216 196 524 4,232 120 15 33 5,357 3,199 114 1,788 5 170 – 4,094 295 29,006 15 51 170 1,050 166 100 2 475 147 64 704 3,285 4 1 144 36 17 344 81,265 – 7 330 337 1) Through subsidiary holdings, total holdings amount to 100% of Compania Ericsson S.A.C.I. 2) Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. 112 Ericsson | Annual Report 2014 Shares owned by subsidiary companies Company Subsidiary companies Ericsson Cables Holding AB Ericsson France SAS Ericsson Telekommunikation GmbH 1) Ericsson Telecommunicatie B.V. Ericsson Telekomunikasyon A.S. Ericsson Ltd. Redbee Media Ericsson Inc. Ericsson Wifi Inc. Drutt Corporation Inc. Redback Networks Inc. Telcordia Technologies Inc. Ericsson Telecomunicações 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. Reg. No. Domicile Percentage of ownership 556044-9489 Sweden France Germany The Netherlands Turkey United Kingdom 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 51 100 100 1) Disclosures Pursuant to Section 264b of the German Commercial Code (Handelsgesetzbuch – HGB) Applying Section 264b HGB, Ericsson Holding GmbH and Ericsson Telekommunikation GmbH, 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. P9 Inventories Inventories Finished products and goods for resale Inventories P10 Trade receivables and customer finance Credit risk management is governed on a Group level. For further information, see Notes to the consolidated financial state- ments – Note C14, “Trade receivables and customer finance” and Note C20, “Financial risk management and financial instruments.” Trade receivables and customer finance 2014 2013 27 27 7 7 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 2014 2013 30 –23 7 1 8 3,073 –255 2,818 54 –22 32 2 34 2,040 –75 1,965 Movements in allowances for impairment Opening balance Additions Utilization Reversal of excess amounts Translation difference Closing balance Trade receivables Customer finance 2014 2013 2014 2013 23 – – – – 23 23 – – – – 23 75 191 –4 –11 4 255 97 3 – –27 2 75 Financials – Notes to the Parent Company financial statements 113 Ericsson | Annual Report 2014 FINANCIALS – Notes to the Parent Company financial statements Aging analysis as per December 31 2014 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 2013 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 current Credit commitments for customer finance Trade receivables excluding associated companies and joint ventures Allowances for impairment of receivables Trade receivables rela- ted to associated com- panies and joint ventu- res Customer finance Allowances for impairment of customer finance 23 – –1 – – 8 30 24 – 1 8 – 23 56 – – – – – –23 –23 – – – – – –23 –23 1 – – – – – 1 2 – – – – – 2 2,072 94 12 682 4 209 3,073 1,404 80 58 448 18 32 2,040 – –94 – – –3 –158 –255 – –63 – – –9 –3 –75 2014 3,073 75 3,148 172 –649 2,671 2,818 1,343 4,975 2013 2,040 178 2,218 115 –213 2,120 1,965 901 456 P11 Receivables and liabilities – subsidiary companies Receivables and liabilities – subsidiary companies Payment due by period < 1 year 1–5 years >5 years Total 2014 Total 2013 Non-current receivables 1) Financial receivables 41 13,249 Current receivables Trade receivables Financial receivables Total Non-current liabilities 1) Financial liabilities Current liabilities Trade payables Financial liabilities Total 5,228 15,902 21,130 – 454 40,233 40,687 – – – – – – – – – – – 13,290 11,024 5,228 15,902 21,130 3,573 10,260 13,833 24,034 24,034 24,034 – – – 454 40,233 40,687 502 43,942 44,444 1) Including non-interest-bearing receivables and liabilities, net, amounting to SEK –24,034 (–24,034) million. Transfers of financial assets Transfers where the Parent Company has not derecognized the assets in their entirety As per December 31, 2014 there existed certain customer financing assets that the Parent Company had transferred to third parties where the Parent Company did not derecognize the assets in their entirety. The total carrying amount of the original assets transferred was SEK 811 (899) million; the amount of the assets that the Parent Company continues to recognize was SEK 168 (210) million; and the carrying amount of the associated liabilities was SEK 0 (0) million. 114 Ericsson | Annual Report 2014 P12 Other current receivables P13 Equity and other comprehensive income 2014 516 263 993 401 2,173 2013 506 126 1,527 197 2,356 Capital stock 2014 Capital stock at December 31, 2014, consisted of the following: Capital stock Class A shares 1) Class B shares 1) Total Number of shares 261,755,983 3,043,295,752 3,305,051,735 Capital stock 1,309 15,217 16,526 1) Class A shares (quotient value SEK 5.00) and Class B shares (quotient value SEK 5.00). Other current receivables Prepaid expenses Accrued revenues Derivatives with a positive value Other Total Equity and other comprehensive income 2014 January 1, 2014 Net income Other comprehensive income Items that may be reclassified to profit or loss Revaluation of other investments in shares and participations Fair value remeasurement Total other comprehensive income, net of tax Total comprehensive income Transactions with owners Stock issue Sale of own shares Stock Purchase Plans Repurchase of own shares Dividends paid December 31, 2014 Equity and other comprehensive income 2013 Capital stock Revaluation reserve Statutory reserve Total restric- ted equity Disposition reserve Fair value reserves 16,526 – – – – – – – – – 20 – – – – – – – – – 31,472 48,018 – – – – – – – – – – – – – – – – – – 100 – – – – – – – – – 69 – 46 46 46 – – – – – 16,526 20 31,472 48,018 100 115 Capital stock Revaluation reserve Statutory reserve Total restric- ted equity Disposition reserve Fair value reserves January 1, 2013 Net income Other comprehensive income Items that may be reclassified to profit or loss Revaluation of other investments in shares and participations Fair value remeasurement Total other comprehensive income, net of tax Total comprehensive income Transactions with owners Stock issue Sale of own shares Stock Purchase Plans Repurchase of own shares Dividends paid December 31, 2013 16,526 – – – – – – – – – 20 – – – – – – – – – 31,472 48,018 – – – – – – – – – – – – – – – – – – 100 – – – – – – – – – 16,526 20 31,472 48,018 100 – – 69 69 69 – – – – – 69 Financials – Notes to the Parent Company financial statements Other retai- ned ear- nings Non- restricted equity 23,629 23,798 Total 71,816 23,600 23,600 23,600 – – – – 106 23 – –9,702 37,656 46 46 46 – 106 23 – –9,702 37,871 46 46 46 – 106 23 – –9,702 85,889 Other retai- ned ear- nings Non- restricted equity 25,524 25,624 Total 73,642 6,855 6,855 6,855 – – – – 90 23 – –8,863 23,629 69 69 69 – 90 23 – –8,863 23,798 69 69 69 – 90 23 – –8,863 71,816 115 Ericsson | Annual Report 2014 2014 2013 118 258 382 133 140 1031 – 33 119 203 93 499 947 1 2014 2013 407 –6 –8 93 –72 –77 53 390 386 –23 –17 126 –65 –51 51 407 Change in the defined benefit obligation Opening balance Payment to pension trust Payment to pension trust, reclassified 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 2015 are SEK 68 million. Total pension cost and income recognized in the Income statement 2014 2013 2012 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 exclu- ding taxes Return on plan assets Total pension cost, net excluding taxes 39 54 2 95 65 65 –24 136 87 40 1 61 39 1 128 101 73 73 – 59 59 – 201 160 Of the total pension cost, SEK 106 (161 in 2013 and 121 in 2012) million is included in operating expenses and SEK 30 (40 in 2013 and 39 in 2012) million in the financial net. FINANCIALS – Notes to the Parent Company financial statements P14 Untaxed reserves Untaxed reserves 2014 Accumulated depreciation in excess of plan Total accumulated depreciation in excess of plan Jan 1 Additions/ withdrawals (–) Dec 31 Plan assets allocation Cash and cash equivalents Equity securities Debt securities Real estate Investment funds – – – Total Of which Ericsson securities Contributions to Swedish subsidiaries amount to SEK 1,700 (430) million. There were no contributions from Swedish subsidiaries in 2014 and 2013. P15 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 rela- ting 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 ITP2 plan for the Parent Company is partly funded. ITP2 is a supplementary pension plan for salaried employees born before 1979. 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 Payment to pension trust, reclassified Closing balance provision for pensions 2014 793 –1,031 –238 390 238 – 390 2013 754 –947 –193 407 185 8 407 1) The ITP2 obligation is covered by the Swedish law on safeguarding of pension commitments and amounts to SEK 755 (737) million. The defined benefit obligations are calculated based on the actual salary levels at year-end and based on a discount rate of 3.4%. 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 2009–2014 additional transfers of SEK 182 million have been made. The Parent Company utilizes no assets held by the pension trust. Return on plan assets was 8.1 (5.8)%. 116 Ericsson | Annual Report 2014 P16 Other provisions Other provisions 2014 Opening balance Additions Reversal of excess amounts Cash out/utilization Reclassifications Closing balance 2013 Opening balance Additions Reversal of excess amounts Cash out/utilization Reclassifications Closing balance 1) Of which SEK 1,073 (1,540) million is expected to be utilized within one year. p17 Interest-bearing liabilities As of December 31, 2014, the Parent Company’s outstanding interest- bearing liabilities, excluding liabilities to subsidiaries, stood at SEK 21.2 (26.2) 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 0 (1,966) million. Notes, bonds, bilateral loans and committed credits 2014 2013 – – – 14,346 6,859 21,205 21,205 5,966 39 6,005 14,522 5,686 20,208 26,213 Restruc turing Customer finance 159 12 –40 –99 – 32 71 170 – –82 – 159 89 1 –4 –78 – 8 84 5 – – – 89 Other 1,442 93 –200 –294 – 1,041 3,554 218 –195 –2,135 – 1,442 Total other provisions1) 1,690 106 –244 –471 – 1,081 3,709 393 –195 –2,217 – 1,690 To secure long-term funding the Parent Company use notes and bond programs together with bilateral research and development facilities. All outstanding notes and bond loans are issued under the Euro Medium- Term Note (EMTN) program or under the U.S. Securities and Exchange Commission (SEC) Registered program. Bonds issued at a fixed interest rate could be swapped to a floating interest rate using interest rate swaps, and normally a maximum of 50% of all outstanding loans are at fixed inte- rest rates. Total weighted average interest rate cost during the year was 4.18% (4.44%). Outstanding notes and bonds are revalued based on changes in benchmark interest rates according to the fair value hedge methodology stipulated in IAS 39. In January 2014 the Parent Company repaid the SEK 4 billion EIB loan with original maturity July 2015. In February 2014 the Parent Company repaid the USD 300 million note from the Swedish Export Credit Corporation with original maturity in 2016. In June 2014 the Parent Company repaid the EUR 220 million note. In June 2014 the Parent Company exercised the option to extend the maturity of the USD 2 billion multi-currency revolving credit facility with one year to June 2019. One extension option of one year remains. Nominal amount Coupon Currency Book value (SEK) Maturity date Unrealized hedge gain/loss (included in book value) Issued–maturing Notes and bond loans 2007–2017 2010–2020 2) 2012–2022 Total notes and bond loans Bilateral loans 2012–2019 3) 2012–2021 4) 2013–2020 5) Total bilateral loans 500 5.375% 4.125% 170 1,000 98 98 684 2,000 EUR USD USD USD USD USD USD 5,277 1) June 27, 2017 1,325 7,744 14,346 763 764 5,332 6,859 0 0 December 23, 2020 May 15, 2022 September 30, 2019 September 30, 2021 November 6, 2020 June 27, 2019 4) Nordic Investment Bank (NIB), R&D project financing. 5) European Investment Bank (EIB), R&D project financing. 6) Multi-currency revolving credit facility. Unutilized. One extension option of one year remains. –551 –551 117 Committed credit Long-term committed credit facility 6) Total committed credit 1) Interest rate swaps are designated as fair value hedges. 2) Private Placement, Swedish Export Credit Corporation (SEK). 3) Nordic Investment Bank (NIB), R&D project financing. Financials – Notes to the Parent Company financial statements Ericsson | Annual Report 2014 FINANCIALS – Notes to the Parent Company financial statements P18 Financial risk management and financial instruments 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) available-for-sale with maturity less than one year and are therefore short- term investments. Cash, cash equivalents and short-term investments are mainly held in SEK unless offset by EUR-funding. Debt financing is mainly carried out through borrowing in the Swedish and international debt capital markets. Fair value Asset Liability Asset Liability committed credit facilities. 2014 2013 Bank financing is used for certain subsidiary funding and to obtain Funding programs 1) Euro Medium-Term Note program (USD million) SEC Registered program (USD million) Amount Utilized Unutilized 5,000 2) 778 1,000 4,223 1) There are no financial covenants related to these programs. 2) Program amount indeterminate. In May 2014 Moody’s changed the Company’s credit rating from A3 (negative) to Baa1 (stable). In August 2014 Standard & Poor’s changed the Company’s credit rating outlook from BBB+ (negative) to BBB+ (stable). Both credit ratings are considered to be solid investment grade. Fair valuation of the Company’s financial instruments The Company’s financial instruments generally meet the requirements of level 1 valuation due to the fact that they are based on quoted prices in active markets for identical assets. Exceptions to this relates to: > OTC derivatives with an amount of gross SEK 4.9 (5.2) billion in relation to assets and gross SEK 5.5 (5.1) billion in relation to liabilities were valued based on references to other market data as currency or interest rates. These valuations fall under level 2 valuation as defined by IFRS. > Ownership in other companies where the Company neither has control nor significant influence. The amount recognized in these cases was SEK 0.5 (0.5) billion. These assets, classified as level 3 assets for valua- tion purposes, have been valued based on value in use technique. Currency derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity between 1 and 3 years Total Of which internal Interest rate derivatives Maturity within 3 months Maturity between 3 and 12 months Maturity between 1 and 3 years Maturity between 3 and 5 years Maturity of more than 5 years 1,351 1,185 946 0 2,297 1,994 0 72 937 85 146 933 0 2,118 63 5 896 656 285 211 523 290 8 821 23 – 186 382 663 101 604 266 – 870 720 – 269 688 163 36 Total 1,240 2) 2,053 1,332 2) 1,156 Of which designated in fair value hedge relations 669 0 724 – 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 551 (613) million is reported as non-current assets. Cash, cash equivalents and short-term investments SEK billion Bank Deposits Type of issuer/counterpart Governments Banks Corporations Mortgage institutes 2014 2013 Remaining time to maturity < 3 months 3–12 months 1–5 years >5 years 15.4 1.0 6.1 2.9 25.4 24.3 5.5 12.3 0.6 1.0 6.5 4.0 10.1 22.4 26.5 0.1 0.7 3.7 Total 15.4 19.4 6.1 2.9 11.2 55.0 58.5 The instruments are either classified as held for trading or as assets Financial instruments, book value Trade recei v ables Short- term investment Rec eiv- ables and liabilities sub sidi- aries Borrowings Trade payables Cash equivalent Other current receivables Other current liabilities Other non- current assets 2014 2013 P10 – 2.8 – 2.8 P11 – 34.4 –64.7 –30.3 P17 P20 – – –21.2 –21.2 – – –0.4 –0.4 30.6 – – 30.6 P12 1.0 – – 1.0 P19 –4.1 – – –4.1 8.9 – – 8.9 0.6 – – 0.6 37.0 37.2 –86.3 –12.1 46.4 26.9 –95.1 –21.8 SEK billion Note Assets at fair value through profit or loss Loans and receivables Financial Liabilities at amortized cost Total 118 Ericsson | Annual Report 2014 P19 Other current liabilities P23 Statement of cash flows Other current liabilities Accrued interest Accrued expenses, of which Employee related Other Deferred revenues Derivatives with a negative value Other current liabilities Total P20 Trade payables Trade payables Trade payables excluding associated companies and joint ventures Associated companies and joint ventures Total All trade payables fall due within 90 days. P21 Assets pledged as collateral Assets pledged as collateral Bank deposits Total 2014 205 693 357 336 41 4,109 207 5,255 2013 189 633 299 334 15 1,305 80 2,222 2014 2013 411 204 615 407 204 611 2014 525 525 2013 553 553 The major item in bank deposits is the internal bank’s clearing and settle- ment commitments of SEK 303 (376) million. Interest paid in 2014 amounted to SEK 864 million (SEK 1,022 in 2013 and SEK 1,218 million in 2012) and interest received was SEK 1,657 million (SEK 1,203 in 2013 and SEK 1,536 million in 2012). Income taxes paid were SEK 321 million (income taxes paid were SEK 255 million in 2013 and income taxes received SEK 133 million in 2012). Adjustments to reconcile net income to cash 2014 2013 2012 171 171 355 – 355 526 –58 203 203 218 – 218 421 –7 177 177 218 – 218 395 421 28 434 12,167 – 1,700 – –139 –288 430 – –34 –388 2,034 – –193 2,057 956 14,436 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 P24 Leasing Leasing with the Parent Company as lessee At December 31, 2014, future payment obligations for leases were distributed as follows: Future payment obligations for leases P22 Contingent liabilities Contingent liabilities Total contingent liabilities 2014 2015 2016 2017 2018 2019 and later Total 2014 2013 20,906 15,999 Operating leases 742 637 495 355 304 1,190 3,723 Contingent liabilities include pension commitments of SEK 16,910 (14,362) million. In accordance with standard industry practice, the Company enters into commercial contract guarantees related to contracts for the supply of telecommunication equipment and services. The total amount for 2014 was SEK 19,801(16,595) million. Potential payments due under these bonds are related to the Company’s performance under applicable contracts. For information about financial guarantees, see Note P10, “Trade Receivables and Customer Finance.” Leasing with the Parent Company as lessor At December 31, 2014, future minimum payment receivables were distributed as follows: Future minimum payment receivables Operating leases 2014 2015 2016 2017 2018 2019 and later Total 6 1 1 1 – – 9 The operating lease income is mainly income from the subleasing of real estate. See Notes to the consolidated financial statements, Note C27, “Leasing.” Financials – Notes to the Parent Company financial statements 119 Ericsson | Annual Report 2014 FINANCIALS – Notes to the Parent Company financial statements P25 Information regarding employees Average number of employees 2014 2013 Men Women Total Men Women Total 187 168 355 187 187 172 20 192 172 172 359 188 547 359 359 189 217 406 189 189 168 27 195 168 168 357 244 601 357 357 Northern Europe & Central Asia 1) 2) Middle East Total 1) Of which in Sweden 2) Of which in EU Remuneration Wages and salaries and social security expenses Wages and salaries Social security expenses Of which pension costs Wages and salaries per geographical area Northern Europe & Central Asia 1) 2) Middle East Total 1) Of which in Sweden 2) Of which in the EU 2014 2013 707 341 180 644 380 246 2014 2013 460 247 707 460 460 410 234 644 410 410 Remuneration in foreign currency has been translated to SEK at average exchange rates for the year. Remuneration to the Board of Directors and the President and CEO See Notes to the consolidated financial statements, Note C28, “Informa- tion Regarding members of the Board of Directors, the Group manage- ment and employees.” Long-term variable compensation The Stock Purchase Plan Compensation costs for all employees of the Parent Company amounted to SEK 22.4 (22.1) million. P26 Related party transactions During 2014, various transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. Ericsson Nikola Tesla d.d. Ericsson Nikola Tesla d.d. is a company providing the design, sales and service of telecommunications systems and equipment and an associa- ted member of the Ericsson Group. Ericsson Nikola Tesla d.d. is located in Zagreb, Croatia. 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 divi- dends. Ericsson Nikola Tesla d.d. Related party transactions License revenues Dividends Related party balances Receivables 120 2014 2013 1 249 1 12 128 2 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 in 2009 as a joint venture, equally owned by Ericsson and STMicroelectronics. In early 2013 the parents agreed to split up and close the joint venture. The company ST-Ericsson is winding down and all business has been transferred to parents or divested during 2013. In 2013, the Parent Company acquired the remaining shares in ST-Ericsson AT SA which is now a fully owned subsidiary. 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 Payables 2014 2013 – 142 170 186 – 23 – 204 Other related parties 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.” P27 Fees to auditors Fees to auditors 2014 Audit fees Audit-related fees Tax services fees Other fees Total 2013 Audit fees Audit-related fees Tax services fees Other fees Total 2012 Audit fees Audit-related fees Tax services fees Other fees Total PwC 24 7 1 1 33 22 8 1 10 41 23 11 1 5 40 The allocation of fees to the auditors is based on the requirements in the Swedish Annual Accounts Act. During the period 2012–2014, in addition to audit services, PwC provided certain audit-related services, tax and other services to the Parent Com- pany. The audit-related services include quarterly reviews, SSAE 16 reviews and services in connection with the issuing of certificates and opinions and consultation on financial accounting. The tax services include general expatriate services and corporate tax compliance work. Other services include services related to acquisitions, operational effectiveness and assessments of internal control. Ericsson | Annual Report 2014 FINANCIALS risk factors Contents Market, technology and business risks Regulatory, compliance and corporate governance risks Risks associated with owning Ericsson shares 121 126 128 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, revenues, operating and after-tax results, profit margins, financial condition, cash flow, liquidity, credit rating, market share, reputation, 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 operating 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 and political unrest could have adverse, wide-ranging effects on demand for our products and for the products of our customers. Adverse global economic conditions and political unrest, could cause operators and other customers to postpone investments or initiate other cost-cutting initiatives to improve their financial position. This could result in significantly reduced expenditures for our products and services, including network infrastructure, 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. 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 and other customers. Some operators and other customers, 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 manu- facturing capacity > Risk of financial difficulties or failures among our suppliers > Increased demand for customer finance, difficulties in collec- tion of accounts receivable and increased risk of counter party 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 > Changes in the value in our pension plan assets resulting from for example, adverse equity and credit market developments and/or increased pension liabilities resulting from, for example, lower discount rates. Such development may trigger additional pension trust capitalization needs affecting the company’s cash balance negatively > End user demand could also be adversely affected by reduced consumer spending on technology, changed operator pricing, security breaches and trust issues. We may not be successful in implementing our strategy or in achieving improvements in our earnings. There can be no assurance that we will be able to successfully implement our strategy to achieve future earnings, growth or cre- ate shareholder value. 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. The telecommunications industry fluctuates and is affected by many factors, including the economic environment, and decisions made 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 ser- vice provider equipment market, telecommunications services market and ICT market to grow in the coming years, the uncer- tainty 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, con- ditions in the specific industry segments in which we participate may be weaker than in other segments. In that case, our revenue and operating results may be adversely affected. If capital expenditures by operators and other customers are weaker than we anticipate, our revenues, operating results and profitability may be adversely affected. The level of demand from operators and other customers who buy our products and ser- vices can change quickly and can vary over short periods of time, including from month to month. Due to the uncertainty and varia- Financials – Risk factors 121 Ericsson | Annual Report 2014 FINANCIALS – Risk factors tions in the telecommunications industry, as well as in the ICT industry, accurately forecasting revenues, results, and cash flow remains difficult. Sales volumes and gross margin levels are affected by the mix and order time of our products and services. Our sales to operators and other customers represent a mix of equipment, software and services, which normally generate dif- ferent gross margins. We sell our own products as well as third party products, which normally have 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 shorter lead times for delivery than initial network build outs. Orders for such network expansions and upgrades are normally placed at short notice by customers, often less than a month in advance, and consequently variations in demand are difficult to forecast. As a result, changes in our product and service mix and the short order time for certain of our products may affect our ability to accurately forecast sales and margins or detect in advance whether actual results will deviate from market consensus. Short-term variation could have a material adverse effect on our business, operating results, financial condition and cash flow. We may not be able to properly respond to market trends in the industries in which we operate, 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 indus- tries in which we operate, including the convergence of the tele- com, 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 have entered and may continue to 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 competencies to develop and sell products, services and solutions that are competitive in this changing business environment, 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 and operating results. A substantial portion of our business depends on the continued growth 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 operators fail to increase the number of subscribers and/or usage does not increase, our business and operating results could be materially adversely affected. Also, if operators fail to monetize new services, fail to introduce new business mod- els or experience a decline in operator revenues or profitability, their willingness to further invest in their network systems may decrease which will reduce their demand for our products and 122 services and have an adverse effect on our business, operating 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, regula- tion, or market acceptance occur, this could adversely affect our business, operating results and financial condition. 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. The markets in which we operate are highly competitive in terms of price, functionality, service quality, customization, timing of development, and the introduction of new products and services. We face intense competition from significant competitors, many of which are very large, with substantial technological and financial resources and established relationships with operators. Further, certain competitors, Chinese companies in particular, have become relatively stronger in recent years. We also encounter increased competition from new market entrants and alternative technologies are evolving industry standards. In particular, we face competition from large IT companies entering the telecom- munications market who benefit from economies of scale due to being active in several industries. We cannot assure that we will be able to compete successfully with these companies. Our compet- itors 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 busi- ness 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, which could have a material adverse effect on our business, operating results, finan- cial condition and market share. Traffic development on cellular networks could be affected if more traffic is offloaded to Wi-Fi net- works. 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 business, operating results, financial condition and market share. Vendor consolidation may lead to stronger competitors who are able to benefit from integration, scale and greater resources. Industry convergence and consolidation among equipment and services suppliers could potentially result in stronger competitors that are competing as end-to-end suppliers as well as competi- tors more specialized in particular areas. Consolidation may also result in competitors with greater resources than we have or in reduction of our current scale advantages. This could have a Ericsson | Annual Report 2014 materially adverse effect on our business, operating results, finan- cial condition and market share. A significant portion of our revenue is currently generated from a limited number of key customers, and operator con- solidation may increase our dependence on key customers. We derive most of our business from large, multi-year agreements with a limited number of significant customers. Many of these agreements are opened up on a yearly basis to renegotiate the price for our products and services and do not contain committed purchase volumes. Although no single customer represented more than 8% of our sales in 2014, our ten largest customers accounted for 47% of our sales in 2014. 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 fewer operators with activities in several countries. This trend is expected to continue, and intra-country consolidation is likely to accelerate as a result of competitive pres- sure. A market with fewer and larger operators will increase our reliance on key customers and may negatively impact our bargain- ing position and profit margins. Moreover, if the combined compa- nies operate in the same geographic market, networks may be shared and less network equipment and fewer 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 agreements, securing necessary regulatory approvals, or integration of businesses. Network opera- tors also share parts of their network infrastructure through coop- eration agreements rather than legal consolidations, which may adversely affect demand for network equipment. Accordingly, operator consolidation may have a material adverse effect on our business, operating results, market share and financial condition. Certain long-term agreements with customers still include commitments to future price reductions, requiring us to constantly manage and control our cost base. Long-term 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 continu- ously 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 to reduce costs will be sufficient or quick enough to maintain our gross margin in such contracts, which may have a material adverse effect on our business, oper- ating results and financial condition. Growth of our managed services business is difficult to predict, and requires taking significant contractual risks. Operators increasingly outsource parts of their operations to reduce cost and focus on new services. To address this oppor- tunity, we offer operators various services in which we manage their networks. The 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, early contract margins are generally low and the mix of new and old contracts may negatively affect reported results in a given period. Contracts for such services normally cover several years and generate recurring revenues. However, contracts have been, and may in the future be, terminated or reduced in scope, which has negative impacts on sales and earnings. While we believe we have a strong position in the managed services market, competition in this area is increasing, which may have adverse effects on our future growth, business, operating results and profitability. 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 make significant investments in technological innovation. We invest significantly in new technology, products and solutions. In order for us to be successful, those technologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. The failure of our research and development efforts to be technically or commercially successful, could have adverse effects on our business, operating results and financial condition. If we invest in the development of technolo- gies, products and solutions that do not function as expected, are not adopted by the industry, are not ready in time, or are not suc- cessful in the marketplace, our sales and earnings may materially suffer. Additionally, it is common for research and development projects to encounter delays due to unforeseen problems. Delays in production and research and development may increase the cost of research and development efforts and put us at a disad- vantage against our competition. This could have a material adverse effect upon our business, operating results and financial condition. We engage in acquisitions and divestments which may be disruptive and require us to incur significant expenses. In addition to in-house innovation efforts, we make strategic acquisitions in order to obtain various benefits such as reduced time-to-market, access to technology and competence, increased scale or to broaden our product portfolio or customer base. Future acquisitions could result in the incurrence of contin- gent liabilities and an increase in amortization expenses related to goodwill and other intangible assets, which could have a material adverse effect upon our business, operating results, financial con- dition and liquidity. Risks we could face with respect to acquisi- tions 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 > Expenses of any undisclosed or potential legal liabilities of the acquired company. From time to time we also divest parts of our business to optimize our product portfolio or operations. Any decision to dispose of or otherwise 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 Financials – Risk factors 123 Ericsson | Annual Report 2014 FINANCIALS – Risk factors successful in consummating future acquisitions or divestments on favorable terms or at all. The risks associated with such acqui- sitions and divestments could have a material adverse effect upon our business, operating results, financial condition and liquidity. We are in, and may enter into new, JV arrangements and have, and may have new, partnerships which may not be successful and expose us to future costs. Our JV and partnering arrangements may fail to perform as expected for various reasons, including an incorrect assessment of our needs, our inability to take action without the approval of our partners or the capabilities or financial stability of our strategic partners. Our ability to work with these partners or develop new products and solutions may become constrained, which could harm our competitive position in the market. Additionally, our share of any losses from or commitments to contribute additional capital to such JV’s and partnerships may adversely affect our business, operating results, financial condi- tion and cash flow. 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. Our ability to deliver according to market demands and contrac- tual commitments depends significantly on obtaining a timely and adequate supply of materials, components, production capacity and other vital services on competitive terms. Although we strive to avoid single-source supplier solutions, this is not always possi- ble. Accordingly, there is a risk that we will be unable to obtain key supplies we need to produce our products and provide our ser- vices on commercially reasonable terms, or at all. Failure by any of our suppliers could interrupt our product or services supply or operations and significantly limit sales or increase our costs. To find an alternative supplier or redesign products to replace com- ponents may take significant time which could cause significant delays or interruptions in the delivery of our products and services. We have from time to time experienced interruptions of supply and we may experience such interruptions in the future. Furthermore, our procurement of supplies requires us to pre- dict future customer demands. If we fail to anticipate customer demand properly, an over or under supply of components and production capacity could occur. In many cases, some of our competitors utilize the same manufacturers and if they have pur- chased capacity ahead of us we could be blocked from acquiring the needed products. This factor could limit our ability to supply our customers and increase costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs. We are also exposed to financial counterpart risks to suppliers when we pay in advance for supplies. Such supply dis- ruptions and cost increases may negatively affect our business, operating results and financial condition. Product or service quality issues could lead to reduced revenue and gross margins and declining sales to existing and new customers. Sales contracts normally include warranty undertakings for faulty products and often include provisions regarding penalties and/or termination rights in the event of a failure to deliver ordered prod- ucts or services on time or with required quality. Although we undertake a number of quality assurance measures to reduce 124 such risks, product quality or service performance issues may negatively affect our reputation, business, operating results and financial condition. If significant warranty obligations arise due to reliability or quality issues, our operating results and financial posi- tion could be negatively impacted by costs associated with fixing software or hardware defects, high service and warranty expenses, high inventory obsolescence expense, delays in collecting accounts receivable or declining sales to existing and new customers. Due to having a significant portion of our costs in SEK and revenues in other currencies, our business is exposed to foreign exchange fluctuations that could negatively impact o ur revenues and operating results. We incur a significant portion of our expenses in SEK. As a result of our international operations, we generate, and expect to con- tinue 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 cur- rency, 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. As market prices are predominantly established in USD or EUR, we presently have a net revenue exposure in foreign curren- cies which means that a stronger SEK exchange rate would gen- erally have a negative effect on our reported results. Our attempts to reduce the effects of exchange rate fluctuations through a vari- ety of hedging activities may not be sufficient or successful, result- ing in an adverse impact on our results and financial condition. 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 infringe- ment, the loss of licenses from third parties, infringement claims brought against us by competitors and others and changes in the area of open standards, especially in light of recent attention on licensing of open standard patents. Although we have a large number of patents, there can be no assurance that they will not be challenged, invalidated, or circum- vented, or that any rights granted in relation to our patents will in fact provide us with competitive advantages. We utilize a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. In addition, we rely on many software patents, and limitations on the patentability of software may materially affect our business. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing legal systems of some countries in which we conduct business offer only limited protection of intel- lectual property rights, if at all. Our solutions may also require us to license technologies from third parties. It may be necessary in the future to seek or renew licenses and there can be no assurance that they would be available on acceptable terms, or at all. More- over, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect proprietary rights in our products. Ericsson | Annual Report 2014 Many key aspects of telecommunications and data network tech- nology are governed by industry-wide standards usable by all market participants. As the number of market entrants and the complexity of technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. In addition to industry-wide standards, other key industry-wide software solutions are today developed by market participants as free and open source software. Contributing to the development of software developed as free and open source software may limit our ability to enforce applicable patents in the future. Third parties have asserted, and may assert in the future, claims, directly against us or 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 liti- gation, we could be required to pay damages and other compen- sation directly or to indemnify our customers for such damages and other compensation, develop non-infringing products/tech- nology 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 material adverse effect on our business, reputation, operating results and financial condition. Using free and open source software may allow third parties to further investigate our software due to the accessibility of source code. This may in turn make this software more prone to assertions from third parties. Recent attention on licensing of patents necessary to conduct an open standard (e.g. 2G, 3G and 4G technology), investigations held by antitrust authorities and legislative change could poten- tially affect Ericsson’s ability to benefit from its patent portfolio in the area of such open standards, which could have a material adverse effect on our business, reputation, operating results and financial condition. Ericsson holds a leading patent portfolio in open standards and possible changes regarding such a portfolio may materially affect our reputation, business, operating results and financial condition. We are involved in lawsuits and investigations which, if determined against us, could require us to pay substantial damages, fines and/or penalties. In the normal course of our business we are involved in legal pro- ceedings. These lawsuits include such matters as commercial disputes, claims regarding intellectual property, antitrust, tax and labor disputes. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results, financial condition and reputation. As a publicly listed company, Ericsson may be exposed to law- suits in which plaintiffs allege that the Company or its officers have failed to comply with securities laws, stock market regulations or other laws, regulations or requirements. Whether or not there is merit to such claims, the time and costs incurred to defend the Company and its officers and the potential settlement or com- pensation to the plaintiffs could have significant impact on our reported results and reputation. For additional information regard- ing certain of the lawsuits in which we are involved, see “Legal Proceedings” in the Board of Directors’ Report. 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 commu- nications networks, which are vulnerable to damage or distur- bance from a variety of sources. Having outsourced significant portions of our operations, such as IT, finance and HR operations, we depend on the performance of external companies, including their security and reliability measures. Regardless of protection measures, our systems and communications networks are sus- ceptible to disruption due to failure, vandalism, computer viruses, security or privacy breaches, natural disasters, power outages and other events. We also have a concentration of operations on certain sites, including R&D, production, network operation cen- ters, ICT centers and logistic centers and shared services centers, where business interruptions could cause material damage and costs. The delivery of goods from suppliers, and to customers, could also be hampered for the reasons stated above. Interrup- tions to our systems and communications may have an adverse effect on our operations and financial condition. Cyber security incidents affecting our business may have a material adverse effect on our business, financial condition, reputation and brand. Ericsson’s business operations involve areas that are particularly vulnerable to cyber security incidents such as data breaches, intrusions, espionage, know-how and data privacy infringements, leakage and general malfeasance. Examples of these areas include, among others, research and development, managed services, usage of cloud solutions, software development, lawful interception, product engineering, IT, finance and HR operations. Any cyber security incident including unintended use, involving our operations, product development, services, our third party providers or installed product base, could cause severe harm to Ericsson and could have a material adverse effect on our busi- ness, financial condition, reputation and brand. Ericsson relies heavily on third parties to whom we have out- sourced significant aspects of our IT infrastructure, product devel- opment, engineering services, finance and HR operations. While we have taken precautions relating to the selection, integration and ongoing management of these third parties, any event or attack that is caused as a result of vulnerabilities in their operations or products supplied to us could have a material adverse effect upon Ericsson, our business, financial condition, reputation and brand, potentially slowing operations, leaking valuable intellectual prop- erty or sensitive information or damaging our products which have been installed in our customers’ networks. We must continue to attract and retain highly qualified employees to remain competitive. We believe that our future success largely depends on our cont- inued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide ser- vices to our customers. Competition for skilled personnel and highly qualified manag- ers in the industries in which we operate remains intense. We are continuously developing our corporate culture, remuneration, promotion and benefits policies as well as other measures aimed at empowering our employees and reducing employee turnover. Financials – Risk factors 125 Ericsson | Annual Report 2014 FINANCIALS – Risk factors However, there are no guarantees that we will be successful in attracting and retaining employees with appropriate skills in the future, and failure in retention and recruiting could have a material adverse effect on our business and brand. If our customers’ financial conditions decline, we will be exposed to increased credit and commercial risks. After completing sales to customers, we may encounter difficulty collecting accounts receivables and could be exposed to risks associated with uncollectable accounts receivable. We regularly assess the credit worthiness of our customers and based on that we determine a credit limit for each one of them. Challenging eco- nomic 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 demands may increase. Upon the financial failure of a customer, we may experience losses on credit extended and loans made to such customer, losses relating to our commercial risk exposure, and the loss of the cus- tomer’s ongoing business. If customers fail to meet their obliga- tions to us, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our operating results and financial condition. We rely on various 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, financial condition and cash flow may materially suffer. Our business requires a significant amount of cash. If we do not generate sufficient amounts of capital to support our operations, service our debt and continue our research and development and customer finance programs, or if we cannot raise sufficient amounts of capital at the required times and on reasonable terms, our business is likely to be adversely affected. Access to funding may decrease or become more expensive as a result of our oper- ational and financial condition, market conditions, including finan- cial conditions in the Eurozone, or due to deterioration in our credit rating. There can be no assurance that additional sources of funds that we may need from time to time will be available on reasonable terms or at all. If we cannot access capital on a commercially via- ble basis, our business, financial condition and cash flow could materially suffer. Impairment of goodwill or other intangible assets may nega- tively impact our financial condition and results of operations. An impairment of goodwill or other intangible assets could adversely affect our financial condition or results of operations. We have a significant amount of goodwill and intangible assets; for example, patents, customer relations, trademarks and soft- ware. Goodwill is the only intangible asset the company has recog- nized to have indefinite useful life. Other intangible assets are mainly amortized on a straight-line basis over their estimated useful lives, but for no more than ten years, and are reviewed for impairment whenever events such as product discontinuances, product dispositions or other changes in circumstances indicate that the carrying amount may not be wholly recoverable. Those not yet in use are tested for impairment annually. Historically, we have recognized impairment charges related to intangible assets mainly due to restructuring. Additional impair- ment charges may be incurred in the future that could be signifi- cant due to various reasons, including restructuring actions or adverse market conditions that are either specific to us or the broader telecommunications industry or more general in nature and that could have an adverse effect on our operating results and financial condition. Negative deviations in actual cash flows compared to esti- mated cash flows as well as new estimates that indicate lower future cash 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 might result in significantly different results and may differ from the actual financial condition in the future. Regulatory, Compliance and Corporate Governance risk Ericsson may fail or be unable to comply with laws or regula- tions and could experience penalties and adverse rulings in enforcement or other proceedings, which could have a mate- rial adverse impact on our business, financial condition and brand. The industries in which we operate are subject to laws and regula- tions. While Ericsson strives for compliance, we cannot assure that violations do not occur. If we fail to or are unable to comply with applicable laws and regulations, we could experience pen- alties and adverse rulings in enforcement or other proceedings, which could have a material adverse effect on our business, fin- ancial condition and reputation. Further our business may suffer as a result of changes in laws or regulations which could subject us to liability, increased costs, or reduced product demand and have a material adverse effect on our business, financial condition and brand. Changes to these regulations may adversely affect both our customers’ and our own operations. For example, regulations imposing more stringent, time-consuming or costly planning and zoning requirements or building approvals for radio base stations and other network infrastructure could adversely affect the timing and costs of network construction or expansion, and ultimately the commercial launch and success of these networks. Similarly, tariff and roaming regulations or rules on network neutrality could also affect operators’ ability or willingness to invest in network infrastructure, which in turn could affect the sales of our systems and services. Additionally, delay in radio frequency spectrum allo- cation, and allocation between different types of usage may adversely affect operator spending or force us to develop new products to be able to compete. Further, we develop many of our products and services based on existing regulations and technical standards. Changes to exist- ing regulations and technical standards, or the implementation of new regulations and technical standards relating to products and services not previously regulated, could adversely affect our development efforts by increasing compliance costs and causing delay. Demand for those products and services could also 126 Ericsson | Annual Report 2014 decline. Regulatory changes in license fees, environmental, health and safety, privacy and other regulatory areas may increase costs and restrict our operations or the operations of network operators and service providers. Also indirect 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 products or us. Our substantial international operations are subject to uncertainties which could affect our operating results. We conduct business throughout the world and are subject to the effects of general global economic conditions as well as con- ditions unique to specific countries or regions. We have custom- ers in 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 geopolitical instability and conflict, pandemics, 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 enforc- ing 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 our sales or our ability to purchase critical components. We must always comply with relevant export control regula- tions and sanctions or other trade embargoes in force in all parts of the business process. The political situation in parts of the world, particularly in the Middle East, remains uncertain and the level of sanctions is still high. A universal element of these sanc- tions 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. In particular, the sanctions towards Iran are still significant in scope, although in part temporarily and conditionally recently relieved. The EU exemption for certain standard telecom equipment is still maintained. Even so, there is a risk in many of these countries of unexpected changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls, or other governmental policies which could limit our operations and decrease our profit- ability. Further export control regulations, sanctions or other forms of trade restrictions imposed on countries in which we are active may result in a reduction of commitment in those countries. The need to terminate activities as a result of further trade restrictions may also expose us to customer claims and other actions. Although we seek to comply with all such regulations, there can be no assurance that we are or will be compliant with all relevant regulations at all times. Such violations could have material adverse effects on our business, operating results, reputation and brand. There has been a growing concern reported by media and others, that certain countries may use features of their telecom- munications systems in violation of human rights. This may adversely affect the telecommunications business and may have a negative impact on our reputation and brand. We may fail to comply with our corporate governance standards which could negatively affect our business, oper- ating results, financial condition, reputation and our brand. We are subject to corporate governance laws and regulations and are also committed to several corporate responsibility and sus- tainability initiatives. In some of the countries where we operate, corruption risks are high. In addition, there is higher focus on anti- corruption, for example with changed legislation in many coun- tries. To ensure that our operations are conducted in accordance with applicable requirements, our management system includes a Code of Business Ethics, a Code of Conduct and a Sustainability Policy, as well as other policies and directives to govern our pro- cesses and operations. Our commitment to apply the UN Global Compact principles, the UN Guiding Principles for Business and Human Rights and principles of the Partnering Against Corruption Initiative to our operation cannot fully prevent unintended or unlawful use of our technology by democratic and non-demo- cratic regimes, violation of our Code of Business Ethics, corrup- tion or violations of our Code of Conduct in the supply chain. While we attempt to monitor and audit internal compliance with the poli- cies and directives as well as our suppliers’ adherence to our Code of Conduct and strive for continuous improvements, we cannot provide any assurances that violations will not occur which could have material adverse effects on our business, operating results, reputation and brand. Failure to comply with environmental, health and safety regu- lations 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, products and services in each of the jurisdictions in which we operate. While we believe that we are in compliance with all material laws and regula- tions related to the environment, health, and safety that apply to us, we can provide no assurance that we have been, are, or will 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, financial condition, reputation and brand. Additionally, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to main- tain compliance with current or future laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, such as climate change and weather events, including potential liabilities. This is due to several factors, particularly the length of time often involved in resolving such matters. Adverse future events, regula- tions, or judgments could have a material adverse effect on our business, operating results, financial condition, reputation and brand. 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 Financials – Risk factors 127 Ericsson | Annual Report 2014 FINANCIALS – Risk factors 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 find- ings 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 recom- mendations regarding applicable electromagnetic fields, we cannot guarantee that we 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, financial condition, reputation and brand. Regulations related to “conflict minerals” may cause us to incur additional expenses, and may make our supply chain more complex. In 2012, the US Securities and Exchange Commission (“SEC”) adopted a rule requiring disclosures of specified minerals ( “con- flict minerals”) that are necessary to the functionality or production of products manufactured or contracted to be manufactured by companies that file periodic reports with the SEC, whether or not these products or their components are manufactured by third parties. While we believe that we will be able to fulfill these require- ments without materially affecting our costs or access to materials we can provide no assurance that there will not be material costs associated with complying with the disclosure requirements. These requirements could adversely affect the sourcing, availa- bility and pricing of minerals used in the manufacture of certain of our products. In addition, since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals contained in our products through the due diligence procedures that we implement, which may harm our reputation. We may also encounter challenges if customers require that all of the compo- nents of our products be certified as conflict-free. 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 financial results and the expectations of financial ana- lysts, as well as statements and market speculation regarding our 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 regard- ing 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 introduc- tion 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 > Announcements concerning bankruptcy or investigations into the accounting procedures of ourselves or other telecommuni- cations companies > Our ability to forecast and communicate our future results in a manner consistent with investor expectations. Currency fluctuations may adversely affect share value or value of dividends. Because our shares are quoted in SEK on Nasdaq 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’ investments. 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 Stockholm or NASDAQ New York. 128 Ericsson | Annual Report 2014 FINANCIALS Auditor’s 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 2014. (The annual accounts and consolidated accounts of the company are included in the printed version of this document on pages 42–128.) 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 respons- ible for the preparation and fair presentation of these annual accounts and consolidated accounts in accordance with Intern- ational 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 con- ducted 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 evi- dence 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 appropriate- ness 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 suffi- cient and appropriate to provide a basis for our audit opinion. Opinions In our opinion, the annual accounts have been prepared in accor- dance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the Parent Company as of 31 December 2014 and of its financial performance and its cash flows for the year then ended in accordance with the Annual Accounts Act. 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 2014 and of their financial performance and cash flows for the year then ended 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 share- holders 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 also audited 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 2014. Responsibilities of the Board of Directors and the President and CEO The Board of Directors is responsible for the proposal for appro- priations of the company’s profit or loss, and the Board of Direc- tors 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 assur- ance 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 stan- dards 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 20, 2015 PricewaterhouseCoopers AB Peter Nyllinge Authorized Public Accountant Bo Hjalmarsson Authorized Public Accountant Auditor in Charge Financials – Auditor’s report 129 Ericsson | Annual Report 2014 FINANCIALS – Forward-looking statements Forward-looking statements This Annual Report includes forward-looking statements, includ- ing 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,” “forecast,” “will,” “should,” “predict,” “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 docu- ment, 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 future characteristics of the markets in which we operate > Projections and other characterizations of future events > 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 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 for- ward-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: > Challenging global economic conditions may adversely impact the demand and pricing for our products and services as well as limit our ability to grow. > We may not be successful in implementing our strategy or in achieving improvements in our earnings. > The telecommunications industry fluctuates and is affected by many factors, including the economic environment, and deci- sions made by operators and other customers regarding their deployment of technology and their timing of purchases. > Sales volumes and gross margin levels are affected by the mix and ordertime of our products and services. > We may not be able to properly respond to market trends in the industries in which we operate, including the ongoing conver- gence of the telecom, data and media industries, which may harm our market position relative to our competitors. 130 > 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 and oper- ating results. > We face intense competition from our existing competitors as well as new entrants, including IT companies entering the tele- communications market, and this could materially adversely affect our results. > Vendor consolidation may lead to stronger competitors who are able to benefit from integration, scale and greater resources. > 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. > Certain long-term agreements with customers still include commitments to future price reductions, requiring us to con- stantly manage and control our cost base. > Growth of our managed services business is difficult to predict, and requires taking significant contractual risks. > 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. > We engage in acquisitions and divestments which may be disruptive and require us to incur significant expenses. > We are in, and may enter into new JV arrangements and have, and may have new, partnerships which may not be successful and expose us to future costs. > We rely on a limited number of suppliers of components, pro- duction capacity and R&D and IT services, which exposes us to supply disruptions and cost increases. > Product or service quality issues could lead to reduced reve- nue and gross margins and declining sales to existing and new customers. > Due to having a significant portion of our costs in SEK and rev- enues in other currencies, our business is exposed to foreign exchange fluctuations that could negatively impact our reve- nues and operating results. > 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, infringement claims brought against us by competitors and others and changes in the area of open standards, especially in light of recent attention on licensing of open standard patents. > We are involved in lawsuits and investigations which, if deter- mined against us, could require us to pay substantial damages, fines and/or penalties. > Our operations are complex and several critical operations are centralized in a single location. Any disruption of our opera- tions, whether due to natural or man-made events, may be highly damaging to the operation of our business. > Cyber security incidents affecting our business may have a material adverse effect on our business, financial condition, reputation and brand. Ericsson | Annual Report 2014 > We must continue to attract and retain highly qualified employees to remain competitive. > If our customers’ financial conditions decline, we will be exposed to increased credit and commercial risks. > 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, financial condition and cashflow may materially suffer. > Impairment of goodwill or other intangible assets may nega- tively impact financial condition and results of operations. > Ericsson may fail or be unable to comply with laws or regula- tions and could experience penalties and adverse rulings in enforcement or other proceedings, which could have a material adverse impact on our business, financial condition and brand. > Our substantial international operations are subject to uncer- tainties which could affect our operating results. > We may fail to comply with our corporate governance stan- dards which could negatively affect our business, operating results, financial condition, reputation and our brand. > Failure to comply with environmental, health and safety regula- tions in many jurisdictions may expose us to significant penal- ties and other sanctions. > Potential health risks related to electromagnetic fields may sub- ject us to various product liability claims and result in regulatory changes. > Regulations related to “conflict minerals” may cause us to incur additional expenses, and may make our supply chain more complex. > Our share price has been and may continue to be volatile, especially as technology companies, securities and markets as a whole remain volatile. > Currency fluctuations may adversely affect share value or value of dividends. 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. Financials – Forward-looking statements 131 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT 2014 Corporate governance describes how rights and responsibilities are distributed among corporate bodies according to applicable laws, rules and internal pro- cesses. Corporate governance also defines the decision-making systems and structure through which owners directly or indirectly control a company. Contents Regulation and compliance Governance structure Shareholders General Meetings 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 Auditor Internal control over financial reporting 2014 Auditor’s report on the Corporate Governance Report 133 134 134 135 136 137 140 143 144 148 152 155 156 158 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, Sections 6 and 8) and the Swedish Corporate Governance Code. The report has been reviewed by Ericsson’s auditor in accordance with the Annual Accounts Act. A report from the auditor is appended hereto. Ericsson’s core values “professionalism, respect and perseverance”, together with Ericsson’s continuous corporate governance focus, have an important role in creating and main- taining a robust corporate culture globally where business is con- ducted with integrity. I am confident that such robust corporate culture is a key factor for a global organization to maintain com- petitive and sustainable business operations worldwide. Important tasks of the Board of Directors are to support and develop talent management, to give Group management clear governance frameworks and mandates, and to set the Group strategy. As Chairman of the Board, I know that the Board needs to have considerable insight in the business activities of Ericsson and in the markets in which Ericsson operates, to provide support to management and add value, while also exercising due control of the business operations. Therefore, I strive to enable an open and meaningful dialogue between the Board and the Group management. This Corporate Governance Report 2014 aims to describe how Ericsson continuously works with these matters and how we focus on establishing efficient and reliable controls and proce- dures. I believe that Ericsson’s continuous corporate governance focus and work to create a robust corporate culture build trust, and in turn, generate value for our investors.” Leif Johansson Chairman of the Board of Directors Ericsson’s core values Professionalism Respect Perseverance Our values are the foundation of our culture. They guide us in our daily work, in how we relate to each other and the world around us and in the way we do business. 132 Ericsson | Annual Report 2014 The Code of Business Ethics can be found on Ericsson’s website. Code of Business Ethics Regulation and compliance External rules As a Swedish public limited liability company with securities quoted on Nasdaq Stockholm as well as on NASDAQ New York, Ericsson is subject to a variety of rules that affect its gover- nance. Major external rules include: > The Swedish Companies Act > The Rule Book for issuers of Nasdaq Stockholm > The Swedish Corporate Governance Code (the “Code”) > NASDAQ 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 (the “SEC”) Internal rules In addition, to ensure compliance with legal and regulatory requirements and the high 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 busi- ness processes for approval, control and risk management > A Code of Conduct, to be applied in product development, production, supply and sup- port of Ericsson products and services worldwide. Compliance with regulations Compliance with the Swedish Corporate Governance Code The Code is based on the principle of “comply or explain” and is published on the website of the Swedish Corporate Governance Board, which administrates the Code: www.corporategovernanceboard.se. Ericsson is committed to com plying with best-practice corporate governance on a global level wherever possible. This includes continued compliance with the Code. Ericsson does not report any deviations from the rules of the Code in 2014. The articles of association and the work pro- cedure for the Board of Directors also include internal corporate governance rules. Code of Business Ethics Ericsson’s Code of Business Ethics summarizes fundamental Group policies and directives and contains rules to ensure that business is con- ducted with a strong sense of integrity. This is critical to maintain trust and credibility with Ericsson’s customers, partners, employees, shareholders and other stakeholders. The Code of Business Ethics contains rules for all individuals performing work for Ericsson, under the staff management of Ericsson or in Ericsson premises, whether as an employee of Ericsson or a subcontractor, or as a private con- tractor. The Code of Business Ethics has been translated into 30 languages. This ensures that it is accessible to everyone working for Ericsson. During recruitment, employees acknowledge that they are aware of the principles of the Code of Business Ethics. This procedure is repeated during the term of employment. Through this process, Ericsson strives to raise awareness throughout its global operations. Everyone working for Ericsson has an individ- ual responsibility to ensure that business prac- tices adhere to the Code of Business Ethics. Compliance with applic able 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 in 2014. Corporate Governance – Corporate Governance Report 133 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Governance structure Shareholders Shareholders Ownership percentage (voting rights) Swedish institutions: 54.65% Of which: – Investor AB: – AB Industrivärden: (together with SHB Pensions- stiftelse and Pensionskassan SHB Försäkringsförening) 21.50% 20.05% Foreign institutions: Swedish retail investors: Others: 32.16% 5.44% 7.75% Source: Nasdaq Shareholders may exercise their decision-mak- ing rights in Telefonaktiebolaget LM Ericsson (the “Parent Company”) at General Meetings of shareholders. A Nomination Committee is appointed each year by the major shareholders in accordance with the Instruction for the Nomination Commit- tee adopted by the Annual General Meeting of shareholders. The tasks of the Nomination Committee include the proposal of an external auditor and Board members for election by the Annual General Meeting of shareholders and proposals of Board member and auditor remu- neration. In addition to the Board members elected by shareholders, the Board of Directors consists of employee representatives and their deputies, which the unions have the right to appoint under Swedish law. The Board of Directors is ultimately responsible for the strategy and the organization of Ericsson and the management of its opera- tions. The President and CEO, appointed by the Board of Directors, is responsible for handling the day-to-day management of Ericsson in accordance with guidelines from the Board. The President and CEO is supported by the Execu- tive Leadership Team (ELT). The external auditor of Ericsson is elected by the General Meeting of shareholders. Ownership structure As of December 31, 2014, the Parent Company had 482,025 registered shareholders, of which 470,016 were resident or located in Sweden (according to the share register kept by Euro- clear Sweden AB). Swedish institutions held approximately 54.65% of the votes. The largest shareholders as of December 31, 2014 were Investor AB, with 21.50% of the votes, and AB Industrivärden, with 20.05% of the votes (together with Svenska Handelsbankens Pensionsstiftelse and Pensions kassan SHB Försäkringsförening). A significant number of the shares held by foreign investors are nominee-registered, i.e. held of-record by banks, brokers and/or nomi- nees. 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 con- sists 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, which shares are used to create treasury stock to finance and hedge long-term variable compensation programs resolved by the Gen- eral Meeting of shareholders. Class C shares are converted into Class B shares before they are used for long-term variable compensation programs. In the United States, the Ericsson Class B shares are listed on NASDAQ New York in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR). Each ADS represents one Class B share. The members of the Board of Directors and the Executive Leadership Team have the same voting rights on shares as other shareholders holding the same class of shares. Governance structure 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 134 Ericsson | Annual Report 2014 General Meetings of shareholders Decision-making at General Meetings The decision-making rights of Ericsson’s share- holders 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 treasury stock to employees participating in long-term variable compensation programs. Ericsson’s Annual General Meeting 2014 Including shareholders represented by proxy, 2,930 shareholders were represented at the AGM held on April 11, 2014, making up almost 70% of the votes. The meeting was also attended by members of the Board of Directors, members of the Exec- utive Leadership Team (ELT) and the external auditor. Decisions of the AGM 2014 included: > Payment of a dividend of SEK 3 per share > Re-election of Leif Johansson as Chairman of The Annual General Meeting of shareholders The Annual General Meeting of shareholders (AGM) is held in Stockholm. The date and venue for the meeting are announced on the Ericsson website no later than at the time of release of the third-quarter interim financial report in the preceding year. Shareholders who cannot participate in person may be represented by proxy. Only shareholders registered in the share register have voting rights. Nominee-registered share- holders who wish to vote must request to be entered into the share register by the record date for the AGM. The AGM is held in Swedish and is simultane- ously translated 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. Normally, the majority of the mem- bers of the Board of Directors and the Executive Leadership Team is present to answer such questions. the Board of Directors > Re-election of members of the Board of Directors: Roxanne S. Austin, Sir Peter L. Bonfield, Nora Denzel, Börje Ekholm, Alexander Izosimov, Ulf J. Johansson, Sverker Martin-Löf, Kristin Skogen Lund, Hans Vestberg, Jacob Wallenberg and Pär Östberg > Board of Directors’ fees: – Chairman: SEK 3,975,000 (previously SEK 3,850,000) – Other non-employee Board members: SEK 950,000 each (previously SEK 900,000) – Chairman of the Audit Committee: SEK 350,000 (unchanged) – Other non-employee members of the Audit Committee: SEK 250,000 each (unchanged) – Chairmen of the Finance and Remunera- tion Committees: SEK 200,000 each (unchanged) – Other non-employee members of the Finance and Remuneration Committees: SEK 175,000 each (unchanged) The external auditor is always present at > Approval for part of the Directors’ fees to be the AGM. paid in the form of synthetic shares > Approval of Guidelines for remuneration to Group management > Implementation of a Long-Term Variable Compensation Program 2014. The minutes from the AGM 2014 are available on Ericsson’s website. Annual General Meeting 2015 Ericsson’s AGM 2015 will take place on April 14, 2015 at Stockholm Waterfront Congress Centre in Stockholm. Further information is available on Ericsson’s website. Contact the Board of Directors The Board of Directors Secretariat SE-164 83 Stockholm Sweden boardsecretariat@ericsson.com Corporate Governance – Corporate Governance Report 135 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Nomination Committee The Annual General Meeting of shareholders has adopted an Instruction for the Nomination Committee that includes the tasks of the Nomi- nation Committee and the procedure for appointing its members. The instruction applies until the General Meeting of shareholders resolves otherwise. Under the instruction, the Nomination Committee shall consist of: > Representatives of the four largest share- holders by voting power by the end of the month in which the AGM was held, and > The Chairman of the Board of Directors. The Committee may also 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 The current Nomination Committee members are: > Petra Hedengran (Investor AB), Chairman of the Nomination Committee > Carl-Olof By (AB Industrivärden, Svenska Handelsbankens Pensionsstiftelse) > Johan Held (AFA Försäkring) > Leif Johansson, Chairman of the Board of Directors > Marianne Nilsson (Swedbank Robur Fonder). The tasks of the Nomination Committee The main task of the Committee is to propose Board members for election by the AGM. The Committee must orient itself on the Company’s strategy and future challenges to be able to assess the competence and experience that is required by the Board. In addition, the Commit- tee must consider independence rules applica- ble to the Board of Directors and its committees. The Nomination Committee also makes the following proposals, for resolution by the AGM: > Proposal for remuneration to non-employee Directors elected by the AGM and remunera- tion to the auditor > Proposal for election of auditor, whereby candidates are selected in cooperation with the Audit Committee of the Board > Proposal for election of Chairman at the AGM. Work of the Nomination Committee for the AGM 2015 The Nomination Committee started its work by going through a checklist of its duties under the Code and the Instruction for the Nomination Committee and by setting a time plan for its work ahead. A good understanding of Ericsson’s business and strategy is important for the mem- bers of the Nomination Committee. Therefore, the Committee met with Ericsson’s President and CEO who, together with the Chairman of the Board, presented their views on the Company’s position and strategy. The Committee was thoroughly informed of the results of the evaluation of the Board work and procedures, including the performance of the Chairman of the Board. On this basis, the Committee has assessed the competence and experience required by Ericsson Board members as well as the need for improvement of the composition of the Board in terms of diversity in age, gender and cultural/geographic background. The Nomination Committee has met with members of the Board of Directors to get their views on the Board work. The Nomination Committee searches for potential Board member candidates both with a long-term and a short-term perspective. This year, the Committee has made particular efforts to identify potential female candidates that would bring relevant expertise and competence to the Board, while also improving the gender balance. The Nomination Committee consid- ered the need for renewal and diversity and carefully assessed whether the proposed Direc- tors have the capability to devote necessary time and care to the Board work. The Committee met with the Chairman of the Audit Committee to acquaint itself with the assessments made by the Company and the Audit Committee of the quality and efficiency of external auditor work. The Audit Committee also provided its recommendations on external audi- tor and audit fees. As of February 20, 2015 the current Nomina- tion Committee has held eight meetings. 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 Proposals to the Nomination Committee Shareholders may submit propos- als to the Nomination Committee at any time, but should do so in due time before the AGM to ensure that the proposals can be consid- ered by the Committee. Further information is available on Erics- son’s website. 136 Ericsson | Annual Report 2014 Board of Directors The Board of Directors is ultimately responsible for the organization of Ericsson and the manage- ment of Ericsson’s operations. The Board appoints the President and CEO who is respon- sible for managing the day-to-day operations in accordance with guidelines from the Board. The President and CEO ensures that the Board is updated regularly on issues of importance to Ericsson. This includes updates on business development, results, financial position and liquidity. 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 a Director of the Board, but, under the Swedish Companies Act, the President of a public com- pany may not be elected Chairman of the Board. Conflicts of interest Ericsson maintains rules and regulations regard- ing 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 that may be contrary to the interests of Ericsson. The Audit Committee has implemented a procedure for 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 current Board of Directors consists of 12 Directors elected by the shareholders at the AGM 2014 for the period until the close of the AGM 2015. It also consists of 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 2014. Work procedure Pursuant to the Swedish Companies Act, the Board of Directors has adopted a work proce- dure and Committee charters outlining rules for the distribution of tasks among the Board, its Committees and the President and CEO. This complements rules in the Swedish Companies Act and in the Articles of Association of the Company. The work procedure and the Com- mittee charters are 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 rules under applicable Swedish law, the Code and applica- ble US securities laws, SEC rules and the NAS- DAQ Stock Market Rules. Ericsson can rely on exemptions from certain US requirements. The composition of the Board of Directors meets all applicable independence criteria. The Nomination Committee concluded before the AGM 2014 that, for purposes of the Code, at least seven of the nominated Directors were inde pendent of Ericsson, its senior management and its major shareholders. These were Roxanne S. Austin, Sir Peter L. Bonfield, Nora Denzel, Alexander Izosimov, Leif Johansson, Ulf J. Johansson and Kristin Skogen Lund. Structure of the work of the Board of Directors 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. In addition to Board meetings, the annual work cycle of the Board includes two Board Strategic Days held in connection with Board meetings. The Board Strategic Days are described below under Training and Board Strategic Days. As the Board is responsible for financial oversight, financial information is presented and evaluated at each Board meeting. Furthermore, the Chairmen of each Committee, generally report on Committee work at each Board meet- ing and minutes from Committee meetings are distributed to all Directors prior to the Board meetings. At every Board meeting, the President and CEO reports on business and market develop- ments as well as on the financial performance of the Group. Strategic issues and risks are also addressed at most Board meetings. The Board is regularly informed of developments in legal and regulatory matters of importance. Corporate Governance – Corporate Governance Report 137 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report The 2014 annual work cycle of the Board: > Fourth-quarter and full-year financial results meeting Following the end of the calendar year, the Board held a meeting which focused on the financial results of the entire year 2013 and handled the fourth-quarter financial report. > Board Strategic Day A Board Strategic Day, focusing on deepen- ing Board member knowledge of matters of strategic importance for Ericsson, was held in connection with a Board meeting in the spring. > Annual Report meeting At this meeting the Board approved the Annual Report 2013. > Statutory Board meeting The statutory Board meeting was held in con- nection with the AGM 2014. At this meeting, members of each of the three Board Commit- tees were appointed and the Board resolved on signatory power. > First interim report meeting At the next ordinary meeting, the Board handled the interim financial report for the first quarter of the year. > Main strategy meeting Various strategic issues are addressed at most Board meetings and, in accordance with the annual cycle for the strategy process, a main strategy Board meeting was held, 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 was cascaded throughout the entire organization, starting at the Global Leadership Summit with Ericsson’s top 250 leaders. > Second interim report meeting At the second interim report meeting, the Board handled the interim financial report for the second quarter of the year. > Follow-up strategy and risk management meeting Following the summer, a meeting was held to address particular strategy matters in further detail and to finally confirm the Group strat- egy. The meeting also addressed the overall risk management of the Group. > Board Strategic Day A Board Strategic Day, focusing on deepen- ing Board member knowledge of matters of strategic importance for Ericsson, was held in connection with a Board meeting in the fall. > Third interim report meeting A Board meeting was held to handle the interim financial report for the third quarter of the year. At this meeting, the results of the Board evaluation were presented to and discussed by the Board. > Budget and financial outlook meeting A meeting was held for the Board to address the budget and financial outlook as well as to further analyze internal and external risks. The Board’s annual work cycle 2014 The annual cycle applied to the Board’s work allows the Board to appropriately address its duties during the year. It also facilitates the organization in aligning its global processes to allow appropriate Board involve- ment. This is particularly relevant for the Group’s strategy process and risk management. Budget and financial outlook meeting Third interim report meeting > Q3 Financial report > Board work evaluation Board Strategic Day Follow-up strategy and risk management meeting Second interim report meeting > Q2 Financial report 138 Fourth-quarter and full-year financial results meeting > Financial result of the entire year Q4 Dec Jan Q1 Nov Feb Board Strategic Day Oct Sep Mar Apr Aug May Q3 Jul Jun Q2 Annual Report meeting Statutory Board meeting (in connection with AGM) > Appointment of Committee Members > Authorization to sign for the Company First interim report meeting > Q1 Financial report Main strategy meeting Ericsson | Annual Report 2014 Training and Board Strategic Days 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 func- tions, as well as training arranged by Nasdaq Stockholm on listing issues and insider rules. In addition, the company arranges training for Board members at regular intervals. Since 2013, bi-annual Board Strategic Days are arranged for Board members in conjunction with ordinary Board meetings, and these Board Strategic Days normally span one full day each. The Board Strategic Days focus on combining strategy issues with making deep dives into issues of importance for the Ericsson Group. The purpose of the Board Strategic Days is to ensure that members of the Board have know- ledge and understanding of the business activi- ties of the Group, the business environment and the Group’s strategic options and challenges. Directors’ knowledge in these fields is crucial to allow well-founded Board resolutions, and to ensure that the Company takes due advantage of the different competences of the Directors. The Board Strategic Days also form an import- ant platform for contacts between Directors and talent from different parts of Ericsson’s organiza- tion where the Board gets the opportunity to meet Ericsson employees and leaders. Such contacts and meetings are highly valued by the Board as part of the Board’s involvement in Ericsson’s talent management. As a rule, the Board Strategic Days also include sustainability and corporate responsib- ility training for the Board members. Auditor involvement The Board meets with Ericsson’s external audi- tor in closed sessions at least once a year to receive and consider the auditor’s observations. The auditor reports to management on the accounting and financial reporting practices of the Group. The Audit Committee also meets regularly with the auditor to receive and consider obser- vations on the interim reports and the Annual Report. The auditor has been instructed to report on whether the accounts, the manage- ment of funds and the general financial position of the Group are presented fairly in all material respects. In addition, the Board reviews and assesses the process for financial reporting, as described later in “Internal control over financial reporting 2014”. Combined with other steps taken inter- nally, the Board’s and the auditor’s review of the interim and annual reports are deemed to give reasonable assurance of the effectiveness of the internal controls over financial reporting. Work of the Board of Directors in 2014 In 2014, nine Board meetings were held. For attendance at Board meetings, see the table on page 143. Strategy and risk management are always high on the Board’s agenda and, during 2014, these matters got even more focus through the bi-annual Board Strategic Days instituted in 2013. The Board Chairman has also had several meetings with different Ericsson talents to fur- ther develop Ericsson’s talent management and learn from the organization. Organization of the Board work Board of Directors 15 Directors Audit Committee (4 Directors) Finance Committee (4 Directors) Oversight of financial reporting Oversight of internal control Financing Investing Oversight of auditing Customer credits Remuneration Committee (4 Directors) Guidelines for remuneration to Group management Long-Term Variable Remuner ation Executive remuneration Corporate Governance – Corporate Governance Report 139 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Sustainability and corporate responsibility are increasingly important to Ericsson and the Com- pany continuously strives to improve in these areas. Sustainability and corporate responsibility are integrated into Ericsson’s business strategy. Due to the political unrest in various parts of the world, the Board has continuously monitored the international developments and their possi- ble impact on Ericsson. During 2014, profitability, cost reductions and efficiency gains have been a focus within Ericsson. Further, the evaluatio1n of the future of Ericsson’s modems business was completed and it was resolved to discontinue the develop- ment of modems. The Board also addressed a number of acquisitions, including the acquisi- tions of Azuki Systems Inc., Fabrix Systems and Metra-Tech Corporation and the acquisition of the business of Ambient Corporation and a majority stake in Apcera, Inc. Board work evaluation A key objective of the Board evaluation is to ensure that the Board work is functioning well. This includes gaining an understanding of the issues that the Board thinks warrant greater focus, as well as determining areas where addi- tional competence is needed within the Board and whether the Board composition is appropri- ate. 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 the Board and Com- mittee work and procedures. Evaluation tools include detailed questionnaires and discussions. The services of an external corporate advisory firm have been retained by the Company to assist in developing questionnaires, carrying out surveys and summarizing responses. In 2014, all Directors responded to written questionnaires, covering the Director’s individual performance, Board work in general, Committee work 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. As part of the eval- uation process, the Chairman of the Board also had individual discussions with each of the Directors. The evaluations were thoroughly dis- cussed 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 from amongst the Board members. The task of the Committees is mainly to pre- pare matters for resolution by the Board. How- ever, the Board has authorized each Committee to determine and handle certain issues in limited areas. It may also on occasion provide extended authorization for the Committees to determine specific matters. If deemed appropriate, the Board of Directors and each Committee have the right to engage independent external expertise, either in general or with respect to specific matters. Prior to the Board meetings, each Committee submits the minutes from Committee meetings to the Board. The Chairman of the Committee also reports on the Committee work at each Board meeting. Audit Committee On behalf of the Board, the Audit Committee monitors the following: > The scope and accuracy of the financial statements > Compliance with legal and regulatory require- ments > Internal control over financial reporting > Risk management > The effectiveness and appropriateness of the Group’s anti-corruption program. Members of the Committees Members of the Committees of the Board of Directors 2014 Audit Committee Finance Committee Remuneration Committee Ulf J. Johansson (Chairman) Leif Johansson (Chairman) Leif Johansson (Chairman) Sir Peter L. Bonfield Kristina Davidsson Pär Östberg Pehr Claesson Sverker Martin-Löf Jacob Wallenberg Börje Ekholm Roxanne S. Austin Karin Åberg 140 Ericsson | Annual Report 2014 The Audit Committee also reviews the annual and interim financial reports and oversees the external audit process, including audit fees. The Audit Committee itself does not perform audit work. Ericsson has an internal audit func- tion which reports directly to the Audit Commit- tee. Ericsson also has an external auditor elected by the AGM. The Committee is involved in the preparatory work of proposing an auditor for election by the AGM. It also monitors Group transactions and the ongoing performance and independence of the auditor with the aim to avoid conflicts of interest. In order to ensure the auditor’s independence, the Audit Committee has established pre-appro- val policies and procedures for non-audit related services to be performed by the external auditor. Pre-approval authority may not be delegated to management. The Audit Committee also oversees Ericsson’s process for reviewing transactions with related parties and Ericsson’s whistleblower procedures. Whistleblower procedure Ericsson’s whistleblower procedure can be used for reporting of alleged violations of laws or the Code of Business Ethics that: > are conducted by Group or local manage- ment, and > relate to corruption, questionable accounting or auditing matters or otherwise seriously affect vital interests of the Group or personal health and safety. Violations reported through the whistleblower procedures are handled by Ericsson’s Group Compliance Forum, consisting of representa- tives from Ericsson’s internal audit function, Group Function Legal Affairs, Group Security, and Group Function Human Resources. Infor- mation 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 four Board members appointed by the Board. The Audit Committee members appointed by the Board in connection with the AGM 2014 are: Ulf J. Johansson (Chairman of the Committee), Sir Peter L. Bonfield, Kristina Davidsson and Pär Östberg. applicable US securities laws, SEC rules and NASDAQ Stock Market Rules and each of them is financially literate and familiar with the accounting practices of an international com- pany, such as Ericsson. Work of the Audit Committee in 2014 The Audit Committee held six meetings in 2014. Directors’ attendance is reflected in the table on page 143. During the year, the Audit Committee reviewed the scope and results of external finan- cial 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 proce- dures. The Committee approved the annual audit plan for the internal audit function and reviewed its reports. Prior to publishing it, the Committee also reviewed and discussed each interim report and the annual 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. The Committee reviewed and evaluated the effectiveness and appropriateness of the Group’s anti-corruption program. 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 loans, issuing guarantees and similar undertakings, and approving financial sup- port 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 guarantees and similar undertakings > Certain investments, divestments and financial commitments. The composition of the Audit Committee meets all applicable independence require- ments. The Board of Directors has determined that each of Ulf J. Johansson, Sir Peter L. Bonfield and Pär Östberg is an audit committee financial expert, as defined under the SEC rules. Each of them is considered independent under Members of the Finance Committee The Finance Committee consists of four Board members appointed by the Board. The Finance Committee members appointed by the Board in connection with the AGM 2014 are: Leif Johans- son (Chairman of the Committee), Pehr Claes- son, Sverker Martin-Löf and Jacob Wallenberg. Corporate Governance – Corporate Governance Report 141 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Work of the Finance Committee in 2014 The Finance Committee held six meetings in 2014. Directors’ attendance is reflected in the table on page 143. During the year, the Finance Committee approved numerous customer finance credit arrangements and reviewed a number of potential mergers and acquisitions and real estate investments. The Finance Com- mittee spent significant time discussing and securing an adequate capital structure, as well as examining cash flow and working capital performance. It also continuously monitored Ericsson’s financial position, foreign exchange and credit exposures. Remuneration Committee The Remuneration Committee’s main responsi- bilities include: > Reviewing and preparing for resolution by the Board, proposals on salary and other remu- neration, including retirement compensation, for the President and CEO. > Reviewing and preparing for resolution by the Board, proposals to the AGM on guidelines for remuneration to the ELT. > Approving proposals on salary and other remuneration, including retirement compen- sation, for the Executive Vice Presidents and other CEO direct reports. > Reviewing and preparing for resolution by the Board, proposals to the AGM on the Long- Term Variable Compensation Program and similar equity arrangements. In its work, the Remuneration Committee con- siders trends in remuneration, legislative changes, disclosure rules and the general global executive remuneration environment. The Com- mittee reviews salary survey data before approv- ing any salary adjustment for CEO direct reports and before preparing 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 appointed by the Board. The Remuneration Committee members appointed by the Board in connection with the AGM 2014 are: Leif Johansson (Chairman of the Commit- tee), Börje Ekholm, Roxanne S. Austin and Karin Åberg. An independent expert advisor, Piia Pilv, has been appointed by the Remuneration Commit- tee to advise and assist the Committee. Work of the Remuneration Committee in 2014 The Remuneration Committee held six meetings in 2014. Directors’ attendance is reflected in the table on page 143. The Committee reviewed and prepared a proposal for the LTV 2014 for resolution by the Board and further approval by the AGM 2014. The Committee further resolved on salaries and Short-Term Variable remuneration (STV) for 2014 for certain CEO direct reports and prepared pro- posals regarding remuneration to the President and CEO, for resolution by the Board. The Com- mittee also prepared guidelines for remuneration to the ELT, for resolution by the Board, which were subsequently referred by the Board to the AGM for approval. The Remuneration Committee additionally concluded its analysis of the current LTV struc- ture and executive remuneration. The resulting proposals on LTV and guidelines for remunera- tion to the ELT will be referred to the AGM 2015 for resolution. For further information on fixed and variable remuneration, please see Notes to the consoli- dated financial statements – Note C28 “Informa- tion regarding members of the Board of Direc- tors, the Group management and employees” and the “Remuneration Report” included in the Annual Report. 142 Ericsson | Annual Report 2014 Directors’ attendance and fees 2014 Board member Leif Johansson Sverker Martin-Löf Jacob Wallenberg Roxanne S. Austin Sir Peter L. Bonfield Nora Denzel Börje Ekholm Alexander Izosimov Ulf J. Johansson Kristin Skogen Lund Hans Vestberg Pär Östberg Pehr Claesson Kristina Davidsson Karin Åberg Rickard Fredriksson Karin Lennartsson Roger Svensson Total number of meetings Fees resolved by the AGM 2014 Number of Board/Committee meetings attended in 2014 Board fees, SEK 1) Committee fees, SEK Board Audit Committee Finance Committee Remuneration Committee 3,975,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 950,000 – 950,000 13,500 2) 13,500 2) 13,500 2) 13,500 2) 12,000 2) 10,500 2) 400,000 175,000 175,000 175,000 250,000 – 175,000 – 350,000 – – 250,000 – – – – – – 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 8 7 9 6 6 6 6 6 6 5 6 6 6 6 5 6 6 6 1) Non-employee Directors can choose to receive part of their Board fee (exclusive of Committee fees) in the form of synthetic shares. 2) Employee representative Board members and their deputies are not entitled to a Board fee but compensation in the amount of SEK 1,500 per attended Board meeting. 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 2014 approved the Nomination Committee’s pro- posal for fees to the non-employee Board members for Board and Committee work. For further information on Board of Directors’ fees 2014, 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 2014 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 that 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’ interests with shareholder interests. For more information on the terms and conditions of the synthetic shares, please refer to the notice con- vening the AGM 2014 and to the minutes from the AGM 2014, which are available at Ericsson’s website. Corporate Governance – Corporate Governance Report 143 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE Members of the Board of Directors Board members elected by the AGM 2014 Leif Johansson (first elected 2011) Chairman of the Board of Directors, Chairman of the Remuneration Committee and of the Finance Committee Sverker Martin-Löf (first elected 1993) Jacob Wallenberg (first elected 2011) Deputy Chairman of the Board of Directors, Member of the Finance Committee Deputy Chairman of the Board of Directors, Member of the Finance Committee Roxanne S. Austin (first elected 2008) Member of the Remuneration Committee Born 1951. Master of Science in Engineering, Chalmers University of Technology, Gothenburg, Sweden. Born 1943. Doctor of Technology and Master of Engineering, KTH Royal Institute of Technology, Stockholm, Sweden. Board Chairman: Svenska Cellulosa Aktiebolaget SCA, SSAB and AB Industrivärden. Deputy Board Chairman: Svenska Handelsbanken AB. Board Member: Skanska AB. Holdings in Ericsson: 10,400 Class B shares 1) 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. Board Chairman: Astra Zeneca PLC. Board Member: Svenska Cellulosa Aktiebolaget SCA and Ecolean AB. Holdings in Ericsson: 41,933 Class B shares 1), and 12,000 Class B shares held via endowment insurance 2). Principal work experience and other information: Member of the European Round Table of Indust- rialists since 2002, and served as Chairman 2009–2014. President of the Royal Swedish Academy of Engineering Sciences since 2012. Chairman of the International Advisory Board of the Nobel Foun- dation. 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. Holds honorary Doctorates at Blekinge Institute of Technology, the University of Gothenburg and Chalmers University of Technology. Awarded the Large Gold Medal of the Royal Swedish Academy of Engineering Sciences in 2011. Born 1956. Bachelor of Science in Economics and Master of Business Administration, Wharton School, University of Pennsylvania, USA. Officer of the Reserve, Swedish Navy. Board Chairman: Investor AB. Deputy Board Chairman: SAS AB. Board Member: ABB Ltd, The Knut and Alice Wallenberg Foundation and the Stockholm School of Economics. Holdings in Ericsson: 2,703 Class B shares 1), and 15,026 synthetic shares 3). Principal work experience and other information: Chairman of the Board of Investor AB since 2005. President and CEO of SEB in 1997 and Chairman of SEB’s Board of Directors 1998–2005. Executive Vice President and CFO of Investor AB 1990–1993. Honorary Chairman of IBLAC (Mayor of Shanghai’s International Business Leaders Advisory Council) and member of The European Round Table of Industrialists. Born 1961. Bachelor of Business Administration in Accounting, University of Texas, San Antonio, USA. Board Member: Abbott Laboratories, AbbVie Inc., Target Corporation and Teledyne Technologies Inc. Holdings in Ericsson: 3,000 Class B shares 1), and 26,123 synthetic shares 3). Principal work experience and other information: President of Austin Investment Advisors since 2004. President and CEO of Move Networks Inc. 2009–2010. President and COO 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 California State Society of Certified Public Accountants and the American Institute of Certified Public Accountants. The Board memberships and holdings in Ericsson reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 2) Shares held via endowment insurance include shares held under an insurance under which the insurance holder may make investment decisions with respect to the shares (Sw: “kapitalförsäkring” or “depåförsäkring”) and include holdings by related natural and legal persons, as well as holdings of ADS, if applicable. 3) Since 2008, the AGM has each year resolved that part of the Board fee may be received in the form of synthetic shares. A synthetic share is a right to receive in the future a payment corresponding to the value of the Class B share in Ericsson at the time of payment. Please see page 143 for further information. 144 Ericsson | Annual Report 2014 Sir Peter L. Bonfield (first elected 2002) Member of the Audit Committee Nora Denzel (first elected 2013) Börje Ekholm (first elected 2006) Member of the Remuneration Committee Alexander Izosimov (first elected 2012) Born 1944. Honors degree in Engineering, Loughborough University, Leicestershire, UK. Board Chairman: NXP Semiconductors N.V. Board Member: GlobalLogic Inc., Mentor Graphics Inc. and Taiwan Semiconductor Manufacturing Company, Ltd. Holdings in Ericsson: 4,400 Class B shares 1), and 7,944 synthetic shares 3). 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 Board of the Longreach Group. Board Mentor of CMi. Senior Advisor, Rothschild, London. Chair of Council and Senior Pro- Chancellor, Loughborough University, UK. Fellow of the Royal Academy of Engineering. Born 1962. Master of Science in Business Administration, Santa Clara University, USA. Bachelor of Science in Computer Science, State University of New York, USA. Board Member: Advanced Micro Devices, Inc., Outerwall, Inc. and Saba Software. Holdings in Ericsson: 3,850 Class B shares1) , and 2,976 synthetic shares3). Principal work experience and other information: Intuit Software (2008– 2012) – Senior Vice President Big Data, Marketing and Social Product Design and General Manager QuickBooks Payroll Division. Previous positions include Senior Vice President and General Manager of HP’s Global Software, Storage and Consulting Divisions (2000–2006), Senior Vice President Product Operations Legato Systems (bought by EMC) and various engineering, marketing and executive positions at IBM. Non-Profit board member of YWCA of Silicon Valley, Ushahidi and the Anita Borg Institute. Born 1963. Master of Science in Electrical Engineering, KTH Royal Institute of Technology, Stockholm, Sweden. Master of Business Administration, INSEAD, France. Board Chairman: KTH Royal Institute of Technology, Stockholm and NASDAQ OMX Group Inc. Board Member: Investor AB, AB Chalmersinvest and EQT Partners AB. Holdings in Ericsson: 30,760 Class B shares 1), and 41,178 synthetic shares 3). 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. Member of the Board of Trustees of Choate Rosemary Hall. Born 1964. Master of Business Administration, INSEAD, France and Master of Science in Production Management Systems and Computer Science, Moscow Aviation Institute, Russian Federation. Board Member: Modern Times Group MTG AB, EVRAZ Group S.A., Dynasty Foundation and Transcom WorldWide SA. Holdings in Ericsson: 1,600 Class B shares 1), 50,000 Class B shares held via endowment insurance 2), and 9,272 synthetic shares 3). Principal work experience and other information: CEO and President of VimpelCom 2003– 2011. Previous positions with Mars Inc., including Member of the Global Executive Board and Regional President for CIS, Central Europe and Nordics. Earlier positions with McKinsey & Co as consultant in the Stockholm and London offices. Served as GSMA Board member 2005–2008 and Chairman of GSMA 2008–2010. The Board memberships and holdings in Ericsson reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 2) Shares held via endowment insurance include shares held under an insurance under which the insurance holder may make investment decisions with respect to the shares (Sw: “kapitalförsäkring” or “depåförsäkring”) and include holdings by related natural and legal persons, as well as holdings of ADS, if applicable. 3) Since 2008, the AGM has each year resolved that part of the Board fee may be received in the form of synthetic shares. A synthetic share is a right to receive in the future a payment corresponding to the value of the Class B share in Ericsson at the time of payment. Please see page 143 for further information. Corporate Governance – Corporate Governance Report 145 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Board members elected by the AGM 2014, cont. Ulf J. Johansson (first elected 2005) Kristin Skogen Lund (first elected 2013) Hans Vestberg (first elected 2010) Pär Östberg (first elected 2013) Chairman of the Audit Committee Member of the Audit Committee Born 1945. Doctor of Technology and Master of Science in Electrical Engineering, KTH Royal Institute of Technology, Stockholm, Sweden. Board Chairman: Acando AB, Eurostep Group AB and Trimble Navigation Ltd. Board Member: European Institute of Innovation and Technology. Holdings in Ericsson: 6,435 Class B shares 1), and 6,571 synthetic shares 2). 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. Born 1966. Master of Business Administration, INSEAD, France. Bachelor in International Studies and Business Administration, University of Oregon, USA. Board Member: None. Holdings in Ericsson: 5,780 synthetic shares 2). Principal work experience and other information: Director General of the Confederation of Norwegian Enterprise (NHO) since 2012. Executive Vice President and Head of Digital Services and Broadcast and Executive Vice President and Head of Nordic Region, Group Executive Manage- ment at Telenor 2010–2012. Previous positions include Chief Executive Officer and Commercial Director at Aftenposten, Chief Executive Officer at Scanpix, Managing Director and Editor in Chief at Scandinavia Online, and several positions at the Coca-Cola Company, Unilever and Norges Eksport råd. Born 1965. Bachelor of Business Administration and Economics, University of Uppsala, Sweden. Board Chairman: Svenska Handbollförbundet. Board Member: Thernlunds AB. Holdings in Ericsson: 333,329 Class B shares 1). Principal work experience and other information: President and CEO of Telefonaktiebolaget LM Ericsson since January 1, 2010. Previously, First Executive Vice President, CFO and Head of Group Function Finance and 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. Founding member of the Broadband Commission for Digital Development, and heading the Commission’s task group on the post 2015 development agenda. Member of the Leadership Council of the United Nations Sustainable Development Solutions Network. Born 1962. Master of Business Administration, Gothenburg School of Economics, Gothenburg, Sweden. Board Member: Skanska AB and SSAB. Holdings in Ericsson: 4,000 Class B shares held via endowment insurance 3). Principal work experience and other information: Executive Vice President of AB Industrivärden since 2012. Executive Vice President at Volvo Group Truck Joint Ventures between January 2012 and October 2012. Several senior managerial positions within the Volvo group including Senior Vice President and President Trucks Asia at AB Volvo, Chairman of the Board of VE Commercial Vehicles Ltd, Senior Vice President and CFO at AB Volvo, CFO at Volvo Trucks France and senior positions at Volvo Treasury Asia Ltd, Singapore and Volvo Treasury Europe AB. Previous positions also include Senior Vice President, CFO at Renault Trucks and positions within Renault Crédit International (RCI) and Renault SA. The Board memberships and holdings in Ericsson reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 2) Since 2008, the AGM has each year resolved that part of the Board fee may be received in the form of synthetic shares. A synthetic share is a right to receive in the future a payment corresponding to the value of the Class B share in Ericsson at the time of payment. Please see page 143 for further information. 3) Shares held via endowment insurance include shares held under an insurance under which the insurance holder may make investment decisions with respect to the shares (Sw: “kapitalförsäkring” or “depåförsäkring”) and include holdings by related natural and legal persons, as well as holdings of ADS, if applicable. 146 Ericsson | Annual Report 2014 Board members and deputies appointed by the unions Pehr Claesson (first appointed 2008) Kristina Davidsson (first appointed 2006) 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 1966. Appointed by the union The Swedish Association of Graduate Engineers. Holdings in Ericsson: 1,661 Class B shares 1). Employed since 1997. Working with marketing and communication for Consulting and Systems Integration within Business Unit Global Services. Born 1955. Appointed by the union IF Metall. Born 1959. Appointed by the union Unionen. Holdings in Ericsson: 2,088 Class B shares 1). Holdings in Ericsson: 3,577 Class B shares 1). Employed since 1995. Previously working as a repairer within Business Unit Networks and currently working full time as union representative. Employed since 1998. Working as a Service Engineer within the IT organization. Rickard Fredriksson (first appointed 2012) Karin Lennartsson (first appointed 2010) Roger Svensson (first appointed 2011) Deputy employee representative Deputy employee representative Deputy employee representative Born 1969. Appointed by the union IF Metall. Born 1957. Appointed by the union Unionen. Holdings in Ericsson: 1,688 Class B shares 1). Holdings in Ericsson: 667 Class B shares 1). Employed since 2000. Previously working as machine operator within Business Unit Networks and currently working full time as union representative. Employed since 1976. Working as Process Expert within Group Function Business Excellence & Common Functions. Born 1971. Appointed by the union The Swedish Association of Graduate Engineers. Holdings in Ericsson: 11,738 Class B shares 1). Employed since 1999. Working as Senior Specialist within Business Unit Networks. Hans Vestberg was the only Director who held an operational management position at Ericsson in 2014. No Director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person. 1) The number of shares reflects ownership as of December 31, 2014 and includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Corporate Governance – Corporate Governance Report 147 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report 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 (the “ELT”). The ELT members as of December 31, 2014, are presented on page 152. The role of the ELT is to: > Establish a strong corporate culture, a long- term vision and Group strategies and poli- cies, all based on objectives stated by the Board. > Determine targets for operational units, allo- cate resources and monitor unit performance. > Secure operational excellence and realize global synergies through efficient organiza- tion of the Group. Remuneration to the Executive Leadership Team Guidelines for remuneration to the ELT were approved by the AGM 2014. For further inform- ation 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. The Ericsson Group Management System Ericsson has one global management system, Ericsson Group Management System known as the Ericsson Group Management System (EGMS) to drive corporate culture and to ensure that the business is managed: > 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 responsibilities. The EGMS is a framework consisting of rules and requirements for Ericsson’s business, spec- ified through process and organization descrip- tions, policies, directives and instructions. The management system is applied in all Ericsson’s operations globally, and its consistency and global reach is designed to build trust in the way Ericsson works. The EGMS is founded on ISO 9001 (international standard for quality manage- ment systems) but is designed as a dynamic governance system, enabling Ericsson to adapt the system to evolving demands and expecta- tions, including new legislation as well as cus- tomers’ and other stakeholders’ requirements. Ericsson does not implement external require- ments without analyzing them and putting them into the Ericsson context. The EGMS comprises three elements: > Management and control > Ericsson business processes > Organization and resources. Demands and Expectations Customers Key Stakeholders Business Environment Management and Control Vision Policies Directives Satisfaction through Value Deliverables Objectives Strategies Results The Ericsson Business Processes Performance improvement Performance evaluation Organization and Resources Corporate Culture 148 Ericsson | Annual Report 2014 Management and control Ericsson’s strategy and target-setting processes consider the demands and expectations of customers as well as other key stakeholders. Ericsson uses balanced scorecards as tools for translating strategic objectives into a set of performance indicators for its operational units. Based on annual strategy work, these score- cards are updated with targets for each unit for the next year and are communicated throughout the organization. Group-wide policies and directives govern how the organization works and are core ele- ments in managing and controlling Ericsson. The Group Policies and Directives include, among other things, a Code of Business Ethics, a Code of Conduct and accounting and reporting direc- tives to fulfill external reporting requirements. Ericsson has a Group Steering Documents Committee for purposes of aligning policies and directives with Group strategies, values and structures. Ericsson business processes As a market leader, Ericsson utilizes the compet- itive advantages that are gained through global scale and has implemented common processes and IT tools across all operational units world- wide. Customer requirements are identified, clarified and formalized in Ericsson Business Processes where requirements transform from theory to practice. Ericsson attempts to reduce costs with efficient and effective process flows and with standardized internal controls and performance indicators. Organization and resources 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. In the operational structure, Ericsson is organized in group functions, business units and regions. The legal structure is the basis for legal requirements and responsibility as well as for tax and statutory reporting purposes. There are more than 200 legal entities within the Ericsson Group with eighty branch offices with representation (via legal entities, branch and rep- resentative offices) in more than 150 countries. Chief Compliance Officer Ericsson has a Chief Compliance Officer (CCO), reporting to the General Counsel whose respon- sibilities among other things include to further develop Ericsson’s anti-corruption compliance program. Attention from senior-management level on anti-corruption and compliance is crucial, as is ensuring that these matters are addressed from a cross-functional perspective. Ericsson’s anti-corruption compliance program is reviewed and evaluated by the Audit Commit- tee at least annually. Audits, assessments and certification The purpose of audits and assessments is to determine levels of compliance and to provide valuable information for understanding, analyz- ing and continually improving performance. Management monitors compliance with policies, directives and processes through internal self-assessment within all units. This is com- plemented by internal and external audits. Due to demands and requirements from customers and other external stakeholders, Ericsson sometimes needs to take decisions on certification in order to stay competitive in the market. Certification means that Ericsson’s interpretation of standards or requirements are confirmed by a third party assessment. As the EGMS is a global system, group-wide certificates are issued by a third party certifica- tion body proving that the system is efficient throughout the whole organization. Ericsson is currently globally certified to ISO 9001 (Quality), ISO 14001 (Environment) and OHSAS 18001 (Health & Safety). Selected Ericsson units are also certified to additional standards, for exam- ple ISO 27001 (Information Security) and TL 9000 (telecom-specific standard). EGMS is also audited within the scope of the audit plan of Ericsson’s internal audit function. Ericsson’s external financial audits are per- formed by PricewaterhouseCoopers, and ISO/ management system audits by Intertek. Internal audits are performed by the company’s internal audit function which reports to the Audit Com- mittee. Ericsson conducts audits of suppliers in order to secure compliance with Ericsson’s Code of Conduct, which includes rules that suppliers to the Ericsson Group must comply with. Risk management Ericsson’s risk management is integrated into the operational processes of the business, 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 Com- pany’s risk management. Risks related to 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. acquisi- tions, management remuneration, borrowing or customer finance in excess of pre-defined limits. Corporate Governance – Corporate Governance Report 149 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Operational, financial and compliance risks Operational and financial risk Operational risks are owned and managed by operational units. Risk management is embed- ded in various process controls, such as deci- sion 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 instru- ments. For further information on financial risk management, see Notes to the consolidated financial statements – Note C14, “Trade receiv- ables and customer finance,” Note C19, “Inter- est-bearing liabilities” and Note C20, “Financial risk management and financial instruments” in the Annual Report. Compliance risks Ericsson has implemented Group policies and directives in order to comply 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 comply with financial reporting standards and stock market regulations. Risk mitigation Examples of significant activities to mitigate risks are: > Conducting regular supplier Code of Conduct audits. > Continuously assessing and managing risks relating to Corporate Responsibility. > Conducting business continuity management in an efficient way. > Continuously monitoring information systems to guard against data breaches. > Reviewing top risks and mitigating actions at various internal governance meetings. 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 pro- cess, objectives are set for the next three to five years. Risks are assessed and strategies are developed to achieve the objectives. The strat- egy process in the Company is well established and involves regions, business units and Group functions. The strategy is summarized and dis- cussed in a yearly Leadership Summit with approximately 250 leaders from all parts of the business. By involving all parts of the business in the process, potential risks are identified early Strategy process The annual strategy and target- setting process, including risk management, involves regions, business units and Group functions. Business strategy directives Quantitative and qualitative situation analysis Group management strategic direction, strategic risk identification and mitigation Board target approval Review of one-year risks Target Setting Related risk identification and mitigation (12-month horizon) Region strategy development Q4 Dec Jan Q1 Nov Feb Group strategy development (five-year perspective) Oct Sep Ericsson Strategy process Mar Apr Aug May Q3 Jul Jun Q2 Region strategy directives Function strategy directives Functional strategy development Strategic risk identification and mitigation Board quarterly risk monitoring Review of long-term risks Leadership Summit on strategy Board approval of Group strategy 150 Ericsson | Annual Report 2014 and mitigating actions can be incorporated in the strategy and in the annual target-setting process following the finalization of the strategy. Key components in the evaluation of risk related to Ericsson’s long-term objectives include technology development, cyber security related matters, industry and market fundamen- tals, the development of the economy, the politi- cal environment, health and environmental aspects and laws and regulations. The outcome of the strategy process forms the basis for the annual target-setting process, which involves regions, business units and Group functions. Risks related 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 busi- ness unit and region steering groups and are reviewed by the Board of Directors. Ericsson continuously strives to improve its risk management and believes that it is import- ant that the entire global organization takes part in the risk management and strategy work. The risk management framework implemented during 2012 has been further developed and qualified during 2014. For more information on risks related to Ericsson’s business, see the chapter “Risk factors” in the Annual Report. Process to identify and manage strategic and tactical risks for regions, business units and Group functions The process is aligned with the strategy and target-setting process Leadership Team meeting and workshop Preparations Establish gross list Prioritize risks Assign responsibility Manage risks Compile input: > Business unit plan, region plan, functional strategy including SWOT analysis > Preparatory meetings/ workshop Consider the four risk categories: > Industry & market risks > Commercial risks > Operational risks > Compliance risks > Rank the risks based on business impact and probability > Document risk heat map in relation with strategic objectives (up to 5 years) and with short-term targets (1 year) > Define management response; accept, reduce, eliminate > Assign responsibility for managing each top risk > Agree on cooperation between units. > Develop mitigation actions > Secure risk reviews in monthly business reports and gover- nance meetings Example of risk heat map document Risk heat maps are gener- ated by business units, regions and Group functions in four risk categories: > Industry & market > Commercial > Operational > Compliance RISK HEAT MAP (illustration only) Time horizon 1–5 years Industry & Market Commercial Operational Compliance ) h g H i , i m u d e M , w o L ( y t i l i b a b o r P Impact (Low, Medium, High) Impact (Low, Medium, High) Impact (Low, Medium, High) Impact (Low, Medium, High) Management response Accept Reduce Eliminate Risk description Mitigating action 1 2 3 4 5 Corporate Governance – Corporate Governance Report 151 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE Members of the Executive Leadership Team Hans Vestberg President and CEO (since 2010) Jan Frykhammar Executive Vice President, Chief Financial Officer and Head of Group Function Finance (since 2009) Magnus Mandersson Executive Vice President (since 2011) and Head of Business Unit Global Services (since 2010) Johan Wibergh Executive Vice President (2010–January 15, 2015) and Head of Segment Networks (2008–January 15, 2015) Born 1965. Bachelor of Business Administration and Economics, University of Uppsala, Sweden. Born 1965. Bachelor of Business Administration and Economics, University of Uppsala, Sweden. Born 1959. Bachelor of Business Administration, University of Lund, Sweden. Born 1963. Master of Computer Science, Linköping Institute of Technology, Sweden. Board Member: The Swedish International Chamber of Commerce and Attendo AB. Holdings in Ericsson 1): 33,291 Class B shares. 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. Board Member: None. Holdings in Ericsson 1): 44,588 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. Board Member: Confederation of Swedish Enterprise, KTH Royal Institute of Technology and Teknikföretagen. Holdings in Ericsson 1): 74,006 Class B shares. Background: Head of Business Unit Networks 2008-2014. Previously President of Ericsson Brazil, President of Market Unit Nordic and Baltics and Vice President and Head of Sales at Business Unit Global Services. Board Chairman: Svenska Handbollförbundet. Board Member: Telefonaktiebolaget LM Ericsson and Thernlunds AB. Holdings in Ericsson 1): 333,329 Class B shares. Background: Previously, First Executive Vice President, CFO and Head of Group Function Finance and 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. Founding member of the Broadband Commission for Digital Development, and heading the Commission’s task group on the post-2015 development agenda. Member of the Leadership Council of the United Nations Sustainable Development Solutions Network. Effective January 15, 2015 Johan Wibergh left his previous position as Executive Vice President and Head of Segment Networks. Effective November 1, 2014, Group Function Marketing and Communications was established; a merger of Group Function Communications and Marketing (which was formerly part of Group Function Sales and Marketing). As a consequence, Group Function Sales and Marketing was renamed Group Function Sales. Helena Norrman heads Group Function Marketing and Communications and Jan Wäreby heads Group Function Sales. Effective August 1, 2014, Douglas Gilstrap, former Senior Vice President, Head of Group Function Strategy and Chairman of Business Unit Modems, left Ericsson. No ELT member has been appointed pursuant to an arrangement or understand- ing with any major shareholder, customer, supplier or other person. The Board memberships and Ericsson holdings reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 152 Ericsson | Annual Report 2014 Per Borgklint Senior Vice President and Head of Business Unit Support Solutions (since 2011) Bina Chaurasia Senior Vice President, Chief Human Resources Officer and Head of Group Function Human Resources (since 2010) Ulf Ewaldsson Senior Vice President, Chief Technology Officer and Head of Group Function Technology (since 2012) Nina Macpherson Senior Vice President, General Counsel, Head of Group Function Legal Affairs and secretary to the Board of Directors (since 2011) Born 1972. Master of Science in Business Administration, Jönköping International Business School, Sweden. Board Member: None. Holdings in Ericsson 1): 5,000 Class B shares. Background: Previously CEO of Net1 (Ice.net), Canal Plus Nordic and Versatel. Has also held several leading positions at Tele2. Born 1962. Master of Science in Management and Human Resources, Ohio State University, USA, and Master of Arts in Philosophy, University of Wisconsin, USA. Board Member: None. Holdings in Ericsson 1): 36,009 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. Born 1965. Master of Science in Engineering and Business Management, Linköping Institute of Technology, Sweden. Board Member: Lund University. Holdings in Ericsson 1): 29,913 Class B shares. Background: Previously Head of Product Area Radio within Business Unit Networks. Has held various managerial positions within Ericsson since 1990. Member of the European Cloud Partnership Steering Board. Born 1958. Master of Laws, LL.M., University of Stockholm, Sweden. Board Member: The Association for Swedish Listed Companies and the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). Holdings in Ericsson 1): 16,624 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. The Board memberships and Ericsson holdings reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Corporate Governance – Corporate Governance Report 153 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Members of the Executive Leadership Team, cont. Helena Norrman Senior Vice President, Chief Marketing and Communications Officer and Head of Group Function Marketing and Communications (since November 1, 2014) Mats H. Olsson Senior Vice President and Head of Asia-Pacific (since 2013) Rima Qureshi Senior Vice President, Chief Strategy Officer, Head of Group Function Strategy and Head of M&A (since May 1, 2014) Angel Ruiz Head of Region North America (since 2010) Born 1970. Master of International Business Administration, Linköping University, Sweden. Born 1954. Master of Business Administration, Stockholm School of Economics, Sweden. Board Member: None. Holdings in Ericsson 1): 18,243 Class B shares. Board Member: None. Holdings in Ericsson 1): 90,051 Class B shares. Background: Senior Vice President and Head of Group Function Communications 2011- 2014. Previously Vice President, Communications Operations at Group Function Communications. Has held various positions within Ericsson’s global communications organization since 1998. Previous positions as communications consultant. Background: International economic advisor to a number of Chinese provincial and municipal governments. Head of Region North East Asia, 2010–2012. Has held various executive positions across the Asia-Pacific region for more than 25 years, including Head of Market Unit Greater China and Head of Market Unit South East Asia. Born 1965. Bachelor of Information Systems and Master of Business Administration, McGill University, Montreal, Canada. Board Member: MasterCard Incorporated and the Supervisory Board of Wolters Kluwer NV. Holdings in Ericsson 1): 9,178 Class B shares. Background: Senior Vice President Strategic Projects 2013– 2014, and Head of Business Unit CDMA Mobile Systems, 2010– 2012. Previously Vice President of Strategic Improvement Program and Vice President Product Area Customer Support. Has held various positions within Ericsson since 1993. Born 1956. Bachelor of Electrical Engineering, University of Central Florida, USA, and Master of Management Science and Information Systems, Johns Hopkins University, USA. Board Member: CTIA–The Wireless Association and Liberty Mutual Holding Company. Holdings in Ericsson 1): 79,962 Class B shares. Background: Joined Ericsson in 1990 and has held a variety of technical, sales and managerial positions within the Company, including heading up the global account teams for Cingular/SBC/ BellSouth (now AT&T). Was appointed Head of Market Unit North America in 2001. Member of the US National Security Telecommunications Advisory Committee (NSTAC). The Board memberships and Ericsson holdings reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. 154 Ericsson | Annual Report 2014 Anders Thulin Senior Vice President, Chief Information Officer and Head of Group Function Business Excellence and Common Functions (since 2013) Born 1963. Degree in Economics and Business Administration from Stockholm School of Economics, Sweden, including MBA studies at the Western University, Ivey Business School, Canada. Board Member: None. Holdings in Ericsson 1): 3,677 Class B shares. Background: Joined Ericsson from McKinsey & Co where he was senior partner. Has more than 20 years of experience in implementing business excellence across diverse industries, including IT and telecom. Jan Wäreby Senior Vice President and Head of Group Function Sales (since November 1, 2014) Born 1956. Master of Science, Chalmers University, Gothenburg, Sweden. Board Member: None. Holdings in Ericsson 1): 98,314 Class B shares. Background: Senior Vice President and Head of Group Function Sales and Marketing 2011-2014. Previously Senior Vice President and Head of Business Unit Multimedia and Executive Vice President and Head of Sales and Marketing for Sony Ericsson Mobile Communications. Auditor According to the Articles of Association, the Parent Com- pany shall have no less than one and no more than three registered public accounting firms as external indepen- dent auditor. Ericsson’s auditor is currently elected each year at the AGM pursuant to the Swedish Companies Act for a one-year mandate period. The auditor reports to the shareholders at General Meetings. The duties of the auditor include: > Updating the Board of Directors regarding the plan- ning, scope and content of the annual audit work > Reviewing the interim reports to assess that the finan- cial statements are presented fairly in all material respects and providing review opinions over the interim reports for the third and fourth quarters and the year-end financial statements > Reviewing and providing an audit opinion over the Annual Report > Advising the Board of Directors of non-audit services performed, the consideration paid and other issues that determine the auditor’s independence. Auditing work is carried out by the auditor continuously throughout the year. For further information on the con- tacts between the Board and the auditor, please see “Work of the Board of Directors” earlier in this Corporate Governance Report. Current auditor PricewaterhouseCoopers AB was elected auditor at the AGM 2014 for a period of one year, i.e. until the close of the AGM 2015. PricewaterhouseCoopers AB has appointed Peter Nyllinge, Authorized Public Accountant, to serve as auditor in charge. Fees to the auditor Ericsson paid the fees (including expenses) for audit- related and other services listed in the table in Notes to the consolidated financial statements – Note C30, “Fees to auditors” in the Annual Report. The Board memberships and Ericsson holdings reported above are as of December 31, 2014. 1) The number of shares includes holdings by related natural and legal persons, as well as holdings of any ADS, if applicable. Corporate Governance – Corporate Governance Report 155 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Corporate Governance Report Internal control over financial reporting 2014 This section has been prepared in accordance with the Annual Accounts Act and the Swedish Corporate Gover- nance 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 mainte- nance 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 internationally established 2013 COSO framework for internal control. The COSO frame- work is issued by the Committee of Sponsoring Organi- zations of the Treadway Commission (COSO). 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. Disclosure policies Ericsson’s financial disclosure policies aim to ensure transparent, relevant and consistent communication with equity and debt investors on a timely, fair and equal basis. This will support a fair market value for Ericsson securities. 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 eco- nomic 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 opera- tions and performance and to avoid misinterpretations. > Relevant – with focus on what is relevant to Ericsson’s stakeholders or required by regulation or listing agree- ments, to avoid information overload. > Timely – with regularly scheduled disclosures as well as ad-hoc information, such as press releases on important events, performed in a timely manner. > 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 – disclosures compliant with applicable financial reporting standards and listing requirements and in line with industry norms. Ericsson’s website comprises comprehensive information on the Group, including: > An archive of annual and interim reports. > Access to recent news. Disclosure controls and procedures Ericsson has controls and procedures in place to allow for timely disclosure in accordance with applicable laws and regulations, including the US Securities Exchange Act of 1934, and under agreements with Nasdaq Stock- holm and NASDAQ New York. These procedures also require that such information is provided to management, including the CEO and the CFO, so timely decisions can be made regarding required disclosure. The Disclosure Committee comprises members with various expertise. It assists management in fulfilling their responsibility regarding disclosures made to the share- holders 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 subsidi aries. Ericsson’s President and CEO and the CFO evaluated the Company’s disclosure controls and procedures and concluded that they were effective at a reasonable assur- ance level as of December 31, 2014. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. 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 assess- ment, control activities, information and communication and monitoring. During the period covered by the Annual Report 2014, there were no changes to the internal control over finan- cial reporting that have materially affected, or are reason- ably 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 dele- gations of authority. > Several well-defined Group-wide processes for plan- ning, 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: 156 Ericsson | Annual Report 2014 > 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 financial reports. The management of each reporting legal entity, region and business unit is supported by a financial controller function with execu- tion 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 con- troller function is also established on Group level, report- ing 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 disclo- sure. Other risks related to financial reporting include fraud, loss or embezzlement of assets and undue favor- able 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 manage- ment activities, 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 busi- ness transactions. The financial closing and reporting process has controls regarding recognition, measure- ment 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, these procedures are designed to produce financial reports without material errors. For external financial reporting purposes, the Disclo- sure Committee performs additional control procedures to review whether the disclosure requirements are fulfilled. The Company has implemented controls to ensure that 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 allows the President and CEO and the CFO to assess the effectiveness of the controls in a way that is compliant with SOX. Entity-wide controls, focusing on the control environ- ment and compliance with 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 the 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 geo- graphical 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 chan- nels support complete, correct and timely financial reporting by making all relevant internal process instruc- tions 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 finan- cial and management reports for internal steering groups and Company management. These include analysis and comments on financial performance and risks. The Board of Directors receives financial reports monthly. Ericsson has established whistleblower procedures for the reporting of alleged violations that: > are conducted by Group or local management, and > relate to corruption, questionable accounting or audit- ing matters or otherwise seriously affect vital interests of the Group or personal health and safety. 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 monitor 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. Corporate Governance – Corporate Governance Report 157 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE 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 man- agement, 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 reports directly to the Audit Committee. 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 20, 2015 Telefonaktiebolaget LM Ericsson (publ) Org. no. 556016-0680 Auditor’s 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 corporate governance report for the year 2014 and that it has been prepared in accordance with the Annual Accounts Act. We have read the corporate governance report and based on that reading and our knowledge of the com- pany and the group we believe that we have a sufficient basis for our opinions. This means that our statutory examination of the corporate governance report is differ- ent and substantially less in scope than an audit con- ducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. 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, February 20, 2015 PricewaterhouseCoopers AB Peter Nyllinge Authorized Public Accountant Auditor in charge Bo Hjalmarsson Authorized Public Accountant 158 Ericsson | Annual Report 2014 Connected talents Ericsson’s technology and services enable change and change makers around the world. One of the new business models that the networked society has enabled is crowdsourcing which allows global talent to contribute and develop new ideas or concepts. The crowdsourcing project that DJ/producer Avicii launched in 2013 is an example of how music has the ability not only to reach millions of fans, but also be created by thousands, through communication technology. As advancements in mobility provide more ways to communicate, expression is no longer limited to one device or one person. Connected individuals participated in the creation process of the new single and Avicii received almost 13 000 contributions of which the best were picked. The world’s first collaborative or crowdsourced hit single “Avicii X You” became a platinum hit. Corporate Governance – Corporate Governance Report 159 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE REmuNERATION REPORT Introduction This report outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best prac- tice, with specific references to Group management. The work of the Remuneration Committee in 2014 and the remuneration policy are explained at the beginning of the report, followed by descriptions of plans and their outcome. More details on the remuneration of Group management and Board members’ fees can be found in the Notes to the Consoli- dated financial statements – Note C28, “Information regarding members of the Board of Directors, the Group management and employees.” Board member remuneration is resolved annually by the Annual General Meeting. The Remuneration Committee The Remuneration Committee advises the Board of Directors on a regular basis on the remuneration to the Group management, consisting of the Executive Leadership Team (ELT). This includes fixed salaries, pensions, other benefits and short-term and long- term variable compensation, all in the context of pay and employ- ment conditions throughout Ericsson. The Remuneration Com- mittee reviews and prepares for resolution by the Board: > Proposals on salary and other remuneration, including retire- ment compensation, for the President and CEO. > Proposals on targets for the short-term variable compensation for the President and CEO. > Proposals to the Annual General Meeting on guidelines for remuneration to the ELT. > Proposals to the Annual General Meeting on long-term variable compensation and similar equity arrangements. The responsibility of the Remuneration Committee is also to: > Approve proposals on salary and other remuneration, including retirement compensation, for the Executive Vice Presidents and other ELT members. > Approve proposals on targets for the short-term variable compensation for the Executive Vice Presidents and other ELT members. > Approve pay out of the short-term variable compensation for the ELT, based on achievements and performance. The Remuneration Committee’s work forms 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, Roxanne S. Austin, and Karin Åberg. All the members are non-executive directors, independent (except for the employee representative) as required by the Swedish Corporate Gover- nance Code and have relevant knowledge and experience of remuneration matters. The Company’s General Counsel acts as secretary to the Committee. The President and CEO, the Senior Vice President, Head of Human Resources and the Vice President, Head of Total Rewards attend 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 2014. The Remuneration Committee is also furnished with national and international pay data collected from external survey providers and can call on other independent expertise, should it so require. The Chairman strives to ensure that contact is main- tained, as necessary and appropriate, with shareholders regard- ing remuneration. Further information on the Remuneration Committee and its responsibilities can be found in the Corporate Governance Report. These responsibilities, together with the Guidelines for remuneration to Group management (ELT) and the Long-Term Variable (LTV) compensation program is reviewed and evaluated annually in light of matters such as changes to corporate gover- nance 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 Group management are, in accordance with Swedish law, brought to shareholders annually for approval. The Remuneration Committee met six times during the year 2014. The winter meetings focused on following up on results from the 2013 variable compensation programs and preparing propos- als to shareholders for the 2014 Annual General Meeting (AGM). Based on the Committee’s proposal, the AGM decided to adjust Remuneration policy Remuneration at Ericsson is based on the principles of per- formance, 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 Guidelines for remuneration to Group management 2014, approved by the AGM, can be found in Note C28. The auditor’s report regarding whether the company has complied with the guide lines for remuneration to the ELT during 2014 is posted on the Ericsson website. 160 Ericsson | Annual Report 2014 the 2014 Guidelines for Remuneration to Group management by deleting the reference to normal retirement age between 60 and 65 years. The reason for this change is that all new retirement schemes for ELT members are defined contribution plans and thus the retirement age is not relevant. Also, the Committee pro- posed to the Board of Directors to approve the LTV 2011 vesting result. In the summer the committee reviewed alternative LTV plan designs. The Committee based its considerations on business needs, analyses and reviews of the global market trends and feedback from shareholders and institutions. Supported by the independent advisor, the Committee reviewed the competitive- ness of the ELT remuneration in the global market. The Committee also reviewed the ELT severance conditions and adjusted two ELT members’ remuneration following a re-organization. Evaluation of the Guidelines for remuneration to Group management and of the LTV program The Remuneration Committee supports the Board with the review and evaluation of the Guidelines for remuneration to Group man- agement and Ericsson’s application of these guidelines. The Committee and the Board have concluded that the guidelines remain valid and right for Ericsson and that the guidelines should not be materially changed for 2015. Furthermore, the Remuneration Committee is of the opinion that the LTV program fulfills the defined objectives to promote “One Ericsson”. The number of participants as of December 1, 2014 was approximately 32,000 employees, compared to 29,000 employees as of December 1, 2013. The evaluation also confirms that the Key Contributor Retention Plan meets the purpose of retaining the Company’s key employees. The voluntary attrition rate among Key Contributors is about two-thirds compared to the attrition rate in the total number of employees. After a thorough review of alternative LTV designs, the Committee concluded not to propose any changes in the 2015 Executive Performance Stock plan but will continue to explore alternatives. Total remuneration When considering the remuneration of an individual, it is the total remuneration that matters. First, the total annual cash compensa- tion is defined, consisting of the target level of short-term variable compensation plus fixed salary. Thereafter, target long-term vari- able compensation may be added to get to the total target com- pensation and, finally, pension and other benefits may be added to arrive at the total remuneration. For the ELT, remuneration consists of fixed salary, short-term and long-term variable compensation, pension and other benefits. If the size of any one of these elements is increased or decreased when setting the remuneration, at least one other element has to change if the competitive position is to remain unchanged. The remuneration costs for the CEO and the ELT are reported in Note C28. Fixed salary When setting fixed salaries, the Remuneration Committee con- siders the impact on total remuneration, including pensions and associated costs. The absolute levels are determined based on 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 appro- priate to the remuneration policy. Variable compensation Ericsson strongly believes that, where possible, variable comp- ensation should be encouraged as an integral part of total remu- neration. 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 compensation plans have maximum award and vesting limits. Short-term variable compensation is to a greater extent dependent on the performance of the specific unit or func- tion, while long-term variable compensation is dependent on the achievements of the Ericsson Group. Short-term variable compensation payouts as percentage of opportunity Fixed salary, short-term and long-term variable compensation as percentage of total target compensation 100 80 60 40 20 0 61.9 60.4 2010 2011 2012 2013 2014 CEO Average ELT excl. CEO Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. CEO 35.8 Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Average Där väljer man färg och ev tint. ELT excl. Kolla särskilt att “Sliding” är valt på CEO “Column type”. 55.6 28.7 35.5 27.8 16.7 20 40 60 80 100 0 Type–Options: 1 stapel: 76% 70% 2 staplar: 80% 80% Fixed salary 2014 Short-Term Variable Target 2014 Long-Term Variable at half of max 2014 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Type–Options: 1 stapel: 76% 70% 2 staplar: 80% 80% Corporate Governance – Remuneration report 161 Ericsson | Annual Report 2014 CORPORATE GOVERNANCE – Remuneration report Summaries of 2014 short- and long-term variable compensation What we call it What is it? What is the objective? Who participates? How is it earned? Short-term: Compensation delivered over twelve months or less Fixed salary Short-Term Variable compensation (STV) Fixed compensation paid at set times A variable plan that is measured and paid over a single year Attract and retain employees, delivering part of annual compensation 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. Approximately 86,000 in 2014 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 Sales Incentive Plans Tailored versions of the STV As for STV, tailored for local or business requirements, such as sales Employees in sales. Approximately 3,000 in 2014 Similar to STV. All plans have maximum award and vesting limits Long-term: Compensation delivered over three years or more Stock Purchase Plan (SPP) All-employee stock- based plan Key Contributor Retention Plan (KC) Share-based plan for selected individuals Reinforce a “One Ericsson” mentality and align employees’ interests with those of shareholders Recognize, retain and motivate key contributors for performance, critical skills and potential All employees are eligible Up to 10% of employees Executive Performance Stock Plan (EPSP) Share-based plan for senior managers Compensation for long-term commitment and value creation Senior managers, including Executive Leadership Team Buy one share and it will be matched by one share after three years if still employed If selected, get one more matching share in addition to the SPP one Get up to four, six or, for CEO, nine further shares matched to each SPP share for long-term performance Ericsson measures business performance according to five cate- gories of measurements derived from the overall strategy: growing sales faster than market, best-in-class operating margin, strong cash conversion, customer satisfaction and employee engage- ment. These categories form the basis for the short- and long- term variable compensation programs and set the framework of what measurements shall be used for variable compensation. Short-term variable compensation Annual variable compensation 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 For the ELT, targets are thus predominantly financial 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 engagement. The chart on previous page illustrates how payouts to the ELT have varied with performance over the past five years. The Board of Directors and the Remuneration Committee decide on all targets for Group management 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 author- ity to revise them should they cease to be relevant or stretching or to enhance shareholder value. During 2014, approximately 89,000 employees participated in short-term variable compensation plans. Long-term variable compensation Share-based long-term variable compensation plans are sub- mitted each year for approval by shareholders at the AGM. All long-term variable compensation 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, out- comes are unknown and rewards depend on long-term personal investment, corporate performance and resulting share price per- formance. During 2014, share-based compensation was made up of three different but linked plans: the all-employee Stock Pur- chase 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% of gross fixed salary (the Presi- dent and CEO can save up to 10% of gross fixed salary and short- term variable compensation) for purchase of Class B shares at market price on Nasdaq Stockholm or ADSs on NASDAQ New York (contribution shares) over a 12-month period. If the contribu- tion 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 2014, the number of participants was over 32,000, or approximately 30% of eligible employees in 102 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 to encourage retention of key employees. Under the program, operating units around the world can nom- inate up to 10% of employees worldwide. Each unit nominates individuals that have been identified according to performance, 162 Ericsson | Annual Report 2014 Short-term variable compensation structure CEO 2013 CEO 2014 Average ELT 2013 1) Average ELT 2014 1) Short-term variable compensation as percentage of fixed salary Percentage of short-term variable compensation maximal opportunity Target level Maximum level Actual paid 40% 80% 37% 54% 80% 160% 74% 107% 25% 99% 36% 59% Group financial targets Unit/functional financial targets Non-financial targets 100% 100% 53% 46% 0% 0% 25% 23% 0% 0% 22% 31% 1) Excludes CEO, differences in target and maximum levels from year to year are due to changes in the composition of the ELT. 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 12-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 to provide market-competitive remuneration. Senior managers, 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 con- tribution share purchased under the all-employee Stock Purchase Plan. Performance matching is subject to the fulfillment of perfor- mance targets. Since 2010, the President and 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 2010 plans, the performance targets were Earnings Per Share (EPS) targets. To support the long-term strategy and value creation of the Company, new targets have been in place since the 2011 plan. At the AGM 2014, the following targets for the 2014 Executive Performance Stock Plan were resolved on proposal by the Board: > Net Sales Growth: Up to one-third of the award will vest if the compound annual growth rate of consolidated net sales is between 2 and 8% comparing 2016 financial results to 2013. > Operating Income Growth: Up to one-third of the award will vest if the compound annual growth rate of consolidated oper- ating income is between 5 and 15% comparing 2016 financial results to 2013. > Cash Conversion: Up to one third of the award will vest if cash conversion is at or above 70% during each of the years 2014– 2016 and vesting one ninth of the total award for each year the target is achieved. Before the number of performance shares to be matched are finally determined, the Board of Directors shall examine whether the performance matching is reasonable considering the Compa- ny’s financial results and position, conditions on the stock market and other circumstances, and if not, as determined by the Board of Directors, reduce the number of performance shares to be matched to the lower number of shares deemed appropriate by the Board of Directors. When undertaking its evaluation of per- formance, the Board of Directors will consider, in particular, the impact of larger acquisitions, divestitures, the creation of joint ventures and any other significant capital event on the three targets on a case-by-case basis. Benefits and terms of employment Pension benefits follow the competitive practice in the employee’s home country and may contain various supplementary plans, in addition to any national system for social security. Where possible, pension plans are operated on a defined contribution basis. Under these plans, Ericsson pays in contributions but does not guaran- tee the ultimate benefit, unless local regulations or legislation prescribe that defined benefit plans that do give such guarantees have to be offered. For the President and 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 retirement age for these ELT members is normally 60 years. The ELT members employed in Sweden from 2011 are normally covered by the defined contribution plan under the ITP1 scheme, with a retirement age of 65 years. For members of the ELT who are not employed in Sweden, local market competitive pension arrangements apply. Other benefits, such as company cars and medical insurance, are also set to be competitive in the local market. The ELT mem- bers may not receive loans from the Company. The ELT members locally employed in Sweden have a mutual notice period of up to six months. Upon termination of employ- ment by the Company, severance pay can amount to up to 18 months’ fixed salary. For other ELT members, different notice periods and severance pay agreements apply; however, no agreement exceeds the notice period of six months or the severance pay period of 18 months. Remuneration policy in practice Ericsson has taken a number of measures over the years to enhance the understanding of how the company translates remu- neration principles and policy into practice. The first step was the launch of an internal remuneration website where it provide e-learning and training program solutions targeted for line manag- ers. This was followed by the development and implementation of an Integrated Human Resources IT tool. During 2014 enhance- ments of the IT tool and intensified briefings of line managers on pay principles and their practical execution enabled further progress towards a globally consistent implementation of core principles while allowing room for adaptation to local legislation and pay markets. Corporate Governance – Remuneration report 163 Ericsson | Annual Report 2014 FOR INVESTORS – Ericsson and the capital market Ericsson and the capital market Roadshows and Conferences in 2014 Nordic 12% UK 24% Rest of Europe 26% US 21% Asia 10% Other 7% Number of IR activities 2014 278 300 250 200 150 100 50 0 179 150 25 17 One-on-one meetings Group meetings Conference calls Roadshows Investor conferences Purpose of the capital markets communications Ericsson’s overall goal is to create shareholder value. This is achieved through a number of objectives, both financial and non-financial, including growing faster than the market with best-in-class margins and strong cash con- version. The communication with the capital market aims to support the Company’s overall goal by ensuring increased understanding and decreased volatility through transparency and clear messages. The Investor Relations depart- ment serves as the bridge between the Compa- ny’s strategic planning , development and activi- ties, and the external valuation and perception. Transparency means giving transparent, rele- vant and consistent communication, on a timely, fair and equal basis and making sure the stake- holders are updated. Over the years, the stake- holders have become more diverse, which has increased the importance of clear and concise messages to the financial market. Goals and measurement Obs! Gjord med column Perception studies are carried out on a regular design. Prata med basis to gauge the perceptions of messages at Eva/Catta/Sanna om ev frågor. capital markets days, the web site, road shows and the availability of IR and the executive man- Gör så här: Färglägg inte från agement. paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Ericsson aims to maintain a long-term rela- Där väljer man färg och ev tint. tionship with its owners, and the IR department Kolla särskilt att “Sliding” är valt på “Column type”. monitors shareholder turnover on a regular basis. IR activities are linked to the Company strategy and development Throughout the year, the IR department carries out a number of activities aiming at meeting the goals of transparent communication and increased understanding; capital markets days, road shows, meetings with investors and analysts etc. IR also participates in all communications surrounding the Company’s activities, product launches, quarterly earnings, M&A-activities etc, to ensure that financial communication is clear and relevant for the capital market. Working with other functions in the company IR also works together with other Group func- tions, e.g. Strategy and Treasury. While commu- nication with the rating institutions primarily falls with Treasury, the IR department is also involved on a regular basis. With strong growth in Ericsson’s operations in the US, coupled with a larger shareholder base, the US market has grown in importance in recent years. To match strong operations with local funding, Ericsson launched a bond program in the US in 2012. Treasury and IR do a joint annual roadshow to meet bondholders in the US market. Activities at Industry events IR also participates at important industry events such as the annual Mobile World Congress. The IR activities include communication relating to important Company news, but also setting up meetings between Com pany spokespeople and different stakeholders to facilitate their under- standing of how important news and activities relate to the Company’s goals and strategy. IR in Transformation Ericsson is transforming from a leader in telecom- munications and related services into a leader in the ICT arena. Important activities during the year > At the Mobile World Con- gress in Barcelona in Feb- ruary, Ericsson announced several new products and contracts. Investor and analysts meetings were held with management and spokespersons. > At the Annual General Meeting of shareholders in April, CEO Hans Vestberg outlined the vision to hold the leadership position in the rapidly deve- loping Networked Society, and talked about the ongoing transition in the Com pany. > CEO Hans Vestberg made a key note speech and held investor meetings at an investor conference in Paris in June. 164 Ericsson | Annual Report 2014 Share price development during the year SEK 120 100 80 60 40 20 0 Volume, 000’s 42,000 35,000 28,000 21,000 14,000 7,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Important events during the year Q4 Report, January: Sales flat YoY while gross margin improved driven by changed business mix. A signed cross-licensing agreement with Samsung contributed to both Sales and Income. Q1 Report, April: Gross margin improved YoY driven by strong capacity business, while sales declined primarily due to reduced mobile broad- band coverage activities. AGM, April: The proposed dividend of SEK 3,00 (SEK 2,75) was approved at the AGM. Record date was April 16. Volume traded at Nasdaq Stockholm, 000’s Ericsson, B OMX Stockholm Q2 Report, July: Sequential sales growth was driven by North America, China and Brazil. Continued strong capacity business had a positive impact on the result. Modems announcement, September: Announced discontinued development of modems business – with an estimated significant reduction in costs related to modems in the 1st half of 2015. Q3 Report, October: Sales growth YoY was driven by Middle East, China, India and Russia, partly offset by lower sales in North America. Revalu ation of currency hedge contracts had a significant negative effect on income. CMD, November: Ericsson announced a cost saving program of SEK 9 billion, at the Capital Markets Day in Stockholm. New stakeholders – new focus areas Simultaneously, the stakeholders in the capital market have also transformed in recent years; from industry-specialists focusing on the technology sector to generalists covering several sectors. It has become increasingly important for the financial communication to make it easy for stake- holders to make the connection between the Company’s activ ities and development and its long-term strategy, thus putting higher demands on clear messages. With almost two thirds of Ericsson’s holdings outside of Sweden, IR needs to have an understanding of focus areas, questions and issues in other parts of the world. The demand for availability at a global level also means working with other tools besides regular meetings, such as digital media. > During the UN week in New York, CEO Hans Vestberg and Elaine Weidman- Grunewald, head of Sustainability and CR, talked about Ericsson’s role and vision of the networked society and how Sustainability and CR is an integral part of this vision. > In November, Ericsson arranged the annual Capital Markets Day in Stockholm with more than 200 participants. For more information see page 167. > CFO Jan Frykhammar held a speech and investor meetings at an investor conference in Barcelona in November. For investors – Ericsson and the capital market 165 Ericsson | Annual Report 2014 FOR INVESTORS – Ericsson and the capital market Investors and financial analysts Q&a What is the sales development and market trend in North America? After a few years of major LTE network build outs, the business in North America during 2014 were driven by network quality and capacity expansion business. This was a consequence of the continued increase in user demand for mobile data. Full-year sales declined, driven by lower network sales as a result of large mobile broadband coverage projects coming to an end, and increased operator focus on cash flow in the second half of the year. Sales in Support Solutions and Profes- sional Services continued to grow, driven by OSS and BSS modernization. The over- all market fundamentals are strong with continued need for capacity investments and densification driven by video and the introduction of new services such as VoLTE. The US market is at the forefront when it comes to network evolution and LTE usage, and many of the targeted areas such as OSS and BSS, IP, Cloud and TV&Media have a strong potential in this market. What is the market trend in Europe? Compared to previous years, that were impacted by the modernization projects, business in 2014 was driven by invest- ments in network quality and capacity combined with managed services. Voda- fone started to invest in a multi-year proj- ect called “Project Spring” to increase the coverage and capacity in several Euro- pean countries. Western Europe is in the forefront of mobile broadband, with 65 percent of all subscriptions being WCDMA/ HSPA. LTE subscriptions are still below 20% but is expected to make up around 75 percent of the subscription base by 2020. Operator consolidations in Europe continued to be on the agenda during the year partly driven by an increasing need for network investments. Business in Russia developed favorably during the year driven by mobile broadband investments. What is the market trend in China? Mainland China has started a large scale roll out of LTE and by the end of 2020 we estimate it will have over 1.2 billion LTE- subscriptions – more than one third of the global total. Sales during the year were driven by deployment of 4G/LTE coverage type of contracts, primarily to one Chinese customer. Future capacity sales will be dependent on subscriber uptake and mobile data usage in the LTE networks. What has driven the improved operating margin in segment Networks during the year? Operating income improved significantly compared with last year due to increased capacity business, earlier actions to improve commercial and operational efficiency and lower restructuring charges. This was partly offset by a negative effect from currency hedges and byhigher oper- ating expenses mainly in IP and Cloud. How has the business mix developed during the year? The business mix has developed with more capacity sales compared to previous years. This was primarily visible in the US, in Europe and in parts of North East Asia. Network rollout revenues declined YoY, which is an indicator for a lower share of coverage projects. The increased capacity and software sales is driven by a continued increase in mobile data traffic and end user demand for good network performance and new services. USD has strengthened compared to several currencies, how has this impacted the result? Compared to 2013, currency movements versus the Swedish Krona has impacted sales positively mainly driven by the strengthened USD and the weakened SEK. The positive underlying effect on the income from having less costs than revenues in USD was offset by negative effect from currency hedge contracts. A strengthened USD versus the Swedish krona will over time have a positive impact on both Sales and Income. Can you give us an update on your cost saving plan? Ericsson continues to proactively identify efficiency opportunities in the Company. The cost and efficiency program pre- sented at the Capital Markets Day, with the ambition to achieve savings of approx- imately SEK 9 b. with full effect during 2017, is progressing. Activities for the dis- continuation of the modems business are included in the program and are ahead of plan. The Company will report progress on the program starting Q1 2015. 166 Ericsson | Annual Report 2014 capital markets day the main messages Ericsson’s Capital Markets Day (CMD) 2014 took place in Stockholm. During the day, speakers including Ericsson’s CEO Hans Vestberg and CFO Jan Frykhammar, and the heads of the business segments, focused on explaining how Ericsson’s technology and service leadership and global strength enable the company to transform in terms of product and business mix, resource allocation, headcount and earnings. The Company’s strategic direction, namely to excel in core business, establish leadership in targeted areas and expand business in new areas, was also thoroughly explained by the CEO Hans Vestberg and Head of Strategy Rima Qureshi. The Company’s focus on operational efficiency, profitability and cash flow generation, with the ambition to improve profitability and grow faster than the market, or by more than CAGR 3–5%, were significant key takeaways from the CMD 2014. FOR INVESTORS – Share information Share information Share trading The Ericsson Class A and Class B shares are listed on Nasdaq Stock- holm. 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 2014, approximately 1.9 (2.0) billion shares were traded on Nasdaq Stockholm and approximately 1.0 (1.0) billion ADS were traded in the United States (incl. NASDAQ New York). A total of 2.9 (3.0) billion Ericsson shares were thus traded on the exchanges in Stockholm and in the United States. Trading volume in Ericsson shares decreased by approximately 4% on Share trading on different market places (class B shares) Shares traded, billions Nasdaq Stockholm and is unchanged in the United States compared to 2013. With the implementation of the Mifid directive in the EU, share trading has become increasingly fragmented across a number of venues and trading categories. Trading on MTFs and other venues have gained market shares from stock exchanges like Nasdaq OMX Stockholm. Trading in Stockholm represented 37 percent of total trading in 2014, compared with more than 50 percent in 2010. Total trading in Ericsson B on all venues combined, has decreased slightly over the past five years, from 6.8 billion shares in 2010 to 5.5 billion shares in 2014. Over the same period, trading of Ericsson ADS in the US has decreased from 1.6 billion ADS to 1 bil- lion ADS. This development, with decreasing share of trading volumes in Stockholm, is in line with the development for other Swedish Large Cap shares. 8 7 6 5 4 3 2 1 0 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Other Turquoise Boat London BATS Chi-X Stockholm 2010 2011 2012 2013 2014 The Ericsson share Share listings Nasdaq Stockholm NASDAQ New York Share data Total number of shares in issue of which Class A shares, each carrying one vote 1) of which Class B shares, each carrying one tenth of one vote 1) Ericsson treasury shares, Class B Quotient value Market capitalization, December 31, 2014 ICB (Industry Classification Benchmark) 3,305,051,735 261,755,983 3,043,295,752 63,450,558 SEK 5.00 approx. SEK 310 b. 9500 1) Both classes of shares have the same rights of participation in the net assets and earnings. Ticker codes Nasdaq Stockholm NASDAQ New York Bloomberg Nasdaq Stockholm Bloomberg NASDAQ Reuters Nasdaq Stockholm Reuters NASDAQ ERIC A/ERIC B ERIC ERICA SS/ERICB SS ERIC US ERICa.ST/ERICb.ST ERIC.O Changes in number of shares and capital stock 2010–2014 2010 2011 2012 2012 2013 2014 December 31 December 31 June 29, new issue (Class C shares, later converted to Class B) December 31 December 31 December 31 Number of shares Share capital (SEK) 3,273,351,735 3,273,351,735 31,700,000 3,305,051,735 3,305,051,735 3,305,051,735 16,366,758,678 16,366,758,678 158,500,000 16,525,258,678 16,525,258,678 16,525,258,678 Share performance indicators Earnings per share, diluted (SEK) 1) Earnings per share, diluted non-IFRS (SEK) 2) Operating income per share (SEK) 3) 4) Cash flow from operating activities per share (SEK) 3) Stockholders’ equity per share, basic, end of period (SEK) 5) P/E ratio Total shareholder return (%) Dividend per share (SEK) 6) 1) Calculated on average number of shares outstanding, diluted. 2) EPS, diluted, excluding restructuring charges, amortizations and write-downs of acquired intangible assets, SEK. 2014 3.54 4.80 5.19 5.78 44.51 26 24 3.40 2013 3.69 5.62 5.53 5.39 43.39 21 25 3.00 2012 1.78 2.74 3.25 6.85 42.51 36 –3 2.75 2011 3.77 4.72 5.58 3.11 44.57 19 –7 2.50 2010 3.46 4.80 7.42 8.31 45.34 22 22 2.25 3) Calculated on average number of shares outstanding, basic. 4) For 2010 excluding restructuring charges. 5) Calculated on number of shares, end of period. 6) For 2014 as proposed by the Board of Directors. For definitions of the financial terms used, see Glossary, Financial Terminology and Exchange Rates. 168 Ericsson | Annual Report 2014 Share trend In 2014, Ericsson’s total market capitalization increased by 20.1% to SEK 310 billion, compared to an increase by 20.3% reaching SEK 258 billion in 2013. The index, OMX Stockholm, on Nasdaq Stockholm increased by 11.9% in 2014 and the NASDAQ composite index increased by 13.4%. The S&P 500 Index increased by 11.4%. Share turnover and price trend, Nasdaq Stockholm Dividend per share Class A shares, SEK 000’s share traded 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 18,000 15,000 12,000 9,000 6,000 3,000 0 Class B shares, SEK 000’s share traded 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 600,000 500,000 400,000 300,000 200,000 100,000 0 Volume traded, 000’s Ericsson share OMX Stockholm Volumes reflect trading on Nasdaq Stockholm only. Share turnover and price trend, US market ADS, USD 000’s share traded 18 15 12 9 6 3 0 2010 2011 2012 2013 2014 300,000 250,000 200,000 150,000 100,000 50,000 0 Volume traded, 000’s Ericsson ADS S&P 500 For investors – Share information SEK 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 3.40 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. 2010 2011 2012 2013 2014 1) 1) For 2014 as proposed by the Board of Directors. Earnings per share, diluted SEK 6 5 4 3 2 1 0 4.80 3.54 2010 2011 2012 2013 2014 Earnings per share, diluted Earnings per share, diluted (non-IFRS) 1) 1) EPS, diluted, excl. restructuring charges, amortizations and write-downs of acquired intangible assets, SEK. Stockholders’ equity per share, basic SEK Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. Type–Options: 1 stapel: 76% 70% 2 staplar: 80% 80% 50 40 30 20 10 0 44.51 Obs! Gjord med column design. Prata med Eva/Catta/Sanna om ev frågor. Gör så här: Färglägg inte från paletten. Markera staplar med vita pilen. Välj Object–Graph–Column. Där väljer man färg och ev tint. Kolla särskilt att “Sliding” är valt på “Column type”. 2010 2011 2012 2013 2014 169 Ericsson | Annual Report 2014 FOR INVESTORS – Share information Share and ADS prices Principal trading market – Nasdaq Stockholm – share prices The table below states the high and low share prices for the Class A and Class B shares as reported by Nasdaq 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 trading off the exchange and on alternative venues during trading hours and also after 5:30 p.m. (CET). Nasdaq 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 low- est 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 Stockholm Official Price List of Shares currently comprise the shares of 269 companies. Host market NASDAQ New York – ADS prices The table below states the high and low share prices quoted for the ADSs on NASDAQ New York for the last five years. The NASDAQ New York quotations represent prices between dealers, not including retail markups, markdowns or commissions, and do not necessarily represent actual transactions. Share prices on Nasdaq Stockholm (SEK) Class A at last day of trading Class A high (December 29, 2014) Class A low (January 23, 2014) Class B at last day of trading Class B high (December 29, 2014) Class B low (January 24, 2014) Source: Nasdaq Stockholm. 2014 88.25 2013 74.50 2012 63.90 2011 69.55 2010 74.00 91.80 86.95 72.00 93.60 88.40 71.55 94.35 50.00 78.50 55.55 65.10 59.05 70.40 65.20 78.15 96.40 90.95 71.90 96.65 90.45 75.05 64.50 55.90 61.70 65.90 Share prices on NASDAQ New York (USD) ADS at last day of trading ADS high (April 9, 2014) ADS low (October 27, 2013) Source: NASDAQ New York. 2014 12.10 13.61 11.20 2013 12.24 14.22 9.78 2012 10.10 10.60 8.23 2011 10.13 15.44 8.83 2010 11.53 12.39 9.40 Share prices on Nasdaq Stockholm and NASDAQ New York Period Annual high and low 2010 2011 2012 2013 2014 Quarterly high and low 2013 First Quarter 2013 Second Quarter 2013 Third Quarter 2013 Fourth Quarter 2014 First Quarter 2014 Second Quarter 2014 Third Quarter 2014 Fourth Quarter Monthly high and low August 2014 September 2014 October 2014 November 2014 December 2014 January 2015 Nasdaq Stockholm SEK per Class A share SEK per Class B share NASDAQ New York USD per ADS 1) High Low High Low High Low 88.40 93.60 72.00 86.95 91.80 84.55 80.20 86.95 82.75 82.00 84.10 89.95 91.80 83.40 89.95 87.35 89.85 91.80 99.00 65.20 59.05 55.55 50.00 71.55 62.90 69.65 71.00 50.00 71.55 74.15 74.50 76.05 79.00 82.00 76.05 81.00 83.45 88.75 90.45 96.65 71.90 90.95 96.40 86.40 83.15 90.95 87.10 86.25 88.55 94.45 96.40 87.65 94.45 91.95 94.45 96.40 104.80 65.90 61.70 55.90 64.50 75.05 64.50 72.40 74.10 76.05 75.05 77.55 77.90 81.05 82.90 86.15 81.05 85.65 88.45 92.90 12.39 15.44 10.60 14.22 13.61 13.46 12.60 14.22 13.71 13.37 13.61 13.28 12.74 12.66 13.28 12.59 12.71 12.74 12.44 9.40 8.83 8.23 9.78 11.20 9.78 10.67 11.26 11.59 11.52 11.83 11.50 11.20 12.10 12.30 11.20 11.57 11.70 11.75 1) One ADS = 1 Class B share. Source: Nasdag Stockholm and NASDAQ New York. 170 Ericsson | Annual Report 2014 Shareholders As of December 31, 2014, the Parent Company had 482,025 sharehold- ers registered at Euroclear Sweden AB (the Central Securities Depository – CSD), of which 952 holders had a US address. According to information provided by the Company’s depositary, Deutsche Bank, there were 233,146,314 ADSs outstanding as of December 31, 2014, and 4,127 registered holders of such ADSs. A significant number of Ericsson ADSs are held by banks, brokers and/or nominees for the accounts of their customers. As of January 15, 2015, the total number of bank, broker and/or nominee accounts holding Ericsson ADSs was 156,271. According to information known at year-end 2014, approximately 87% of the Class A and Class B shares were owned by institutions, Swedish and international. The major shareholders do not have different voting rights than other shareholders holding the same classes of shares. As far as Ericsson knows, the Company is not directly or indirectly owned or con- trolled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly. 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, 2014. 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 (31 persons) 0 1,060,685 0.02% Includes shares held via endowment insurance, for more info see page 144–145, note 2 For individual holdings, see Corporate Governance Report. Geographical ownership breakdown of share capital including retail shareholders and treasury shares Percent of capital Sweden United States United Kingdom Norway Netherlands 2014 37.75% 23.13% 10.52% 3.30% 1.77% 2013 38.65% 21.67% 10.15% 3.26% 1.49% Other countries 23.53% 24.80% Source: Nasdaq Ownership breakdown by type of owner Percentage of voting rights Swedish institutions 54.65% 56.73% 2014 2013 Of which: – Investor AB – AB Industrivärden 1) Foreign institutions Swedish retail investors Other Source: Nasdaq 21.50% 20.05% 32.16% 5.44% 7.75% 21.50% 19.96% 25.38% 4.98% 12.91% 1) Together with SHB Pensionsstiftelse and Pensions kassan SHB Försäkringsförening. Share distribution 1) Holding 1–500 501–1,000 1,001–5,000 5,001–10,000 10,001–15,000 15,001–20,000 20,001– Total, December 31, 2014 2) No. of shareholders 383,779 45,662 43,524 5,019 1,260 593 2,188 482,027 No. of shares A 1,334,383 984,648 2,911,050 1,132,802 559,143 355,152 254,478,805 261,755,983 No. of shares B Percentage of share capital Percentage of voting rights Market value (MSEK) 51,676,575 33,135,228 90,255,636 34,349,148 14,946,325 10,165,451 2,808,653,740 3,043,295,752 1.60% 1.03% 2.82% 1.07% 0.47% 0.32% 92.68% 1.15% 0.76% 2.11% 0.81% 0.36% 0.24% 94.57% 100.00% 100.00% 4,993 3,213 8,773 3,341 1,460 990 287,454 310,235 1) Source: Euroclear 2) Includes a nominee reporting discrepancy of 113,649 shares. The following table shows share information, as of December 31, 2014, with respect to the 15 largest shareholders, ranked by voting rights, as well as their percentage of voting rights as of December 31, 2014, 2013 and 2012. Largest shareholders, December 31, 2014 and percentage of voting rights, December 31, 2014, 2013 and 2012 Identity of person or group 1) Investor AB AB Industrivärden Handelsbankens Pensionsstiftelse Dodge & Cox, Inc. AFA Försäkring AB Swedbank Robur AB AMF Pensionsförsäkring AB Livförsäkringsbolaget Skandia BlackRock Fund Advisors Aberdeen Asset Managers Ltd. Norges Bank Investment Management Handelsbanken Asset Management OppenheimerFunds, Inc. State Street Global Advisors (US) The Vanguard Group, Inc. Others Total 1) Source: Nasdaq For investors – Share information Number of Class A shares Of total Class A shares, percent Number of Class B shares Of total Class B shares, percent 2014 Voting rights, percent 2013 Voting rights, percent 2012 Voting rights, percent 115,762,803 86,052,615 27,430,790 0 11,423,000 13,270 0 7,218,395 0 0 0 630,341 0 603 0 13,224,166 261,755,983 44.23 32.88 10.48 0.00 4.36 0.01 0.00 2.76 0.00 0.00 0.00 0.24 0.00 0.00 0.00 5.05 59,284,545 0 0 117,579,896 2,171,761 107,803,564 104,826,878 16,539,057 82,330,468 67,308,122 64,394,664 51,612,963 57,884,322 51,819,852 43,488,591 2,216,251,069 100 3,043,295,752 1.95 0.00 0.00 3.79 0.07 3.54 3.44 0.54 2.71 2.21 2.12 1.70 1.90 1.69 1.42 72.92 100 21.50 15.20 4.85 2.08 2.06 1.91 1.85 1.57 1.45 1.19 1.14 1.02 1.02 0.92 0.77 41.49 100 21.50 15.21 3.62 1.36 2.10 2.16 1.34 1.32 1.45 0.71 1.15 0.85 1.09 0.77 0.66 44.71 100 21.37 14.96 3.72 1.14 2.18 2.71 1.26 1.31 1.37 1.16 1.36 1.07 1.10 0.07 0.53 44.69 100 171 Ericsson | Annual Report 2014 OTHER INFORMATION Ten-year summary For definitions of the financial terms used, see Glossary, Financial terminology and Exchange rates. Ten-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 Per share indicators Earnings per share, basic, SEK Earnings per share, diluted, 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 Other information 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 and associated companies 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 2014, as proposed by the Board of Directors. 172 2014 Change 2013 2012 2011 2010 2009 2008 2007 2006 2005 227,983 16,807 –996 11,143 293,558 103,246 189,839 72,159 27,629 13,341 144,306 1,003 44,530 3.57 3.54 5.78 3.40 1) 44.51 3,242 3,237 3,270 5,322 4,316 6,184 5,629 36,308 15.9% 7.4% 7.4% 9.3% 84% 8.1% 9.8% 49.5% 1.2 64 3.1 85,465 37.5% 118,055 17,580 113,734 0% –6% 33% –8% 9% –3% 5% –6% –27% 17% 3% –29% 13% –4% –4% 7% 13% 3% – – – 18% 3% 30% –5% 13% – – – – – – – – – – – 3% – 3% –2% 4% 227,376 17,845 –747 12,174 269,190 106,940 180,903 77,089 37,809 11,433 140,204 1,419 39,280 3.72 3.69 5.39 3.00 43.39 3,231 3,226 3,257 4,503 4,209 4,759 5,928 32,236 14.2% 7.9% 7.8% 9.8% 79% 8.7% 10.7% 52.6% 1.3 62 3.4 82,631 36.3% 227,779 10,458 –276 5,938 274,996 100,619 176,653 76,708 38,538 11,493 136,883 1,600 38,170 1.80 1.78 6.85 2.75 42.51 3,220 3,216 3,247 5,429 4,012 13,247 5,877 32,833 14.4% 9.7% 4.6% 6.6% 116% 4.1% 6.7% 50.4% 1.3 73 3.6 84,951 37.3% 226,921 17,900 221 12,569 280,349 109,552 186,307 80,542 39,505 10,788 143,105 2,165 41,037 3.80 3.77 3.11 2.50 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% 203,348 16,455 –672 11,235 281,815 105,488 182,640 87,150 51,295 9,434 145,106 1,679 35,855 3.49 3.46 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% 206,477 5,918 325 4,127 269,809 99,079 181,680 76,724 36,071 9,606 139,870 1,157 40,653 1.15 1.14 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 94,829 208,930 16,252 974 11,667 285,684 99,951 182,439 75,005 34,651 9,995 140,823 1,261 40,354 3.54 3.52 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% 187,780 30,646 83 22,135 245,117 86,327 168,456 57,716 24,312 9,304 134,112 940 33,404 6.87 6.84 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% 179,821 35,828 165 26,436 214,940 82,926 142,447 62,280 40,728 7,881 120,113 782 21,552 8.27 8.23 5.83 2.50 37.82 3,176 3,174 3,189 3,827 3,038 18,319 4,479 27,533 15.3% 16.7% 19.9% 21.0% 57% 23.7% 27.4% 56.2% 1.3 71 3.9 67,454 37.5% 63,781 19,094 98,694 153,222 33,084 251 24,460 209,336 86,184 133,332 81,505 50,645 6,966 101,622 850 30,860 7.67 7.64 5.26 2.25 32.03 3,173 3,169 3,181 3,365 2,438 2,250 3,364 24,059 15.7% 20.1% 21.6% 21.8% 47% 26.7% 28.7% 49.0% 1.2 74 4.1 78,647 51.3% 56,055 21,178 93,879 114,340 17,858 108,944 110,255 17,712 106,997 104,525 17,500 116,507 90,261 17,848 100,070 78,740 20,155 109,254 74,011 19,781 102,486 Ericsson | Annual Report 2014 Ten-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 Per share indicators Earnings per share, basic, SEK Earnings per share, diluted, 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 Other information 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 Operating margin excluding joint ventures and associated companies Ratios Operating margin EBITA margin Cash conversion Return on equity Equity ratio Capital turnover Return on capital employed 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 2014, as proposed by the Board of Directors. For definitions of the financial terms used, see Glossary, Financial terminology and Exchange rates. 2014 Change 2013 2012 2011 2010 2009 2008 2007 2006 2005 227,983 16,807 –996 11,143 293,558 103,246 189,839 72,159 27,629 13,341 144,306 1,003 44,530 3.57 3.54 5.78 3.40 1) 44.51 3,242 3,237 3,270 5,322 4,316 6,184 5,629 36,308 15.9% 7.4% 7.4% 9.3% 84% 8.1% 9.8% 49.5% 1.2 64 3.1 85,465 37.5% 118,055 17,580 113,734 0% –6% 33% –8% 9% –3% 5% –6% –27% 17% 3% –29% 13% –4% –4% 7% 13% 3% 18% 3% 30% –5% 13% – – – – – – – – – – – – – – – 3% 3% –2% 4% 227,376 17,845 –747 12,174 269,190 106,940 180,903 77,089 37,809 11,433 140,204 1,419 39,280 3.72 3.69 5.39 3.00 43.39 3,231 3,226 3,257 4,503 4,209 4,759 5,928 32,236 14.2% 7.9% 7.8% 9.8% 79% 8.7% 10.7% 52.6% 1.3 62 3.4 82,631 36.3% 227,779 10,458 –276 5,938 274,996 100,619 176,653 76,708 38,538 11,493 136,883 1,600 38,170 1.80 1.78 6.85 2.75 42.51 3,220 3,216 3,247 5,429 4,012 13,247 5,877 32,833 14.4% 9.7% 4.6% 6.6% 116% 4.1% 6.7% 50.4% 1.3 73 3.6 84,951 37.3% 226,921 17,900 221 12,569 280,349 109,552 186,307 80,542 39,505 10,788 143,105 2,165 41,037 3.80 3.77 3.11 2.50 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% 203,348 16,455 –672 11,235 281,815 105,488 182,640 87,150 51,295 9,434 145,106 1,679 35,855 3.49 3.46 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% 114,340 17,858 108,944 110,255 17,712 106,997 104,525 17,500 116,507 90,261 17,848 100,070 206,477 5,918 325 4,127 269,809 99,079 181,680 76,724 36,071 9,606 139,870 1,157 40,653 1.15 1.14 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 94,829 208,930 16,252 974 11,667 285,684 99,951 182,439 75,005 34,651 9,995 140,823 1,261 40,354 3.54 3.52 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% 187,780 30,646 83 22,135 245,117 86,327 168,456 57,716 24,312 9,304 134,112 940 33,404 6.87 6.84 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 19,781 102,486 179,821 35,828 165 26,436 214,940 82,926 142,447 62,280 40,728 7,881 120,113 782 21,552 8.27 8.23 5.83 2.50 37.82 3,176 3,174 3,189 3,827 3,038 18,319 4,479 27,533 15.3% 16.7% 19.9% 21.0% 57% 23.7% 27.4% 56.2% 1.3 71 3.9 67,454 37.5% 63,781 19,094 98,694 153,222 33,084 251 24,460 209,336 86,184 133,332 81,505 50,645 6,966 101,622 850 30,860 7.67 7.64 5.26 2.25 32.03 3,173 3,169 3,181 3,365 2,438 2,250 3,364 24,059 15.7% 20.1% 21.6% 21.8% 47% 26.7% 28.7% 49.0% 1.2 74 4.1 78,647 51.3% 56,055 21,178 93,879 Other information – Ten-year summary 173 Ericsson | Annual Report 2014 OTHER INFORMATION Glossary 2G The first digital generation of mobile systems. Includes GSM, TDMA, PDC and cdmaOne. EPC Evolved Packet Core. The core network of the LTE system. 3G Third generation mobile system. Includes WCDMA/HSPA, CDMA2000 and TD-SCDMA. Heterogeneous network Densification and enhancement of a network to increase capacity. Networked Society Ericsson’s vision of what will happen when everything that can benefit from being con- nected is connected, empowering people, business and society. NFV Network Functions Virtualization. Software implementation of network functions that can be deployed in virtualized infrastruc- ture, offering efficient orchestration, automation and scalability. HSPA High Speed Packet Access. Enhancement of 3G/WCDMA that enables mobile broadband. ICT Information and Communication Technology. OSS Operations Support Systems. IMS IP Multimedia Subsystem. A standard for voice and multimedia services over mobile and fixed networks using IP. Penetration The number of subscriptions divided by the population in a geographical area. IP Internet Protocol. Defines how information travels between network elements across the internet. IPR Intellectual Property Rights. IPTV IP Television. A technology that delivers digital television via fixed broadband access. JV Joint Venture. RAN Radio Access Network. SDN Software-Defined Network. A programmable network with physical separa- tion of decisions about where network traffic is sent (control plane), from the underlying system that forward traffic to the selected destinations (data plane). VoLTE (Voice over LTE) VoLTE, based on the IP Multimedia Subsystem (IMS), is a voice service delivered as data flows in LTE, over time replacing the legacy circuit-switched voice network. LTE Long-Term Evolution. 4G; the evolutionary step of mobile technology beyond HSPA, allowing data rate above 100 Mbps. 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 broad- band multimedia communications in fixed-line networks. Examples: IP-DSL, ADSL and VDSL. M-commerce Mobile commerce. M2M Machine-to-machine communication. Managed services Management of operator networks and/or hosting of their services. Mobile broadband Wireless high-speed internet access using the HSPA, LTE and CDMA2000EV-DO technologies. 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. Backhaul Transmission between radio base stations and the core network. BSS Business support systems. CAGR Compound Annual Growth Rate. Capex Capital expenditure. Carrier grade (Also telecom grade) refers to a system, or a hardware or software component, with at least “five nines”, i.e. 99.999%, availability. 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. CO2e The amount of a particular greenhouse gas, expressed as the amount of carbon dioxide that gives the same greenhouse effect. EDGE An enhancement of GSM. Enables the trans- mission of data at speeds up to 250 kbps (Evolved EDGE up to 1 Mbps.) GSM Global System for Mobile Communications. A first digital generation mobile system. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. 174 Ericsson | Annual Report 2014 Financial terminology Capital employed Total assets less non-interest-bearing provi- sions and liabilities. (which includes: non-cur- rent provisions; deferred tax liabilities; other non-current liabilities; current provisions; trade payables; other current liabilities). Capital turnover Net sales divided by average capital employed. Cash conversion Cash flow from operating activities divided by the sum of net income and adjustments to reconcile net income to cash, expressed as percent. Cash dividends per share Dividends paid divided by average number of basic shares. 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 multi- plied by 90 days. If the amount of trade receiv- ables 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 attribut- able 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 aver- age number of shares outstanding are adjusted for the effects of all dilutive potential ordinary shares. EPS (non-IFRS) EPS, diluted, excluding amortizations and write-down of acquired intangible assets and including restructuring charges. EBITA margin Earnings before interest, taxes, amortization and write-downs of acquired intangibles (intel- lectual property rights, trademarks and other intangible assets; see Note C10 “Intangible assets”) as a percentage of net sales. 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 cost of sales divided by the average inven- tories for the year (net of advances from cus- tomers). Net cash Cash and cash equivalents plus short-term investments less interest-bearing liabilities (which include: non-current borrowings and current borrowings) and post-employment benefits. P/E ratio The P/E ratio is calculated as the price of a Class B share at last day of trading divided by Earnings per basic share. 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 percent- age 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). 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 Class B share price during the period, including dividend, 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 maxi- mum potential loss that can arise with a certain degree of probability during a certain period of time. 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. Working capital Current assets less current non-interest-bear- ing provisions and liabilities (which include: current provisions; trade payables; other current liabilities). Exchange rates Exchange rates used in the consolidation SEK/EUR Average rate Closing rate SEK/USD Average rate Closing rate January–December 2014 2013 9.11 9.47 6.89 7.79 8.67 8.90 6.52 6.46 175 Other information – Financial terminology Ericsson | Annual Report 2014 OTHER INFORMATION SHAREHOLDER INFORMATION Telefonaktiebolaget LM Ericsson’s Annual Gen- eral Meeting of shareholders 2015 will be held on Tuesday, April 14, 2015, at 3 p.m. at Stockholm Waterfront Congress Centre, Nils Ericsons Plan 4, 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 Securi- ties Registry) on Wednesday, April 8, 2015; and > Give notice of attendance to the Company at the latest on Wednesday April 8, 2015. Notice of attendance can be given by telephone: +46 8 402 90 54 on weekdays between 10 a.m. and 4 p.m., or on Ericsson’s website: www.ericsson.com Notice of attendance may also be given in writing to: Telefonaktiebolaget LM Ericsson General Meeting of shareholders Box 7835, SE-103 98 Stockholm, Sweden Notice of attendance can be given as from the publication of the notice convening the Annual General Meeting. When giving notice of attendance, please state the name, date of birth or registration number, address, telephone number and number of assistants, if any. The meeting will be conducted in Swedish and simultaneously translated into English. Shares registered in the name of a nominee In addition to giving notice of attendance, shareholders having their shares registered in the name of a nominee, must request the nomi- nee to temporarily enter the shareholder into the share register as per Wednesday, April 8, 2015, in order to be entitled to attend the meeting. The shareholder should inform the nominee to that effect well before that day. Proxy Shareholders represented by proxy shall issue and 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, or if no such certificate exists, a corresponding document of authority. Such documents must not be older than one year 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 original power of attorney, certificates of registration and other documents of authority should be sent to the Company in advance to the address above for receipt by Monday, April 13, 2015. 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 3.40 per share for the year 2014 and that Thursday, April 16, 2015 will be the record date for dividend. Financial information from Ericsson 2014 Form 20-F for the US market: March 2015 Interim reports 2015: > Q1, April 23, 2015 > Q2, July 17, 2015 > Q3, October 23, 2015 > Q4, January 27, 2016 Annual Report 2015: March 2016 176 Ericsson | Annual Report 2014 Ericsson headquarters in Kista, Stockholm, Sweden. For printed publications Where you can find out more Ericsson Annual Report 2014: A printed copy of the Annual Report is provided on request. Information about Ericsson and its development is available on the website: www.ericsson.com Project management: Ericsson Investor Relations 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 Deutsche Bank, Deutsche Bank Shareholder Services American Stock Transfer & Trust Company Registered holders: Toll-free number: +1 (800) 937-5449 Interested investors: Direct dial: +1 (718) 921-8124 Email: DB@amstock.com Ordering a hard copy of the Annual Report: Phone: +1 (888) 301 2504 Annual and interim reports and other relevant shareholder information can be found at: www.ericsson.com/investors Ericsson headquarters Torshamnsgatan 21 Kista, Stockholm, Sweden Registered office Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden Investor relations For questions on the Company, please contact Investor Relations: Phone: +46 (10) 719 00 00 Email: investor.relations@ericsson.com Design and production: Hallvarsson & Halvarsson Group Management, Board of Directors photography: Per Myrehed Printing: Göteborgstryckeriet 2015 Printed on UPM Sol Matt and Munken Lynx Other information – Shareholder information 177 Ericsson | Annual Report 2014 A Networked Society where every person and every industry is empowered to reach their full potential” Telefonaktiebolaget LM Ericsson SE-164 83 Stockholm, Sweden Telephone +46 10 719 0000 www.ericsson.com EN/LZT 138 1462 R1A ISSN 1100-8962 © Telefonaktiebolaget LM Ericsson 2015
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