20-F 1 d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on May 18, 2006

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form 20-F

 


 

¨ registration statement pursuant to section 12(b) or 12(g) of the securities exchange act of 1934

or

 

x annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934

For the Fiscal Year Ended December 31, 2005

or

 

¨ transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934

For the transaction period from/to

Commission file number 0-12033

 


TELEFONAKTIEBOLAGET LM ERICSSON

(Exact Name of Registrant as Specified in Its Charter)

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s Name Into English)

 


Kingdom of Sweden

(Jurisdiction of Incorporation or Organization)

SE-164 83 Stockholm, Sweden

(Address of Principal Executive Offices)

 


Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

American Depositary Shares

B Shares

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 


Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

B shares (SEK 1.00 nominal value)

   14,823,478,760

A shares (SEK 1.00 nominal value)

   1,308,779,918

C shares (SEK 1.00 nominal value)

   0

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

x  Large accelerated filer            ¨  Accelerated filer             ¨  Non-accelerated filer

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  x    Item 18  ¨

Indicate by check mark whether the registrant is a shell company.    Yes  ¨    No  x

 



Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CONTENTS

 

Form 20-F 2005 Cross Reference Table

   i

Financial Highlights

   1

Our Vision

   3

CEO Letter

   4

Operational Review

   6

Share Information

   18

Two-Year Summary

   24

Letter from the Chairman

   26

Board of Directors’ Report

   27

Report of Independent Registered Public Accounting Firm

   40

Consolidated Financial Statements

   41

Notes to the Consolidated Financial Statements

   45

Information on the Company

   120

Forward-Looking Statements

   136

Risk Factors

   137

Shareholder Information

   144

Corporate Governance

   146

Supplemental Information

   170


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

FORM 20-F 2005 CROSS REFERENCE TABLE

Our Annual Report on Form 20-F consists of the Swedish Annual Report for 2005, with certain adjustments to comply with U.S. requirements, together with certain other information required by Form 20-F which is set forth under the heading Supplemental Information. The following cross reference table indicates where information required by Form 20-F may be found in this document.

 

Form 20-F Item Heading

  

Location in this document

   Page
Number

PART I

     

1

  

Identity of Directors, Senior Management and Advisors

  

Not applicable

  

2

  

Offer Statistics and Expected Timetable

  

Not applicable

  

3

  

Key Information

     
  

A

  

Selected Financial Data

  

Two-Year Summary

   24
        

Supplemental Information

  
        

Exchange Rates

   170
        

Supplemental Information

  
        

Five-Year Summary

   179
  

B

  

Capitalization and Indebtedness

  

Not applicable

  
  

C

  

Reason for the Offer and Use of Proceeds

  

Not applicable

  
  

D

  

Risk Factors

  

Risk Factors

   137

4

  

Information on the Company

     
  

A

  

History and Development of the Company

  

Board of Directors’ Report

  
        

Summary

   27
        

Acquisitions/Divestitures, Partnerships and Joint Ventures

   32
        

Capital Expenditures

   31
        

Information on the Company

  
        

General

   120
  

B

  

Business Overview

  

Information on the Company

   120
  

C

  

Organizational Structure

  

Information on the Company

  
        

Organization

   129
        

Supplemental Information

  
        

Investments

   180
  

D

  

Property, Plant and Equipment

  

Information on the Company

  
        

Property, Plant and Equipment

   132
        

Manufacturing and Assembly

   132

4A

  

Unresolved staff comment

  

Not applicable

  

5

  

Operating and Financial Review and Prospects

     
  

A

  

Operating Results

  

Board of Directors’ Report

  
        

Goals, Strategy and Financial Results

   28
        

Notes to the Consolidated Financial Statements

  
        

Note C21 Financial Risk Management and Financial Instruments

   87
  

B

  

Liquidity and Capital Resources

  

Board of Directors’ Report

  
        

Balance Sheet and Cash Flow

   30

 

i


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Form 20-F Item Heading

  

Location in this document

   Page
Number
        

Notes to the Consolidated Financial Statements

  
        

Note C20 Interest-Bearing Provisions and Liabilities

   86
        

Notes to the Consolidated Financial Statements

  
        

Note C21 Financial Risk Management and Financial Instruments

   87
  

C

  

Research and Development, Patents and Licenses

  

Board of Directors’ Report

  
        

Research and Development

   32
        

Information on the Company

  
        

Research & Development

   131
        

Intellectual Property and Licensing

   132
  

D

  

Trend Information

  

Board of Directors’ Report

  
        

Market Environment and Trend information

   27
        

Goals, Strategy and Financial Results

   28
  

E

  

Off-Balance Sheet Arrangements

  

Board of Directors’ Report

  
        

Off Balance Sheet Items

   31
        

Notes to the Consolidated Financial Statements

  
        

Note C21 Financial Risk Management and Financial Instruments

   87
  

F

  

Tabular Disclosure of Contractual Obligations

  

Board of Directors’ Report

  
        

Material Contracts and Contractual Obligations

   33

6

  

Directors, Senior Management and Employees

  

Corporate Governance

  
  

A

  

Directors and Senior Management

  

Members of the Board

   155
        

Company Management

   159
        

Notes to the Consolidated Financial Statements

  
        

Note C33 Subsequent Events

   117
  

B

  

Compensation

  

Notes to the Consolidated Financial Statements

  
        

Note C29 Information Regarding Employees, Members of the Board of Directors and Management

   100
  

C

  

Board Practices

  

Corporate Governance

  
        

Board of Directors

   150
        

Members of the Board

   155
        

Company Management

   159
        

Notes to the Consolidated Financial Statements

  
        

Note C33 Subsequent Events

   117
  

D

  

Employees

  

Board of Directors’ Report

  
        

Employees

   37
        

Notes to the Consolidated Financial Statements

  
        

Note C29 Information Regarding Employees, Members of the Board of Directors and Management

   100

 

ii


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Form 20-F Item Heading

  

Location in this document

   Page
Number
  

E

  

Share Ownership

  

Corporate Governance

  
        

Members of the Board

   155
        

Company Management

   159
        

Notes to the Consolidated Financial Statements

  
        

Note C29 Information Regarding Employees, Members of the Board of Directors and Management

   100
        

Share Information

  
        

Shareholders

   21

7

  

Major Shareholders and Related Party Transactions

     
  

A

  

Major Shareholders

  

Share Information

  
     

Shareholders

   21
  

B

  

Related Party Transactions

  

Notes to the Consolidated Financial Statements

  
        

Note C30 Related Party Transactions

   108
  

C

  

Interests of Experts and Counsel

  

Not applicable

  

8

  

Financial Information

     
  

A

  

Consolidated Statements and Other Financial Information

  

Consolidated Financial Statements

   41
        

Please see also Item 17 cross references

  
        

Board of Directors’ Report

  
        

Legal and Tax Proceedings

   37
        

Supplemental Information

  
        

Dividends

   171
  

B

  

Significant Changes

  

Notes to the Consolidated Financial Statements

  
        

Note C33 Subsequent Events

   117

9

  

The Offer and Listing

     
  

A

  

Offer and Listing Details

  

Share Information

  
        

Offer and Listing Details

   19
  

B

  

Plan of Distribution

  

Not applicable

  
  

C

  

Markets

  

Share Information

  
        

Stock Exchange Trading

   18
  

D

  

Selling Shareholders

  

Not applicable

  
  

E

  

Dilution

  

Not applicable

  
  

F

  

Expenses of the Issue

  

Not applicable

  

10

  

Additional Information

     
  

A

  

Share Capital

  

Not applicable

  
  

B

  

Memorandum and Articles of Association

  

Supplemental Information

  
        

Memorandum and Articles of Association

   170
  

C

  

Material Contracts

  

Board of Directors’ Report

  
        

Material Contracts and Contractual Obligations

   33

 

iii


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Form 20-F Item Heading

  

Location in this document

   Page
Number
        

Acquisitions/Divestitures, Partnerships and Joint Ventures

   32
  

D

  

Exchange Controls

  

Supplemental Information

  
        

Exchange Controls

   174
  

E

  

Taxation

  

Supplemental Information

  
        

Taxation

   175
  

F

  

Dividends and Paying Agents

  

Not applicable

  
  

G

  

Statement by Experts

  

Not applicable

  
  

H

  

Documents on Display

  

Information on the Company

  
        

Documents on Display

   120
  

I

  

Subsidiary Information

  

Not applicable

  

11

  

Quantitative and Qualitative Disclosures About Market Risks

  

Board of Directors’ Report

  
     

Risk Management

   34
        

Notes to the Consolidated Financial Statements

  
        

Note C21 Financial Risk Management and Financial Instruments

   87

12

  

Description of Securities Other than Equity Securities

  

Not applicable

  

PART II

     

13

  

Defaults, Dividend Arrearages and Delinquencies

  

Not applicable

  

14

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

  

Not applicable

  

15

  

Controls and Procedures

  

Corporate Governance

  
     

Disclosure Controls and Procedures

   166

16

  

Reserved

     

16A

  

Audit Committee Financial Expert

  

Corporate Governance

  
     

The Audit Committee

   152
     

Notes to the Consolidated Financial Statements

  
     

Note C33 Subsequent Events

   117

16B

  

Code of Ethics

  

Corporate Governance

  
     

Introduction

   146

16C

  

Principal Accountants Fees and Services

  

Notes to the Consolidated Financial Statements

  
     

Note C31 Fees to Auditors

   110
        

Corporate Governance

  
        

Audit Committee Pre-Approval Policies and Procedures

   166

16D

  

Exemptions from the Listing Standards for Audit Committees

  

Corporate Governance

  
     

Independence Requirements of the Board

   168

16E

  

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

  

Not applicable

  

 

iv


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Form 20-F Item Heading

  

Location in this document

   Page
Number

17

  

Financial Statements

  

Consolidated Income Statement

   41
        

Consolidated Balance Sheet

   42
        

Consolidated Statement of Cash Flows

   43
        

Consolidated Statement of Changes in Equity

   44
        

Notes to the Consolidated Financial Statements

   45

18

  

Financial Statements

  

Not applicable

  

19

  

Exhibits

     
     

Exhibit 1

  

Articles of Association, incorporated by reference to our Form 6-K filed May 16, 2006.

  
     

Exhibit 3

  

Not applicable

  
     

Exhibit 4

  

Memorandum of Agreement, dated 25 October 2005, Telefonaktiebolaget LM Ericsson and Marconi Corporation plc

  
     

Exhibit 5

  

Not applicable

  
     

Exhibit 6

  

Please see Note C1 to the Consolidated Financial Statements, “Significant Accounting Policies”

   45
     

Exhibit 7

  

For definitions of certain ratios used in this report, please see Two-Year Summary

   24
     

Exhibit 8

  

Please see Supplemental Information, Investments

   180
     

Exhibit 11

  

Our Code of Business Ethics and Conduct is included on our web site at http://www.ericsson.com/about /code_business_ethics/index.shtml

  
     

Exhibit 12

  

302 Certifications

  
     

Exhibit 13

  

906 Certifications

  
     

Exhibit 15 (a)

  

Consent of Independent Registered Public Accounting Firm

  

 

v


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

FINANCIAL HIGHLIGHTS

 

SEK million

   2005     20041)  

Net sales

   151,821     131,972  

Operating income

   33,084     26,706  

—operating margin

   21.8 %   20.2 %

Net income

   24,460     17,836  

Earnings per share, diluted, SEK

   1.53     1.11  

Cash dividends per share, SEK

   0.452 )   0.25  

YEAR-END POSITION, SEK million

            

Total assets

   208,829     186,186  

Working capital

   86,980     69,268  

Capital employed

   133,621     115,144  

Property, plant and equipment

   6,966     5,845  

Stockholders’ equity

   104,677     80,445  

Minority interests

   850     1,057  

Interest-bearing provisions and liabilities

   28,094     33,643  

Net cash

   53,411     42,911  

RATIOS

            

Return on equity

   26.2 %   24.2 %

Return on capital employed

   28.7 %   26.4 %

Equity ratio

   50.5 %   43.8 %

Capital turnover

   1.2     1.2  

Inventory turnover

   5.0     5.7  

Accounts receivable turnover

   4.1     4.1  

STATISTICAL DATA, YEAR-END

            

Number of employees

    

—Worldwide

   56,055     50,534  

—Of which in Sweden

   21,178     21,296  

Export sales from Sweden, SEK million

   93,879     86,510  

 * This year, there is only a two-year comparison due to the change to IFRS. For definitions of measures used, please see page 19, “Two-Year Summary”. For further information on our transition to IFRS, please see Notes to the Consolidated Financial Statements—Note C1, “Significant Accounting Policies”.
1) 2004 has been restated in accordance with IFRS.
2) For 2005, adopted by the Annual General Meeting, April 10, 2006.

NET SALES:

Strong growth in global services and mobile networks fueled the 15 percent increase.

OPERATING MARGIN:

Record operating margin reflects our commitment to operational excellence.

NET INCOME:

Net income grew by 37 percent making 2005 the most profitable year in Ericsson’s history.

 

1


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

NET CASH:

Net cash increased by 24 percent to our highest level ever. This strong cash generation allowed our Board of Directors to propose an 80 percent dividend increase.

RETURN ON EQUITY AND EQUITY RATIO:

Record profits lead to strong returns for shareholders and 26.2 percent ROE. Equity ratio now above 50 percent.

LOGO

 

2


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

WHAT IT MEANS TO BE THE PRIME DRIVER IN AN ALL-COMMUNICATING WORLD

From the time our first cry announces our arrival into the world, our need to communicate starts to grow. Interacting with our parents and friends and sharing ideas, we develop our social skills and communication becomes a fundamental part of our lives. We soon want to communicate over longer distances and while on the move.

Mobile communication is now a part of the everyday lives of some two billion people. New ways to enjoy media are emerging with news, music, gaming, television and other experiences conveniently available any time and any place via fixed and mobile broadband. Communication is also improving our professional lives with greater working efficiency, smarter business processes and increased flexibility in blending private and professional life. These are all vital elements of our vision that motivate us as we lead the way into the all-communicating world of the future.

However, two-thirds of the world’s population still do not benefit from communication services. Making communication available and affordable for everybody is an equally important dimension of our vision.

Putting appealing, easy-to-use communication services in the hands of billions of users is a great challenge. It requires not only innovation and technology leadership but also a deep understanding of consumer requirements, market conditions and the ability to undertake large scale assignments. Only a few companies can make this work end-to-end, all the way from one person to another, regardless of which devices and networks they are using.

Ericsson thrives on such technical challenges, but being the prime driver also requires people working together to create new services, new solutions, new ways of communicating for the benefit of all people. At Ericsson we have all of this, and that’s one reason why operators choose to partner with us more than with any other supplier. That’s also why we can confidently say that we are uniquely positioned to be the Prime Driver in an All-Communicating World.

 

3


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

TO MY FELLOW SHAREHOLDERS,

2005 was a tremendous year for Ericsson and for the communications industry as a whole. A record number of people signed up for mobile services, raising the total number of mobile subscriptions by 450 million. Almost 800 million mobile phones were sold and shipments of radio network equipment reached an all-time high. With Ericsson’s 15 percent sales growth outpacing the rate of the mobile systems market, we clearly benefited from these strong industry trends. Our large installed base enabled us to leverage our position with existing customers to gain market share as we entered into new business agreements in all regions of the world.

Financially, we delivered solid profitability with group operating margins of 21.8 percent and a net income increase of 37 percent. This ability to increase our net income significantly faster than sales, demonstrates the importance of scale and our commitment to operational excellence.

2005 was exciting from other perspectives as well. During the year we started to manufacture GSM systems in India and expanded our research and development capacity in the US and China. Our Marconi acquisition extends our market share and customer base with fixed-line operators worldwide. It also strengthens our offering in the strategically important areas of optical transmission, broadband access and related services, providing us with a new base for growth as operators continue their migration to “next generation” networks.

Our rapidly growing global services business now accounts for 28 percent of systems’ sales. This business consists of more recurring revenues and provides a relationship enhancing offering to our customers. As the year drew to a close, we announced the largest contract in the history of our company—an agreement with the operator 3 to build, manage and develop their 3G/WCDMA network in the United Kingdom. This follows similar contracts with the operator 3 in Australia and Italy. These and other agreements with major global operators demonstrate the power of our end-to-end capabilities. We have now publicly announced more than 60 managed services contracts around the world.

Our progress during the year positions us to bring better communication solutions to more people in all regions of the world. Most of the new mobile subscriptions this year came from emerging markets, with China and Russia reporting the largest number of additions. The continuing strong growth of mobile communications throughout most of Africa, Eastern Europe, Latin America and Asia Pacific contributes to global economic and social development, illustrating the vitality of what we do.

The significance of this should not be underestimated. Putting these statistics in human terms means that in the near future, more than 3 billion people, or almost half the world’s population, will be able to instantly connect to each other, essentially con-quering the obstructions of time and distance. It means that a mother, miles from medical care can quickly get advice on how to treat a sick child, farmers in rural India can check on commodity prices in New Delhi, an artist in Tanzania can market his products outside of his village. It means that people throughout the world have equal access to information in real time whenever and wherever they are. There are few inventions that have such a profound effect on the lives of so many.

As we enter 2006, operators in the US, Japan and other markets are in the early stages of the world’s first HSDPA mobile broadband rollouts, bringing data speeds of several megabits per second to mobile subscribers. We are there, as well as in many other markets, helping to bring communications and new capabilities to the world.

Over 90 WCDMA networks have been launched around the world, of which we are a supplier to 49. We expect to deploy this technology in more than a dozen new markets in the year ahead. By year end, we had already deployed 21 HSDPA networks in 17 countries and expect that most existing WCDMA operators will upgrade to HSDPA during 2006. We are excited about leading this next era of mobile communications.

 

4


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

On the mobile phone side of the business, our mobile platforms technology is included in more WCDMA handsets than any other suppliers’. And Sony Ericsson Mobile Communications reported a record year of volumes, sales and profitability, ending the year with a very competitive product portfolio and strong momentum.

Throughout our 129-year history, we have consistently been at the forefront of innovation, responding to our customers’ needs and leading the industry into the future. As we continue to pursue our vision, I believe that we are entering 2006 as well positioned as we have ever been. This ability to be the prime driver of our industry is attributable to three crucial elements—Our long-term customer relationships, Our commitment to technology leadership and Our passion for operational excellence. I believe that it will be these same three things that will keep us on top in the years to come.

Carl-Henric Svanberg

President & CEO

 

5


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

LONG-TERM CUSTOMER RELATIONSHIPS

Strong, long-term customer relationships are integral to the success of our business. We have been building the foundations of today’s relationships for over 100 years and the benefits are still being seen by our shareholders, our customers and consumers. Only by having local resources on the ground and access to experts around the world, can we understand and respond to the unique needs and specific challenges of each customer. This is one reason why all of the world’s top ten mobile operators are our customers, including the largest operators on six continents.

Though our top 20 customers account for the majority of our sales, in total we have more than 425 customers in over 140 countries, and many of these customers have been with us for decades. Why do operators choose Ericsson? When we survey our customers, the responses we most often hear are the most basic: we listen, we are responsive, we are innovative, we understand the consumers and we deliver on our promises.

Of course it is also advantageous to consistently bring new technologies to market, to provide end-to-end solutions including mobile systems, fixed networks and a far-reaching services portfolio as well as cutting-edge mobile platforms and handsets. In this way we ensure that all elements of the network function together, from the core network to the radio base stations, all the way to the subscriber. Our managed services business has been a particularly strong relationship builder during 2005, as handling the day-to-day operations of a customer’s network creates a true partnership.

The mutual trust we build with our customers not only translates into business wins today but it enables us to better meet their future needs as well. Bringing us into the network planning process early enables us to coordinate our development efforts to correspond with where operators see their businesses going in the years ahead. While we receive valuable feedback from our customers, we are able to provide equally valuable consumer research back to them through Ericsson Consumer & Enterprise Lab. And through our Mobility World unit we have created a global network of over 100,000 content providers, application developers and operators to bring all elements of the communications value chain together to help drive the future of mobile data.

Ericsson and Maxis:

HELPING MAXIS INTRODUCE NEW DATA APPLICATIONS

Kugan Thirunavakarasu, head of Mobile Data, Maxis:

“Maxis is deploying 3G services to capitalize on the growth potential of new broadband applications and address the competitive dynamics of the Malaysian market. To do this effectively, we needed to work with a partner with a clear vision—Ericsson’s global reputation made them the obvious choice. We did not want to sit around and wait for the content market to develop—we wanted to create demand. Ericsson’s personalized mobile music portal and existing content relationships helped us to move forward. Ericsson’s ability to host, manage and integrate networks enabled us to reduce initial spending and focus on our core competencies. We are very pleased with the reliability of the network. Usage and revenue growth have exceeded our expectations and we foresee mobile music being a growth catalyst for the industry.”

THE ADVANTAGE OF TECHNOLOGY LEADERSHIP

Bringing faster, more reliable and cost-efficient networks to the world is what we do best. When operators choose their equipment suppliers they are often selecting a partner for the next 10-15 years to take them through not only the initial deployment but also the subsequent expansion and upgrade phase as new solutions come to market.

 

6


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Our early involvement with, and substantial contribution toward, creating the world’s leading technology standards enable us to be first-to-market with many of these solutions. This is a key differentiator for Ericsson and a significant advantage for operators that choose Ericsson as their network partner.

With nearly one-third of our employees working in Research and Development and one of the industry’s largest mobile systems R&D programs, we are a technology leader. We hold over 20,000 patents worldwide and are a leading contributor to the standards of GSM and WCDMA technologies, as well as a considerable holder of Intellectual Property Rights (IPRs) in many other technologies. While our ability to license IPRs to other vendors generates additional profits for Ericsson, our deep commitment to developing technology based on open standards is key to our success.

In addition to both mobile and fixed networks, we also develop and license technology platforms, including the chip design and software that are inside many of the world’s most advanced GPRS and WCDMA handsets.

We have become much more efficient in recent years as we have consolidated R&D centers and focused our investments on fewer core technologies. This has enabled us to improve time-to-market and invest in new areas, such as multimedia solutions, while decreasing R&D as a percentage of sales. This is yet one more aspect of our technology leadership and a key component of our drive for operational excellence.

LOGO

PASSION FOR OPERATIONAL EXCELLENCE

We believe that our business processes must be simple, efficient and better than those of our competitors and thus our operational excellence will be a competitive advantage. As a result of this focus and the dedication of our employees, this past year our operating expenses increased by only five percent while generating sales growth of 15 percent, resulting in record profitability. We also improved our on-time delivery to an all-time high while significantly increasing our radio base station volumes.

These are some of the results of operational excellence, but the daily effort it takes to get there is much more complex.

As we entered 2005 we introduced a new senior management position tasked with driving operational excellence throughout the company. By focusing on operational excellence and creating a more efficient organization we can shorten lead times, improve quality, reduce costs and motivate employees, all of which have helped us to generate very positive feedback from our customers in our annual satisfaction survey.

Some of the actions that we have taken include moving parts of our development function closer to the customer by including it within our business units. In this way we ensure that we are efficiently applying our resources to those areas that are most important for our customers. We have also created a new Multimedia Solutions group that is focused on leveraging our end-to-end capabilities to generate new consumer-focused solutions.

 

7


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

We have made strides toward streamlining our organization with a focus on improving clarity and purpose in every unit and simplicity in every process. It is apparent in our interaction with customers, in the quality of our products and in the pride that our employees take in developing those products faster than our competitors and delivering on-time with our commitments.

There is still much work to be done. In the year ahead, one important area will be to ensure operational excellence as we integrate the recently acquired Marconi operations, particularly in relation to sourcing, sales and delivery precision.

Operational Excellence requires innovation and long-term planning to ensure that we are all working in the simplest and smartest way possible. We will continue to pursue this in all of our business processes. This will enable us to meet the customers’ needs and outperform the competition, a prerequisite for Ericsson to achieve true world leadership.

LOGO

UNDERSTANDING OUR MARKETS

Our long-term presence in many of the world’s markets translates into a deep understanding of local market conditions for business and insights into the global trends driving change.

Consolidation has picked up momentum in recent years, creating larger multinational operators. This is primarily driven by the need for improved economies of scale, business growth, expansion into new markets and the desire to better serve subscribers. More complex technology and the need to reduce costs have increasingly led operators to outsource network management to vendors like Ericsson. While these drivers are constant throughout many parts of the world, markets are in different stages of developing their communications sector.

EMERGING MARKETS*

(45 percent of Ericsson’s Sales)

For people in many parts of the world, access to traditional fixed network services is very limited. Here mobile networks are the best solution for rapid large-scale deployment. While GSM networks have been rolled out in most big cities, there is still much work to do to increase coverage in rural areas and boost capacity in larger cities. With subscriber penetration still low in most of these markets, we are working with our customers to shrink the “digital divide.” We are doing this by reducing the total cost of ownership for operators and developing relevant local applications. Progress is being made as Africa has been doubling its subscriber base every two years and India is adding well over two million subscribers per month. Despite the fact that many of the new users are coming from areas with much lower average income than today’s subscribers, their collective purchasing power is significant. In some of these markets, the rollout of mobile broadband is leading to an acceleration of data usage. We expect that this will spread to many more markets in the years ahead as governments award 3G licenses and locally relevant content continues to be developed.


* The GSM Association (GSMA) defines an emerging market as a country with a GNP per capita index below the World Bank average and a mobile penetration below 60 percent.

 

8


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

DEVELOPED MARKETS

(55 percent of Ericsson’s sales)

Despite high penetration levels, there is still room to grow. Operators are focused on retaining subscribers, stimulating increased usage and introducing attractive new data services to generate additional revenues. This is driving capacity additions to existing GSM networks and the rollout of WCDMA/HSDPA. As of year-end, there were almost 50 million WCDMA subscriptions worldwide and this number is expected to grow significantly in the years ahead. Operators are now beginning to upgrade their WCDMA networks to HSDPA to further improve speed and efficiency. As usage is on the rise and both fixed and mobile data are experiencing rapid growth, many of these operators will need to make additional investments into capacity and transmission. Meanwhile, operators are in the initial stages of making the evolution to all-IP converged networks. This will enable operators who operate both fixed and mobile networks to cost-effectively deliver multimedia content including pictures, music, video and television over either of these access points.

 

LOGO

OUR MARKET-SPECIFIC APPROACH

Regardless of the individual market and the level of development, our approach is the same—we leverage our local presence, consumer understanding, global scale and technology leadership to win business and serve the customer. Being able to understand the local markets and rely on the knowledge and expertise of a global organization brings a very powerful proposition to our customers. It is the Ericsson people that make the difference.

Consumer & enterprise Lab: Understanding the End User

Consumer & Enterprise Lab is our specialized unit for understanding consumer behavior, which is crucial to successfully bring new products and services to market. To help gain such knowledge, we annually conduct over 20,000 consumer interviews in key markets. Henrik Pals-son, Head of Consumer & Enterprise Lab, emphasizes the importance of understanding market trends; “In most countries, adoption of new services is driven by teenagers and young adults, so knowing their habits and attitudes towards different products and services is vital. For operators to

 

9


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

be successful they must define the segments they are targeting and package their offerings accordingly. Our long-term presence in most markets and our understanding of consumer behavior are key differentiators that enable us to provide market-specific solutions to our customers as we work to develop revenue-generating services.”

OUR BUSINESS STRATEGY

To ensure that we are focusing our resources on the most important solutions needed to drive the industry forward, we prioritize our work around five clear areas that have been discussed and agreed to by Ericsson’s 200 top managers at our annual Global Management Conference. These concepts are then shared with the entire organization and put into practice in our daily business. This is one more way that we ensure that all of us at Ericsson are working toward the same goals:

LEAD wireless in 2G, 3G and beyond

We will reinforce our market leadership and further develop our wireless technology to make 2G more efficient and 3G more advanced.

DRIVE complete solutions using telecom grade standards

Working end-to-end and being a major contributor to the world’s leading technology standards means that we see the whole picture, ensuring operators have access to everything they need to launch consumer services.

CREATE more efficient and flexible networks using IP and IMS

Internet Protocol (IP) is transforming telecommunications, and our investments into IMS are starting to be rewarded. We will continue to lead the industry in migrating both fixed and mobile operators towards converged IP-based networks which are able to handle all forms of communications traffic.

EXPAND into high potential business areas

Over the last several years we have built the largest global services business in our sector and in 2005 clearly anchored our leadership with a number of strategic wins. Our Marconi acquisition will also expand our offerings in optical transmission and broadband access, areas where we see strong opportunities going forward.

INNOVATE to develop the market-leading products and services of tomorrow

Our technology leadership enables us to play a significant role in defining standards, developing technologies, growing our patent portfolio and launching innovative products and services.

LOGO

 

10


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

LEADING THE WAY TO THE FUTURE

As one of the world’s largest multinational operators, with networks in 18 countries, Telefonica is a valued customer of Ericsson and a prime example of how we can leverage our global footprint and end-to-end solutions to expand our business opportunities. Ericsson is the prime vendor for Telefonica’s GSM/WCDMA network in their home country of Spain. So when it came time to rollout GSM in their Latin American markets, they chose Ericsson to supply most of their equipment and services once again. But it didn’t stop there. In April 2005, Telefonica announced that it had turned to Ericsson for its most ambitious project yet—the world’s first commercial launch of an IP Multimedia Subsystem (IMS). IMS is an important step on the road toward the converged networks of the future, where new and enriched services and common functions will be reused for multiple fixed and mobile applications. In this way, operators that have both fixed and mobile operations can add additional revenue streams and reduce their operating costs while delivering exciting new applications to their subscribers. This includes video telephony, conference calling, presence management, instant messaging, email and much more. Telefonica and Ericsson are leading the way to the converged world of the future, where consumers have access to richer content and advanced applications on the device that best suits their individual needs.

WINNING PROPOSITIONS

Our winning propositions address growth opportunities as well as cost savings for our customers. Our approach is to apply our competence, technology and large-scale efficiency with innovative business solutions. Focus is on optimized total cost of ownership for operators—lowering financial hurdles while providing new services to encourage subscriber growth and increased usage.

ENTERING NEW GEOGRAPHIC TERRITORIES—EXPANDER SOLUTIONS

In many countries, operators face the challenge of cost effectively addressing new geographic markets where subscriber density may initially be very low. Our studies show that consumers in these markets have similar needs as those in more developed markets with higher penetration levels. The main differences are found in monthly spending and affordability of handsets.

To serve this segment, operators must be able to profitably run operations at much lower revenue levels. An operator’s network cost is mainly driven by the number of radio base station sites needed to provide the coverage and capacity for the required quality of service.

Applying the advanced functionality and flexibility of our high performance radio base stations, we can reduce the number of sites an operator needs by one-third. With capital expenditures as well as operating costs some 30 percent lower than traditional configurations, operators can offer services at prices affordable to a much larger population.

Taking a total cost of ownership approach also means that our Expander solutions have been designed to not only provide basic services at low cost, but also to prepare for the rollout of more advanced services and increased capacity in a simple and scalable way, without having to add more sites.

BROADBAND EVERYWHERE—EFFICIENT EVOLUTION TO ALL-IP

The Internet community, with more than one billion users, is driving the rapid growth of broadband access. With faster speed and better performance, Internet users are discovering new ways to communicate and easy access to content. Now, the introduction of mobile broadband is making it possible to stay connected and enjoy these Internet services while on the move.

 

11


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Evolving today’s voice and data networks into more adaptable, cost-efficient all-IP networks is a critical challenge to the future success of many operators. But operators cannot afford to abandon their existing investments and convert to all-IP in one giant step. They need an incremental step-by-step approach.

Our evolution path to an all-IP network combines the best of today’s telephony services with broadband data and entertainment services. Application of our softswitch solution can reduce core network operating costs by 50 percent while preserving existing services and prior investments in transmission and switching nodes. The addition of Ericsson IMS enables new IP-based services for both mobile and fixed access users, and facilitates the smooth introduction of new services in parallel to legacy services supported by softswitch.

INCREASED OPERATIONAL EFFICIENCY—SERVICES

Operators are continuously challenged to keep spending under control while launching a wider range of services for new revenue streams. Many operators are considering outsourcing non-core business operations to increase their flexibility in meeting these challenges. As an industry leader in this area, we are well placed to advise operators on the strategies and solutions that best support their goals.

Cost reductions of some 15-20 percent can typically be achieved with our managed services offerings. Our approach targets the operator’s business objectives, seeking powerful and flexible solutions with consumer benefits. For operators, this means reduced risks, lower costs and a faster time to market. Consumers enjoy attractive, reliable services, strengthening the operator’s market position.

Ericsson and Rogers Communications inc.

LAUNCHING NEW SERVICES

Bob Berner, Chief Technical Officer, Rogers Communications Inc.:

“Ericsson has consistently provided high-quality, wireless network equipment and services for Rogers and our customers across the country. Their global experience, technology leadership and on-the-ground expertise make them an invaluable part of our success in the Canadian market.”

Our end-to-end approach brings us closer to our customers. Nowhere is this more evident than with Canadian-based Rogers Communications. Rogers is known for its unique asset mix of mobile wireless, broadband data, digital cable services, telephony, and media properties. For the past 20+ years, Ericsson and Rogers have cultivated a strong partnership which has helped position Rogers as a leader in the Canadian market, providing a high-quality network and innovative service offerings to their customers. We provide expertise that assists Rogers in a wide variety of areas including consumer understanding, deployment services, and network integration and optimization. This value-added support demonstrates Ericsson’s understanding of the end-user trends, requirements and opportunities. Recently, Rogers chose Ericsson as its exclusive systems integrator and supplier for the deployment of its high-speed WCDMA/HSDPA voice and data network. With the introduction of HSDPA, Rogers extends its leadership as Canada’s largest supplier of wireless data services. By aligning our efforts with Rogers specific needs at specific points in time, we have created a partnership that enables us to help drive the customer’s strategy.

Ericsson in Nigeria

RAPID SUBSCRIBER GROWTH

Nigeria is the largest country in Africa with a population of more than 140 million. Though Nigeria currently has less than 10 percent mobile penetration, this number is growing rapidly. Five years ago Nigeria represented limited business opportunity, but the beginning of the GSM rollouts in 2001 changed that. Nigeria is

 

12


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

now a top 20 market in terms of sales and we have a leading market share, supplying more than two-thirds of the country’s network equipment. We provide a variety of solutions to four of the top operators in Nigeria including GSM, GPRS and EDGE networks, softswitch, mobile applications and professional services. According to Leif Edwall, Managing Director of Ericsson Nigeria, “Nigeria is a perfect example of Ericsson’s ability to use our local presence and global scale to win new business. When South Africa based MTN entered the Nigerian market our existing relationship with them through our previous work in many other markets put us in an excellent position to be their primary supplier here as well. Our hardworking team in Nigeria enables us to be the supplier of choice, not only for MTN, but also for M-Tel, VMobile and Nitel. Our dedicated local team maintains very good business relations with our customers.”

OUR MARKET POSITION

MOBILE TECHNOLOGY LEADERSHIP

We are the world’s leading supplier of GSM, GPRS, EDGE, WCDMA and HSDPA equipment and services, the technology family that connects more than 80 percent of the world’s mobile subscribers. We are also leading the market in upgrading networks to mobile broadband via WCDMA/HSDPA.

UPGRADING NETWORKS TO IMS AND SOFTSWITCH

Ericsson has comprehensive solutions for upgrading networks to IMS and Softswitch architectures. Ericsson Mobile Platforms includes IMS client architecture in their new releases. We have a leading position in IMS and Softswitch, with solutions for both fixed and mobile networks.

GROWING WITH GLOBAL SERVICES

Our Global Services include network rollout, systems integration, technical support and managed services (network operation and hosting). As a result of our world-class expertise, Ericsson was entrusted to plan, build and integrate over 800 networks during 2005.

EMPOWERING FIXED BROADBAND

Our IP-solutions for upgrading fixed networks to accommodate broadband traffic enable operators to offer their subscribers richer data content and a faster, lower-cost experience. We have a strong position in Ethernet-based broadband access and with Marconi’s ATM-based broadband access we will establish a top-tier global position.

LOGO

 

13


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

LOGO

SONY ERICSSON—OUR LINK TO THE CONSUMER

Sony Ericsson Mobile Communications is a 50/50 joint venture that combines our technology leadership with Sony’s consumer electronics expertise. These complementary strengths enable Sony Ericsson to bring innovative products to market and provide us with valuable insight into consumer trends. In 2005, Sony Ericsson once again started a mobile phone trend with the introduction of several Walkmans®-branded music phones. The W800 was the first in the industry to offer a quality digital music experience and a high-performance 2 mega pixel auto-focus camera, combined with a full-feature mobile phone. Another innovative and popular model, the K750, raised the bar for imaging quality in mobile phones, winning a number of industry awards including the coveted TIPA (Technical Image Press Association) award for Best Mobile Imaging Device.

These successful 2005 launches helped to propel Sony Ericsson to new heights in 2005. The joint venture reported record sales and profitability and enhanced its position with a number of leading operators and distributors.

Sony Ericsson continues to expand its portfolio by adding a variety of handsets designed and priced for different market segments. In the emerging WCDMA market, the K600 offers an attractive and affordable handset with no compromise on size or design. Additions to the 2G portfolio include basic affordable models, camera phones and sleek clamshell designs. This broadening phone portfolio, combined with Sony Ericsson’s accessories, PC-cards and Machine-to-Machine solutions, demonstrate the company’s progress in becoming a leading supplier of a full range of innovative and feature-rich products.

COMMITMENT TO OUR EMPLOYEES

Ericsson is a knowledge company and, as such, we depend on the competence and productive engagement of all of our employees. This is brought into the business context every day through technology leadership, customer responsiveness and operational excellence. Though over 20,000 patents have been registered under Ericsson’s name, the true power of this accomplishment is that each of these patents represents an innovation created by an Ericsson employee.

Our ways of working are based on our core values of professionalism, respect and perseverance. Together they form an essential part of the Ericsson brand and are a key contributor to the company’s continued success. We strive to foster an organization and culture where employees meet challenges with confidence, passion, responsiveness and accountability. They are also well prepared with the most up-to-date industry practices and technological expertise that support the company’s goals and strategies.

To facilitate this, we have built an efficient infrastructure to access and share information including knowledge networks and training centers with customized web-based learning tools.

To ensure the level of expertise of individual employees as well as the company as a whole, we regularly assess our competency requirements and the capabilities of our workforce. We solicit employee input through an

 

14


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

annual survey and in 2005 almost 93 percent of our employees participated. This extraordinarily high level of participation reflects our commitment to employee development and our employees’ strong commitment to help continuously improve our preparedness for future opportunities.

Motivated and competent employees, working for a common cause and acting as one company, are the foundation of our success and the prerequisite to achieve our ultimate goals—customer satisfaction and strong profitability. We strive to provide a stimulating work environment characterized by continuous learning and commitment to innovation. In return, our employees take pride in their work and make the difference with our customers.

It is important for Ericsson to be the employer of choice. We work hard to ensure that employees feel that they are making a real contribution to something important and that their efforts are recognized and appreciated. Only by clearly understanding what the company stands for and where our opportunities lie, can we work in unison to ensure success.

Ericsson and 3

MANAGING NETWORKS FOR OPERATOR 3

Jacqueline Hey, Head of Ericsson Northwest Europe:

“Though we are a very innovative company with excellent technology and strong service delivery, at the end of the day our biggest strength is the people we have on the ground.”

When the operator 3 of the Hutchison Whampoa Group asked us to manage their U.K. network in a 7-year deal signed this past December, it was celebrated throughout our company. This is true not only because this partnership represents the largest contract in our 129-year history, but because it was the 3rd country where 3 decided to trust us with this critical function.

This is not a decision that an operator takes lightly as it requires a great deal of trust to commit to this handover. Yet when 3 asked themselves who do they trust to run their network, Ericsson was the answer all three times—first in Australia, then in Italy and now in the United Kingdom.

Unlike the previous two managed services deals where we were actively supplying the equipment for their network buildout, in the case of 3 UK Ericsson was not an infrastructure supplier before the managed services agreement. That is one more reason why 3 UK is particularly rewarding. As a result of this partnership, a supply of equipment, additional technology and related services will also be part of our future relationship.

The size and breadth of these agreements are prime examples of how our industry leading services organization, technology leadership, geographic reach and consistent performance make us the supplier of choice for most of the world’s leading operators.

OUR BUSINESS HELPS CREATE A BETTER WORLD

Ericsson is committed to making positive contributions to the communities in which we work and the world in which we live. Corporate Responsibility encompasses everything we do to build an enduring value-creation capability for all our stakeholders; customers, employees, investors and society as a whole. We strive to maintain the necessary controls to minimize risk, and we link our products and services to an overall business goal of sustainable growth.

 

15


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Our corporate responsibilities are founded on three main principles:

Economic Prosperity: Pursuing sustainability based on sound economic principles. We contribute to growth in the communities in which we do business; we reduce our customers’ operating costs with an energy-lean portfolio; we help to bridge the “digital divide” by making communication affordable to all.

Environmental Performance: Designing products and services to minimize impacts. We use design for environment (DfE) to avoid hazardous substances and decrease power consumption. Also, telecommunication reduces the need for personal transportation.

Social Equity: Supporting the UN Global Compact. Ericsson was one of the first companies to commit to the Compact’s ten principles, covering human rights, fair labor practices, the environment and anti-corruption.

ERICSSON AND THE ENVIRONMENT

Ericsson supports the UN Global Compact.

In 2005, we were again included in the FTSE4Good and the global DJSI World indexes. And 2005 we were also included in the European DJSI STOXX Index for the first time, where we were named the Technology Equipment Supersector Leader.

We are also listed as one of the top 100 most sustainable companies by Global 100.

2005 Highlights

We adopted a risk-based approach to supply chain management to better govern implementation of our code of conduct.

Ericsson launched a new business model in Tanzania, designed to provide affordable and profitable mobile services to rural users, further building on our partnership with the United Nations Development Program (UNDP) and the Swedish International Development Cooperation Agency (SIDA) in Tanzania.

Ericsson Response is our global initiative to rapidly establish communications anywhere in the world in response to human suffering caused by disasters. We provided support following many natural disasters, including tsunamis, earthquakes and hurricanes in Asia, the Middle East and the Americas.

Ericsson employees made numerous positive contributions to society in the countries where they work and live. These activities were determined by employees according to local needs.

We improved our focus on product energy efficiency. Our 2005 WCDMA radio base stations consume 60 percent less energy than 2001 models. And we plan to reach another 50 percent reduction from 2005 levels by 2008.

From August 13, 2005 Ericsson complies with the EU Directive on Waste Electrical and Electronic Equipment (WEEE). Our Ecology Management Take-Back implementation has begun in more than 30 markets to reduce waste and promote recycling.

We worked to ensure compliance with the EU RoHS (Restriction of the Use of Certain Hazardous Substances) directive by July 1, 2006. RoHS concerns the use of certain substances in electrical and electronic equipment.

For more information, see www.ericsson.com/corporate_responsibility

 

16


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

ANTICIPATING THE FUTURE

Over the past decade, developments in computers, telecommunications and television have been remarkable—leading to a new era of social and economic progress. While these changes may seem to have occurred overnight, in reality, they were many years in the making.

Looking back at forecasts from the mid-1990’s, the International Telecommunications Union (ITU) expected one billion mobile subscribers by 2005. In actuality, the two billion subscriber mark was passed during 2005 and is now on the way to three billion before 2010, making mobility the preferred and more often, the only method of telecommunications.

Consumer demographics are shaping the market. Today’s teenagers and young adults spend more on mobile, Internet and entertainment services than previous generations. As this “mobile generation” matures, and new generations are born into a mobile world, consumer spending on mobile communications should increase. This is a great opportunity for our customers to attract new subscribers and grow their business, but only if they have a good technology partner—one that understands the consumer and is prepared for the future.

Our products have very long life cycles, often stretching 20 years or more. Volume deployments of GSM started in the mid 1990’s and 2005 saw the highest ever shipments. While volume deployments of WCDMA are just beginning, we are already investing R&D into the development of even more advanced technologies so that we will be ready for the next technology wave.

Looking ahead, fixed and mobile networks will converge around a common core network and service layer, providing operators with substantial cost savings. Broadband access combined with an all-IP network environment will offer consumers transparent access to services in the most convenient way. This combined with the rapidly increasing subscriber base and consumer demographics bodes well for our business.

With a long-term-plan and a guiding vision to be the prime driver in an all-communicating world, we will continue to lead our customers into the future as we drive the growth of this fascinating industry.

 

17


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

SHARE INFORMATION

STOCK EXCHANGE TRADING

Ericsson’s Class A and Class B shares are traded on the Stockholm Stock Exchange (Stockholmsbörsen) and the Class B shares are also traded on the London Stock Exchange.

In the United States, the Class B shares are traded on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERICY. Each ADS represents 10 Class B shares.

Approximately 43 (62) billion shares were traded in 2005, of which about 73 (74) percent on the Stockholm Stock Exchange, about 16 (15) percent on NASDAQ, and 11 (11) percent on the London Stock Exchange. Trading volume in Ericsson shares decreased by approximately 31 percent on the Stockholm Stock Exchange and by approximately 31 percent on NASDAQ as compared to 2004.

In 2005, Ericsson was included in the Dow Jones STOXX Sustain ability Index.

SHARE PRICE TREND

In 2005, Ericsson’s total market value increased by about 29 percent to approximately SEK 441 billion (SEK 343 billion in 2004). The OMX SPI index on the Stockholm Stock Exchange increased by 31 percent, the NASDAQ telecom index decreased by approximately 7 percent and the NASDAQ composite index increased by approximately 2 percent in 2005.

SHARE CAPITAL

As of December 31, 2005, Ericsson’s share capital was SEK 16,132,258,678 (16,132,258,678) represented by 16,132,258,678 shares. The par value of each share is SEK 1.00. As of December 31, 2005, the shares were divided into 1,308,779,918 (1,308,779,918) Class A shares, each carrying one vote, and 14,823,478,760 (14,823,478,760) Class B shares, each carrying one-tenth of one vote. As of December 31, 2005, Ericsson held 268,065,241 of its Class B shares.

No Class C shares, each carrying one-thousandth of one vote, are outstanding.

 

LOGO   LOGO

 

18


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

SHARE DATA

 

     2005    2004

Earnings per share, diluted (SEK)1)

   1.53    1.11

P/E ratio, Class B shares1)

   18    19

Dividend (SEK)2)

   0.45    0.25

1) For 2004 restated in accordance with IFRS.
2) For 2005, adopted by the Annual General Meeting, April 10, 2006.

SHARE PRICES ON THE STOCKHOLM STOCK EXCHANGE (SEK)

 

     2005    2004    2003    2002    2001

Class A at last day of trading

   27.50    21.70    13.90    8.60    42.25

Class A high for year (October 4, 2005)

   28.70    26.10    16.80    42.89    91.00

Class A low for year (February 22, 2005)

   19.80    14.00    5.55    3.80    23.98

Class B at last day of trading

   27.30    21.20    12.90    6.10    41.35

Class B high for year (October 4, 2005)

   29.00    24.50    14.60    44.78    88.11

Class B low for year (February 22, 2005)

   19.40    12.70    4.11    2.96    23.18

Offer and listing details

Host market NASDAQ ADS Prices

The tables below state the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions.

Principal trading market the Stockholm Stock Exchange Share prices

The tables below state the high and low sales prices for our Class A and Class B shares as reported by the Stockholm Stock Exchange for the last five years. The equity securities listed on the A-list of the Stockholm Stock Exchange’s Official Price List of Shares currently comprise the shares of 53 companies. Trading on the exchange generally continues until 5:30 p.m. each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.

The exchange publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.

The annual high and low market prices on these markets were as follows:

ANNUAL HIGH AND LOW MARKET PRICES

 

       NASDAQ      THE STOCKHOLM STOCK EXCHANGE
       USD per ADS1)      SEK per Class A share      SEK per Class B share

Period

     High      Low          High              Low              High              Low    

2001

     97.50      22.03      91.00      23.98      88.11      23.18

2002

     43.33      3.40      42.89      3.80      44.78      2.96

2003

     18.85      5.20      16.80      5.55      14.60      4.11

2004

     34.57      17.93      26.10      14.00      24.50      12.70

2005

     37.19      27.78      28.70      19.80      29.00      19.40

 

19


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 


Share market prices prior to August 8, 2002, have been adjusted for the stock dividend element of the stock issue.

1) One ADS = 10 Class B shares. (Prior to October 23, 2002, one ADS = one Class B share. Share prices have been adjusted accordingly.)

Quarterly high and low market prices

The table below states the high and low sales prices for each quarter of 2004 and 2005.

 

       NASDAQ      THE STOCKHOLM STOCK EXCHANGE
       USD per ADS1)      SEK per Class A share      SEK per Class B share

Period

         High              Low              High              Low              High              Low    

2004

                             

First Quarter

     31.41      17.93      25.10      14.00      23.50      12.70

Second Quarter

     32.32      24.72      26.10      20.50      24.50      19.10

Third Quarter

     31.37      23.18      24.50      19.50      23.20      17.40

Fourth Quarter

     34.57      27.76      24.10      20.70      23.80      19.80

2005

                             

First Quarter

     32.49      27.78      22.40      19.80      22.10      19.40

Second Quarter

     33.87      27.80      26.10      19.80      26.30      19.70

Third Quarter

     36.99      31.74      28.40      24.30      28.50      24.30

Fourth Quarter

     37.19      32.17      28.70      25.30      29.00      25.20

1) One ADS = 10 Class B shares

Monthly high and low market prices

The table below states the high and low sales prices for each of the last nine months (August 2005 to April 2006).

 

       NASDAQ      THE STOCKHOLM STOCK EXCHANGE
       USD per ADS1)      SEK per Class A share      SEK per Class B share

Month

         High              Low              High              Low              High              Low    

August 2005

     36.99      33.50      27.70      25.50      27.80      25.30

September 2005

     36.87      34.75      28.40      25.70      28.50      25.70

October 2005

     37.19      32.19      28.70      25.30      29.00      25.20

November 2005

     33.91      32.17      27.50      25.80      27.50      25.60

December 2005

     35.15      32.86      28.30      26.50      28.10      26.40

January 2006

     37.00      33.63      28.90      25.80      28.80      25.60

February 2006

     36.44      33.94      28.10      26.40      28.00      26.30

March 2006

     39.37      33.78      30.90      26.60      31.00      26.70

April 2006

     39.28      34.62      29.90      26.00      30.00      26.10

1) One ADS = 10 Class B shares

 

20


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2001-2005

 

          Number of shares    Capital stock

2001

   Conversions of convertible debentures    168,395    168,395

2001

   New issue (Class C shares) (later converted to Class B)    155,000,000    155,000,000

2002

   Conversions of convertible debentures    560    560

2002

   New issue (Class B shares) 1:1    7,908,754,111    7,908,754,111

2003

   New issue (Class C shares) (later converted to Class B)    158,000,000    158,000,000

2003

   December 31    16,132,258,678    16,132,258,678

2004

   December 31 (no changes)    16,132,258,678    16,132,258,678

2005

   December 31 (no changes)    16,132,258,678    16,132,258,678

SHAREHOLDERS

As of December 31, 2005, we had 869,861 shareholders registered at VPC (the Swedish Securities Register Center). According to information provided by Citibank, there were 119,361,288 ADSs outstanding as of December 31, 2005 and 6,298 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/or nominees for the accounts of their customers. As of December 31, 2005, banks, brokers and/or nominees held ADSs on behalf of 224,696 accounts.

According to information known by year-end 2005, approximately 81 (80) percent of our Class A and Class B shares were owned by Swedish and international institutions.

TEN LARGEST COUNTRIES OF OWNERSHIP

 

       As of December 31,  

Percent of capital

         2005              2004      

Sweden

     54.1 %    53.7 %

United States

     26.5 %    26.9 %

United Kingdom

     4.3 %    4.7 %

Luxembourg

     3.8 %    4.1 %

Switzerland

     1.8 %    1.7 %

Germany

     1.1 %    1.2 %

France

     1.1 %    0.9 %

Netherlands

     0.9 %    —    

Belgium

     0.9 %    0.9 %

Denmark

     0.9 %    0.8 %

Japan

     0.6 %    —    

Other countries

     4.0 %    4.1 %
       

Source: SIS Ägarservice AB

 

21


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

The following table sets forth share information, as of December 31, 2005, with respect to our largest shareholders registered at VPC and known by us, ranked by percentage of voting rights:

LARGEST SHAREHOLDERS BY VOTING RIGHTS, DECEMBER 31, 2005

 

Identity of

person or group1)

  

Number of

Class A shares

   Percentage of
total Class A
shares
   

Number of

Class B

shares

   Percentage of
total Class B
shares
    Voting
rights,
percent
    Percentage
of capital
 

Investor AB

   513,320,192    39.22     297,073,324    2.00     19.46     5.02  

AB Industrivärden

   372,000,000    28.42     5,100,000    0.03     13.35     2.34  

Svenska Handelsbankens Pensionsstiftelse

   83,903,000    6.41     —      —       3.01     0.52  

Livförsäkrings AB Skandia

   58,960,986    4.51     81,258,181    0.55     2.40     0.87  

Pensionskassan SHB Försäkringsförening

   63,360,000    4.84     —      —       2.27     0.39  

Alecta

   13,725,000    1.05     371,160,279    2.50     1.82     2.39  

Robur Fonder

   7,438,773    0.57     376,867,325    2.54     1.62     2.38  

SEB-Trygg Försäkring

   27,923,095    2.13     58,045,000    0.39     1.21     0.53  

SHB/SPP fonder

   664,089    0.05     315,040,121    2.13     1.15     1.96  

AMF Pension

   4,763,682    0.36     268,000,000    1.81     1.13     1.69  

Nordea Fonder

   2,593,202    0.20     247,448,828    1.67     0.98     1.55  

Tredje AP-fonden

   11,945,095    0.91     151,570,735    1.02     0.97     1.01  

Första AP-fonden

   7,472,938    0.57     167,206,311    1.13     0.87     1.08  

Fjärde AP-Fonden

   2,812,755    0.22     208,305,145    1.41     0.85     1.31  

SEB fonder

   3,541,090    0.27     189,561,780    1.28     0.81     1.20  

Svenska Handelsbankens Personalstiftelse

   20,000,000    1.53     —      —       0.72     0.12  

Andra AP-fonden

   1,367,271    0.10     173,646,901    1.17     0.67     1.08  

AFA Försäkring

   —      —       140,203,301    0.95     0.50     0.87  

Foreign owners2)

   16,239,472    1.24     7,391,350,675    49.86     27.06     45.90  

of which Capital Group

   —      —       477,804,643    3.22     1.71     2.96  

of which Fidelity funds

   —      —       339,540,793    2.29     1.22     2.10  

Others

   96,749,278    7.40     4,381,640,854    29.56     19.17     27.78  
                                  

Total

   1,308,779,918    100 %   14,823,478,760    100 %   100 %   100 %
                                  

1) Sources: SIS Ägarservice AB and VPC AB, December 31, 2005 and Capital Precision, December 2005.
2) Including Nats Cumco as Nominee: 1,122,692,601 Class B shares.

 

22


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

The following table indicates changes in holdings of the Class A and Class B shares, respectively, held by major shareholders and percent of voting rights, as of December 31, 2003, 2004 and 2005.

 

     2005    2004    2003

Person or group (percent)

   Class A
shares
   Class B
shares
   Voting
rights
   Class A
shares
   Class B
shares
   Voting
rights
   Class A
shares
   Class B
shares
   Voting
rights

Investor AB

   39.22    2.00    19.46    39.22    2.00    19.46    39.11    3.58    38.29

AB Industrivärden

   28.42    0.03    13.35    28.42    —      13.33    28.34    1.15    27.72

Svenska Handelsbankens Pensionsstiftelse

   6.41    —      3.01    6.41    —      3.01    7.38    0.23    7.21

Livförsäkrings AB Skandia

   4.51    0.55    2.40    4.51    0.50    2.38    4.53    1.09    4.45

Pensionskassan SHB Försakringsfö rening

   4.84    —      2.27    4.84    —      2.27    4.83    0.20    4.72

Alecta

   1.05    2.50    1.82    0.19    1.25    0.75    —      —      —  

Robur Fonder

   0.57    2.54    1.62    0.51    2.65    1.62    0.00    3.09    0.07

SEB Trygg Försakring

   2.13    0.39    1.21    2.13    0.39    1.22    1.98    0.77    1.95

SHB/SPP Fonder

   0.05    2.13    1.15    0.24    1.74    1.05    0.14    1.71    0.17

AMF Pension

   0.36    1.81    1.13    0.36    2.15    1.33    —      —      —  

Nordea Fonder

   0.20    1.67    0.98    0.26    1.64    1.01    —      —      —  

Tredje AP-fonden

   0.91    1.02    0.97    0.94    0.97    0.97    0.77    1.03    0.78

Första AP-fonden

   0.57    1.13    0.87    0.57    1.17    0.90    0.33    1.31    0.36

Fjärde AP-fonden

   0.22    1.41    0.85    0.22    1.32    0.81    —      —      —  

SEB fonder

   0.27    1.28    0.81    0.27    1.25    0.80    0.04    1.52    0.08

Svenska Handelsbankens Personalstiftelse

   1.53    —      0.72    1.53    —      0.72    1.52    0.06    1.49

Andra AP-fonden

   0.10    1.17    0.67                  

AFA Försäkring

   —      0.95    0.50                  

Foreign owners

   1.24    49.86    27.06    1.82    50.15    27.48    1.09    45.74    2.12

of which Capital Group

   —      3.22    1.71    —      2.54    1.35    —      0.00    0.00

of which Fidelity funds

   —      2.29    1.22    —      5.52    2.93    —      5.51    2.93

Others

   7.40    29.56    19.17    5.85    32.75    20.04    8.36    38.45    9.05
                                            

Total

   100.00    100.00    100.00    100.00    100.00    100.00    100.00    100.00    100.00
                                            

Source: SIS Ägarservice AB and VPC AB, December 31, 2005, Ilios and Capital Precision, December 2005.

Our major shareholders do not have different voting rights than other shareholders.

As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) severally or jointly.

As of December 31, 2005, the total number of voting securities of the Company owned by officers and directors as a group was:

 

     Number of
Class A
shares
   Number of
Class B
shares
   Voting
rights,
percent

Officers and directors as a group (27 persons)

   6,080    17,863,398    0.06

For individual holdings, see “Corporate Governance”.

 

23


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

TWO-YEAR SUMMARY

 

SEK million

   2005     20041)  

Net sales

   151,821     131,972  

Operating income

   33,084     26,706  

—operating margin

   21.8 %   20.2 %

Financial net

   251     -540  

Net income

   24,460     17,836  
            

Year-end position

    

Total assets

   208,829     186,186  

Working capital

   86,980     69,268  

Capital employed

   133,621     115,144  

Property, plant and equipment

   6,966     5,845  

Stockholders’ equity

   104,677     80,445  

Minority interests

   850     1,057  

Interest-bearing provisions and liabilities

   28,094     33,643  
            

Other information

    

Earnings per share, basic, SEK

   1.53     1.11  

Earnings per share, diluted, SEK

   1.53     1.11  

Cash dividends per share, SEK

   0.452 )   0.25  

Stockholders’ equity (SEK per share)

   6.60     5.08  

Number of shares (in millions)

    

—outstanding, basic, at end of period

   15,864     15,832  

—average, basic

   15,843     15,829  

—average, diluted

   15,907     15,895  

Additions to property, plant and equipment

   3,365     2,452  

Depreciation on property, plant and equipment

   2,804     2,434  

R&D and other technical expenses

   24,454     23,421  

—as percentage of net sales

   16.1 %   17.7 %
            

Ratios

    

Return on equity

   26.2 %   24.2 %

Return on capital employed

   28.7 %   26.4 %

Equity ratio

   50.5 %   43.8 %

Debt-equity ratio

   0.3     0.4  

Current ratio

   1.9     2.0  

Capital turnover

   1.2     1.2  

Inventory turnover

   5.0     5.7  

Accounts receivable turnover

   4.1     4.1  

Return on sales

   23.5 %   22.9 %

Payment readiness, SEK million

   78,647     81,447  

—as percentage of net sales

   51.8 %   61.7 %

Net cash, SEK million

   53,411     42,911  
            

Statistical data, year-end

    

Number of employees

    

—Worldwide

   56,055     50,534  

—Of which in Sweden

   21,178     21,296  
            

This year, there is only a two-year comparison due to the change to IFRS. All figures in the table are based on IFRS.

1) 2004 has been restated in accordance with IFRS.
2) For 2005, adopted by the Annual General Meeting, April 10, 2006.

 

24


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Working capital: Current assets less current non-interest-bearing provisions and liabilities.

Capital employed: Capital employed is defined as total assets less non-interest-bearing provisions and liabilities.

Earnings per share: See Notes to the Consolidated Financial Statements—Note C1, “Significant Accounting Policies”, for information on principles for calculation of earnings per share.

Cash dividends per share: Defined as dividends paid divided by average number of shares, basic.

Stockholders’ equity (SEK per share): Defined as Stockholders’ equity divided by the Number of shares outstanding, basic, at the end of the period.

Return on equity: Defined as Net income as a percentage of average Stockholders’ equity (based on the amounts at January 1 and December 31).

Return on capital employed: Defined as 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).

Equity ratio: Defined as Equity, expressed as a percentage of total assets.

Debt-equity ratio: Defined as total interest-bearing provisions and liabilities divided by Equity.

Current ratio: Current assets divided by the sum of current provisions and liabilities.

Capital turnover: Net sales divided by average Capital employed.

Inventory turnover: Cost of sales divided by average Inventory.

Accounts receivable turnover: Net sales divided by average Accounts receivable.

Return on sales: Operating income plus Financial income expressed as a percentage of net sales.

Payment readiness: Defined as cash and cash equivalents and short-term investments less short-term borrowings plus long-term unused credit commitments. Payment readiness is also shown as a percentage of net sales.

Net cash: Defined as cash and cash equivalents plus short-term cash investments less interest-bearing provisions and liabilities.

 

25


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

LETTER FROM THE CHAIRMAN

Dear Shareholder,

Ericsson performed well during 2005—generating the highest profitability and largest net cash position in its history. The strong sales growth and healthy profit levels signify the ongoing benefits of restructuring and the hard work of employees around the world.

Ericsson shares also performed well during 2005—appreciating 29 percent in value and outperforming the most relevant stock market indices. Continued robust financial performance convinced all credit rating agencies to restore their investment grade ratings for Ericsson.

The financial community has acknowledged our sustainable development efforts. Ericsson was not only named the Supersector leader in the Dow Jones STOXX Sustainability Index but also included in the FTSE4Good Europe 50 index and listed among the Global 100 Most Sustainable Corporations. This recognition reflects our ongoing efforts to build an enduring value-creation capability for all stakeholders: investors, customers, employees and society.

The Board of Directors works to ensure that Ericsson adheres to high standards of corporate governance and that business is conducted in an ethical manner. Although I believe that our management controls are generally in line with best practices, we continuously strive to make them even better. Along these lines, steering documents and work procedures have been evaluated and adapted to the recently introduced Swedish Code of Corporate Governance. Implementation of the applicable requirements of the U.S. Sarbanes-Oxley Act remains well on track to meet the required effective dates.

In addition to the financial and operational performance, there was good progress on a number of strategic initiatives. Ericsson’s leading position in “next-generation” network technology was reinforced with the early introduction of mobile broadband as well as softswitch and IP Multimedia Subsystem (IMS) based networks for fixed and mobile operators. This includes the world’s first commercial launches of each of these technologies. While these accomplishments demonstrate Ericsson’s leadership in delivering “next-generation” networks, the Group is creating significant value in other areas as well.

During 2005, Ericsson was awarded two record-breaking managed services agreements, which increased the total number of subscribers in networks managed by the Company to 53 million—establishing Ericsson as a market leader in this increasingly important area. Sony Ericsson Mobile Communications significantly improved their position with a number of award winning models and popular Walkman® branded music phones.

In addition to these organic developments, we also agreed to acquire key assets from Marconi to strengthen the Company’s position in rapidly growing markets such as optical transmission and broadband access. All in all, we are building on Ericsson’s competitive advantages to expand the Company’s market position and invest in key growth areas for the future.

On behalf of the Board of Directors, I would like to thank the management team and all Ericsson employees for their accomplishments during the year. This year’s solid performance is also a testament to your valued support as a shareholder. I thank you for allowing me to serve as your Chairman during 2005 and look forward to the continued success of our Company.

Sincerely yours,

LOGO

Michael Treschow

Chairman of the Board

 

26


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

BOARD OF DIRECTORS’ REPORT

This Board of Directors’ Report contains discussion and analysis of the financial statements and operational results. This report also includes “forward-looking statements” about future market conditions, strategies and anticipated results. Such statements are based on assumptions and estimates, which are subject to risks and uncertainties. Actual results could differ materially from those described or indicated by such forward-looking statements. For further discussion, please see “Forward-looking Statements.”

The terms “Ericsson”, “Group”, “the Company”, or similar all refer to Telefonaktiebolaget LM Ericsson and its consolidated subsidiary companies. Unless otherwise noted, numbers in parenthesis indicate prior year, i.e. 2004.

As of January 1, 2005, Ericsson changed accounting principles to International Financial Reporting Standards (IFRS) as required by all publicly listed companies within the EU (European Union). Our consolidated financial statements for 2004 have been restated according to IFRS. However, the Parent Company is required by Swedish regulations to continue reporting according to Swedish GAAP.

SUMMARY

With sales increasing 15 percent and net income 37 percent, the Company’s 2005 performance can be characterized by profitable growth and good progress in strategically important areas. Ericsson supplied the first 3G/HSDPA mobile broadband network in commercial service. Ericsson is the first and only supplier with an IMS-based service layer in commercial operation. BT named Ericsson as the exclusive supplier of softswitching functions for their 21st Century Network in the UK. These achievements reinforce Ericsson’s leading position in “next generation” networks.

Professional services operations were expanded considerably with a number of multi-year managed services agreements, including the two largest agreements in the Company’s history. The majority of all 3G handsets sold outside of Japan are based on technology supplied by Ericsson Mobile Platforms. The Sony Ericsson Mobile Communications joint venture also reported solid progress and has now reached positive accumulated earnings.

The acquisition of Marconi’s optical transmission, broadband access and other strategic operations is expected to significantly improve the Company’s position in these high-growth markets. All in all, we have strengthened the Company’s ability to benefit from a number of growth opportunities beyond those offered by the mobile systems equipment market.

MARKET ENVIRONMENT AND TREND INFORMATION

2005 was a record year in terms of net subscriber additions: some 450 million new mobile subscriptions and almost 800 million mobile phones were sold. Network equipment markets also developed positively during 2005 with particularly strong growth in mobile systems, fixed broadband access and optical transmission.

Excluding the effects of technological developments, pricing trends remained similar to previous years with competition continuing to be especially intense regarding strategic pricing necessary to win new contracts. A number of major contracts for new network rollouts are expected to be awarded in the near term and price competition is likely to intensify during the bidding process. The price/performance trend in both mobile phones and network infrastructure is significantly expanding the addressable market with resulting unit volume increases more than offsetting lower average selling prices.

New mobile subscriptions, mainly in emerging markets, increased usage in almost all regions and expanding deployment of 3G networks drove growth within the mobile systems market. There are now some two billion

 

27


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

mobile subscribers worldwide and global subscription penetration was 34 (27) percent at year-end. We expect another billion net subscription additions before the end of this decade, which will drive a significant increase in the number of initial network build outs and create opportunities for network rollout services and professional services in addition to mobile network systems offerings.

Total traffic on mobile networks worldwide grew an estimated 30% in 2005, driven by subscriber additions and increased average minutes of use (MOU). Western Europe is among the highest penetrated mobile markets in the world in terms of subscriptions. However, Western European usage is significantly lower than the average for the rest of the world. Increased tariff competition among operators is expected to stimulate Western European usage closer to the global average over the coming few years, requiring continued expansion of mobile network capacity.

At year-end, there were 91 3G/WCDMA networks in commercial service of which Ericsson is a supplier to 49. The number of WCDMA subscriptions almost tripled during 2005 and now exceeds 47 million. Net subscriptions are expected to increase rapidly as more 3G networks are placed in service and as lower-cost handsets become available.

Operator consolidation continues to be a key trend in a number of markets. In North America, operator consolidation caused a temporary slowdown in GSM/EDGE investments during 2004 and early 2005 while the companies involved underwent their merger process. In Latin America, where significant operator consolidation occurred in 2003 and earlier, we experienced extraordinarily strong growth for the second consecutive year, especially from operators converting to GSM technology. In Europe, we see an acceleration of cross border expansion as operators there seek revenue growth and economies of scale. In other regions, operator consolidation is ongoing with the emergence of a number of rapidly growing pan-regional operators.

Within fixed networks, many operators are contemplating a conversion to an all-IP (Internet Protocol) broadband environment. This will enable more efficient handling of fixed and mobile voice, data and image based communications as well as provide a platform for converged services. Several operators have already started such an upgrade process with many others expected to follow soon. While we believe that fixed network operators’ spending for network equipment in total was up slightly in 2005, certain segments essential to “next generation” networks—optical transmission, broadband access and IMS/softswitch—showed stronger growth.

In addition to network rollout and systems integration services, the opportunity to supply network management and hosting of services for network operators is growing strongly. The market for such managed services is estimated at USD 8 billion in 2005 with good growth prospects going forward as operators realize the competitive advantages that are made possible when outsourcing operations and other non-strategic activities. Smaller operators especially benefit by gaining access to service capabilities and content far beyond what they could normally afford while at the same time lowering their risks and improving their time to market.

GOALS, STRATEGY AND FINANCIAL RESULTS

Our ultimate goal is for the Company to generate growth and competitive profit that is sustainable over the longer term. Ericsson’s strategy is to be the preferred business partner to customers, especially the world’s leading network operators. Ericsson strives to be the market and technology leader for the supply and operation of network infrastructure. Being a market leader allows the Company to leverage economies of scale to develop superior products and services and thereby offer customers competitive advantages. In addition, when systems integration is combined with mobile platform products and the Sony Ericsson joint venture for mobile handsets, the scope of Ericsson’s operations extends to complete end-to-end solutions.

 

28


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Progress relative to financial targets

The Company performed in line with its financial targets of:

 

    Increase sales at least in line with the market growth;

 

    Deliver best-in-class operating margins, i.e. better than the main competitors;

 

    Generate positive cash flow before financing;

 

    Maintain Investment Grade credit ratings.

Sales

Group sales grew 15 percent mainly driven by increased sales within our systems segment, which consists of network equipment and related services. The effect of fluctuations in foreign exchange rates was not significant on reported sales. Unit volume increases drove mobile network sales growth while network buildout projects and professional services drove Global Services growth. Based on Ericsson’s reported sales combined with the publicly reported and estimated sales for Ericsson’s main competitors, we believe the mobile systems market grew approximately 11 percent in USD terms during 2005. During this period, Ericsson’s mobile systems sales increased by 15 percent measured in constant currencies, indicating that Ericsson grew faster than the market.

Sales of services grew 29 percent during 2005, reflecting strong market growth and our market position. Sales of professional services were particularly encouraging as the Company was awarded a number of contracts for network management, including the largest contracts in Ericsson’s history.

Within fixed networks, Ericsson was awarded a number of contracts for “next generation” converged networks that include broadband access, IMS/softswitch and packet switching products. We are optimistic regarding growth opportunities for broadband access, optical transmission and converged networks and are increasing our focus in these areas with the acquisition of key assets of Marconi.

Positive sales developments within Mobile Platforms and Cables (Network Technologies) were not sufficient to compensate for lower sales by the other units within Other Operations. Total sales declined by 4 percent and operating income was SEK 1 billion lower mainly due to losses in Enterprise Systems, Microwave Systems and Power Modules. Operating margin within Other Operations was also negatively affected by approximately SEK 0.2 billion due to one-off payments for breach of contract damages following an arbitration award.

During the year, we announced 78 new or expanded agreements to supply network equipment and/or related services to operators around the world. This compares with 59 in 2004 and 58 in 2003. Although we do not book frame agreements as firm orders, such customer commitments reassure the robustness of our order backlog, which is at the highest level in three years.

SALES BY SEGMENT AND GEOGRAPHIC REGION 2005

 

(SEK m.)

   Systems    Percent
change
    Other
Operations
   Percent
Change
    Total    Percent
change
    Percent
of total
 

Western Europe

   35,705    6 %   6,235    -3 %   41,940    5 %   28 %

Central and Eastern Europe, Middle East and Africa

   38,781    21 %   1,167    -23 %   39,948    19 %   26 %

Asia Pacific

   29,914    10 %   1,512    8 %   31,426    10 %   21 %

North America

   18,773    27 %   659    -9 %   19,432    26 %   13 %

Latin America

   18,813    33 %   262    -26 %   19,075    32 %   12 %
                                       

Total

   141,986    17 %   9,835    -6 %   151,821    15 %   100 %
                                       

 

29


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Margins and operating expenses

Our ambition is for Ericsson to generate competitive margins. With best-in-class operating margins, the Company continued to perform at record levels. The lower gross margins were mainly a reflection of a product mix that has a significantly higher proportion of services sales. Operating margin was improved by tight cost control of operating expenses, especially selling, general and administrative expenses.

While sales increased 15 percent, operating expenses increased only 5 percent. Operating expenses measured as a percentage of net sales decreased from 30 percent in 2004 to 27 percent in 2005 reflecting ongoing efficiency improvements as well as the continued benefits of the cost reduction measures completed in 2004.

Going forward, we want the Company to continue to deliver competitive profit. We must also ensure a healthy balance between short-term profit and longer-term growth. Reinvesting more profits now will strategically position Ericsson to better benefit from a number of opportunities in the future.

Other income statement items

Share in earnings of joint ventures and associated companies before tax were stable with continued solid contribution from Sony Ericsson Mobile Communications. Ericsson’s 50 percent share in earnings of the joint venture increased from SEK 2.1 billion in 2004 to SEK 2.3 billion. During the year, the joint venture also achieved the significant milestone of retained earnings exceeding cumulative losses.

The strong cash position and repayment of debt improved the financial net from SEK -0.5 billion in 2004 to SEK 0.3 billion.

Income after financial items was SEK 33.3 (26.2) billion. This was an improvement of SEK 7.2 billion on a sales increase of SEK 19.8 billion.

Net income attributable to the stockholders of the parent company improved to SEK 24.3 (17.5) billion and diluted earnings per share improved to SEK 1.53 (1.11). Diluted earnings per share according to US GAAP were SEK 1.54 (0.91).

Balance Sheet and Cash flow

Capital usage and cash position improved during 2005. Total assets were SEK 208.8 (186.2) billion at year-end, an increase of 12 percent compared to 2004. The largest items contributing to the increase were higher accounts receivable and inventories reflecting the increased business activity.

SEK 0.9 billion of non-current borrowings was repaid. Post-employment benefits were funded by SEK 8.3 billion with the establishment of a pension trust.

Net cash developed favorably, with the excess of cash over debt increasing from SEK 42.9 billion to SEK 53.4 billion. Equity increased to SEK 105.5 (81.5) billion and the equity ratio improved to 50.5 (43.8) percent.

Return on Capital Employed (ROCE) was 29 percent compared with 26 percent in 2004.

Cash flow before financial investing activities

Cash flow before financial investing activities was SEK 11.3 (17.7) billion, driven mainly by improved income. SEK 8.3 billion was used to fund the Swedish pension trust and netted against a corresponding liability

 

30


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

on the balance sheet. Excluding this item, cash flow before financial investing activities was SEK 19.6 billion. Cash outlays regarding restructuring amounted to SEK 2.0 (5.7) billion, where SEK 1.5 billion relates to restructuring programs initiated during 2001-2003.

Due to the strong sales growth this year involving significant network rollouts with long project intervals in markets with slower payment patterns, working capital efficiency, although still healthy, declined compared with 2004. Efforts to further improve capital efficiency will continue, especially within inventories.

WORKING CAPITAL EFFICIENCY MEASURES

 

     Target    2005    2004

Days Sales Outstanding (DSO)

   <90    81    75

Inventory Turnover (ITO)

   >5.5    5.0    5.7

Payable Days 1)

   >45    52    51

1) Payable days: Accounts payable divided by Cost of sales and multiplied by 365 days.

Capital expenditures

We continuously monitor the Company’s capital expenditures and evaluate whether adjustments are necessary in light of market conditions and other economic factors. Capital expenditures were mainly for investments in test equipment used to develop, manufacture and deploy network equipment. The increase in capital expenditures from 2004 to 2005 was mainly due to investments needed to support the rapidly growing services business. Capital expenditures in relation to sales is not expected to be significantly different in 2006. However, in addition to these capital expenditures there are commitments to repay SEK 9.8 billion of debt and SEK 16.8 billion for the purchase of certain assets from Marconi. With a net cash position at year-end of SEK 53.4 billion, we expect the Company to be able to cover all 2006 capital expenditure with no additional borrowings, by using funds generated from operations.

The following table summarizes annual capital expenditures during the five years ended December 31, 2005:

CAPITAL EXPENDITURES 2001-2005

 

SEK billion

   2005    2004    2003    2002    2001

Capital expenditures

   3.4    2.5    1.8    2.7    8.7

of which Sweden

   1.0    1.1    1.1    1.2    3.8

Off Balance Sheet items

Customer financing credits of SEK 0.1 (0.6) billion issued by third parties and guaranteed by Ericsson were outstanding as per December 31, 2005. Also see Notes to the Consolidated Financial Statements—Note C21, “Financial Risk Management and Financial Instruments.”

Credit ratings

Moody’s as well as Standard & Poor’s (S&P) credit rating agencies raised Ericsson’s credit ratings during 2005. At year-end, their ratings of Ericsson’s creditworthiness were Baa3 for Moody’s and BBB- for S&P, both considered to be Investment Grade.

 

31


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

ERICSSON CREDIT RATINGS YEAR END 2004–2005

 

     2005    2004

Moody’s

   Baa3    Ba2

Standard & Poor’s

   BBB-    BB+

Research and development

A robust R&D program is key to Ericsson’s competitiveness and future success. With most R&D invested in mobile communications network infrastructure, Ericsson’s program is one of the largest in the industry. We have increased investments in the strategically important areas of broadband access, core network and service layer for fixed and mobile networks. With the acquisition of Marconi, we will broaden R&D investments to include optical transmission and further strengthen broadband access, softswitch/IMS and IP routing capabilities.

R&D PROGRAM

 

     2005     2004  

Expenses (SEK billion)

   24.5     23.4  

As percent of sales

   16.1 %   17.7 %

Employees within R&D at December 31

   16,500     16,000  

Patents

   20,000     16,000  

During 2006, R&D expenses, excluding effects from the Marconi acquisition, are expected to remain at about the same level in absolute terms as in 2005.

Acquisitions/divestitures, partnerships and joint ventures

During 2005, Sony Ericsson Mobile Communications AB (SEMC) reported strong unit volume and sales increases. Income before tax improved during the year with the higher volumes and sales. The improved performance is mainly a result of focusing on imaging, music and enterprise phones while increasing the number of more affordable and attractively designed models. SEMC’s ambition is continued profitable growth by leveraging the opportunities created by the combination of the parent companies’ technologies in the joint venture. The joint venture results are accounted for under the equity method with no sales included in Ericsson’s financial statements. For more information see Notes to the Consolidated Financial Statements—Note C1, “Significant Accounting Policies.”

SONY ERICSSON RESULTS 2004–2005

 

     2005    2004    Percent
change
 

Shipments (unit millions)

   51.2    42.3    21 %

Sales (EUR m.)

   7,268    6,525    11 %

Income before tax (EUR m.)

   514    486    6 %

Net income (EUR m.)

   356    316    13 %

Ericsson share of earnings (SEK billion)

   2.3    2.1    5 %

SEMC invested approximately USD 14 million to purchase a controlling stake in Beijing Suohong Electronics Co, Ltd (BSE). The investment increased SEMC’s ownership from 10 percent to 74.5 percent and strengthened its in-house manufacturing capacity. BSE will be consolidated into SEMC from the first quarter of 2006 with minor effects on reported results. Local minority shareholder ownership remains unchanged.

 

32


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

For more information on transactions with SEMC, please also see Notes to the Consolidated Financial Statements—Note C30, “Related Party Transactions.”

During 2004, Ericsson made a public offer to purchase shares of Ericsson S.p.A. in Italy, increasing Ericsson’s ownership to 93 percent. In the first quarter of 2005, a Residual Public Offer was launched for the remaining shares and subsequently Ericsson S.p.A. was delisted from the Milan Stock Exchange. In total SEK 2.2 billion was paid out for the shares of which SEK 0.6 billion in 2005.

On October 25, 2005, Ericsson announced the intention to acquire key assets of Marconi’s telecommunications operations for SEK 16.8 billion in cash. The acquisition strengthens Ericsson’s position in the accelerating transmission segment and expands Ericsson’s platform for leadership in “next generation” converging networks. As fixed and mobile services converge, Ericsson’s customers will benefit from the acquisition.

Ericsson acquired assets expected to generate 2005 sales of approximately SEK 14.0 billion (GBP 1.0 billion). The acquired operations had net tangible assets of approximately SEK 1.4 billion (GBP 0.1 billion) as of September 30, 2005. The remaining acquisition cost is mainly allocated to intellectual property rights (patents, brands, trade marks, etc). The acquisition is expected to give a positive contribution to earnings starting in 2007.

During 2005, there were several small acquisitions to increase capacity mainly to handle growing systems integration business. The Company also made two technology acquisitions, Netspira and Axxes-sit, to expand the systems product portfolio.

There were no material acquisitions or divestitures completed during 2003 or 2004.

Material contracts and contractual obligations

Primary contractual obligations are outlined in the table below. Operating leases are mainly related to offices and production facilities. Purchase obligations are mainly related to outsourced manufacturing, R&D and IS/IT operations and for components for our own manufacturing. With the exception of the Marconi acquisition, Ericsson has not been a party to any material contracts over the last two years other than those entered in the ordinary course of business.

CONTRACTUAL OBLIGATIONS 2005

 

     Payment due by period

(SEK million)

   Total    <1 year    1-3 years    3-5 years    >5 years

Long-term debt 1)

   21,964    9,739    3,279    8,360    586

Capital lease obligations 2)

   2,697    199    389    324    1,785

Operating leases 2)

   10,807    2,134    3,321    2,409    2,943

Other non-current liabilities

   2,740    32    781    3    1,924

Purchase obligations 3)

   7,398    7,398    —      —      —  

Commitments for customer financing 1)

   3,643    3,643    —      —      —  
                        

Total

   49,249    23,145    7,770    11,096    7,238
                        

1) See also Notes to the Consolidated Financial Statements—Note C21, “Financial Risk Management and Financial Instruments.”
2) See also Notes to the Consolidated Financial Statements—Note C27, “Leasing.”
3) The amounts of purchase obligations are gross, before deduction of any related provisions.

 

33


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Critical accounting estimates

The preparation of financial statements and application of accounting policies often involve management’s judgment and/or the use of estimates and assumptions deemed to be reasonable and prudent. However, other results may be derived using different assumptions or estimates. There are a number of accounting policies subject to such estimates or assumptions. Please see Notes to the Consolidated Financial Statements—Note C2, “Critical Accounting Estimates and Judgments” for more information about the policies that we believe have the most significant impact on Ericsson’s reported results and financial position. For information on the application of IFRS, please see Notes to the Consolidated Financial Statements—Note C3, “Transition to IFRSs”.

CORPORATE GOVERNANCE

Although internal policies and directives for governance and other important rules for managing the Company’s business activities have long been established, we have adapted our work procedures in line with relevant developments in Sweden and the United States regarding reporting, disclosure and other requirements for listed companies as well as changes in legislation, such as the new Swedish Companies Act and the US Sarbanes-Oxley Act.

In accordance with the recently introduced Swedish Code of Corporate Governance, a separate Corporate Governance Report as well as an Internal Control Report have been prepared. There have been no amendments or waivers to Ericsson’s Code of Business Ethics and Conduct for any director or member of management.

RISK MANAGEMENT

Risk taking is an inherent part of doing business. To manage risks, a coordinated process is used whereby risks are identified, probability of occurrence assessed and potential consequences estimated. Actions are then taken to reduce or mitigate the risk exposures and limit potential unfavorable consequences.

We broadly categorize risks into operational risks and financial risks. Our approach to risk management leverages the scale and diversity of our business activities and balances central coordination with well-defined risk management responsibilities within each operational unit.

Operational risk management

Risk management has been integrated within the Ericsson Group Management System and business processes. The operational risk management framework applies universally across all business activities and is based on the following principles:

Each risk is owned and managed by an operational unit that is held accountable with oversight made through unit steering boards and Group Management.

Risks are dealt with on three levels: in the strategy process, in annual target setting and within ongoing operations by transaction (customer bid/contract, acquisition, investment, product development project, etc).

Approval limits are clearly established with escalation according to a well-defined delegation of authority.

A central security and risk management unit coordinates management of certain risks, such as business interruption, information security/IT risks and physical security as well as insurable risks. A crisis management council deals with ad hoc events of a serious nature.

 

34


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Financial risk management

We have an established policy governing the Group’s financial risk management, which is carried out by the Treasury function within the Parent Company and supervised by the Board of Directors’ Finance Committee.

For further information on objectives, policies and strategies for financial risk management please see Notes to the Consolidated Financial Statements—Note C20, “Interest-Bearing Provisions and Liabilities” and Note C21, “Financial Risk Management and Financial Instruments.”

Foreign exchange risks

With significant transaction volumes in currencies other than SEK, the Company has a net exposure to a number of currencies. The duration of this exposure is also considerable, as many contracts have long lead times between order and delivery. A variety of hedging activities, covering on average the forthcoming 6-9 months, are used to managed foreign exchange risks.

The largest foreign exchange exposure is to the US dollar and related currencies, which represented 46 percent of sales in 2005. Assuming other foreign exchange exposures remained the same, a 10 percent plus/minus change in the USD/SEK exchange rate would affect operating income by plus/minus SEK 3.3 (3.6) billion before any hedging effects.

Interest rate risks

Ericsson is exposed to interest rate risk through market value fluctuations of certain balance sheet items and through changes in interest expenses and income. Assuming the net cash position remained at SEK 53.4 billion, a sustained change in interest rates of plus/minus 0.25 percentage points would have an annual impact on the financial net of approximately plus/minus SEK 135 million.

Credit risk in trade receivables

At year-end 2005, trade receivables amounted to SEK 41.2 (32.6) billion, less allowances of SEK 1.4 (1.8) billion. Extended payment terms for trade credits and overdue accounts receivable amounts are regularly reviewed with provisions made to cover any expected losses. Historically, credit losses have been minimal mainly because the customer base largely consists of well established and financially sound network operators.

Customer finance risk

At year-end 2005, gross exposure to customer financing amounted to SEK 7.0 (8.9) billion of which one percent was off-balance sheet. Latin America accounts for 58 (60) percent with the remaining exposure mainly related to Central and Eastern Europe, Middle East and Africa. Risk provisions amount to 29 (32) percent of the gross exposure.

In most customer financing agreements, credit risks are covered by security arrangements, normally in the form of pledges of equipment, pledges of certain of the borrower’s assets and/or pledges of shares in the operating company. Provisions are made and reported as part of selling expenses.

Unutilized but outstanding customer financing commitments amounted to SEK 3.6 (2.2) billion at year-end. New credits are only given on a very selective basis for strategic reasons.

 

35


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Financial credit risk

Financial instruments carry an element of risk in that counterparts may be unable to fulfill their payment obligations. All derivative transactions are covered by ISDA Master agreements to reduce the credit risk. During 2005, no credit losses were incurred from such instruments.

Liquidity and refinancing risk

We expect the Company’s strong cash position to satisfy any short-term liquidity requirements. During 2005, there have been no material defaults in the payment of principle or interest, or any other material default relating to the indebtedness of Ericsson or any of its subsidiaries.

CORPORATE RESPONSIBILITY

Effective management of social, environmental and geopolitical issues can help to assure an enduring capability for value creation and competitive advantage. Ericsson supports the UN Global Compact and its ten guiding principles. We see these principles not only as a prerequisite for sound, long-term business but also as guiding principles and as such, we are committed to responsible business practices for sustainable economic growth that benefit all of our stakeholders. Our commitment to employees, customers, shareholders and the broader global community is underscored by external recognition of our efforts. Ericsson was again included in the FTSE4Good and the Dow Jones Sustainability indices. And for 2005, we were named the Technology Supersector leader for the DJSI STOXX sustainability index.

Ericsson publishes a separate Sustainability Report annually, usually during the second quarter, which provides comprehensive information about corporate responsibility and our related activities.

Community Involvement

We are committed to being a responsible member of the global society and of the communities in which the Company operates. Employees are encouraged and empowered to make a positive contribution to the world around them. Their contributions are of many kinds, determined by our employees according to local needs. They may, for example, be in the fields of health care, social and humanitarian aid, scholarships and other educational support, art and culture, the environment, children’s welfare as well as many other charitable activities.

Ericsson Response is a global initiative to rapidly provide specialists and communications equipment anywhere in the world in response to human suffering caused by disasters. Ericsson Response assists the disaster relief operations of the United Nations Development Program (UNDP), the Office for the Coordination of Humanitarian Affairs (OCHA) and the International Federation of Red Cross and Red Crescent Societies (IFRC). During 2005, Ericsson Response provided relief support for many natural disasters around the world, including the tsunami in South East Asia, earthquakes in the Middle East as well as hurricanes in the Americas. Ericsson is also aiding reconstruction work in these disaster areas.

Environment and health

We believe that the Company is in compliance with all material environmental, health and safety laws and regulations required by its operations and business activities. Ericsson provides public information on radio waves and health and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors more than 40 different ongoing research projects related to electromagnetic fields (EMF), radio waves and health. Public health authorities and independent expert groups have reviewed the total amount of research and they 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.

 

36


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

From August 13, 2005, Ericsson complies with the EU directive on Waste Electrical and Electronic Equipment (WEEE). Work continues to ensure compliance by July 1, 2006 of the EU directive on Reduction of Hazardous Substances (RoHS).

Employees

Every year an employee satisfaction survey is conducted to assess our Human Capital Index (HCI) and Empowerment Index (El). In 2005 over 92 (90) percent of employees participated in this survey. The results show a marked improvement from last year with both indices exceeding our target levels. The Human Capital Index as well as the Empowerment Index improved by 7 points. HCI measures the employees’ contribution in adding value for our customers and meeting business goals. El addresses how employees act on their own initiative to achieve the Company’s goals.

Employee headcount at year-end was 56,055 (50,534). Most of the additions were to support the growing services business. During the year, 2,377 employees departed while 7,898 joined the company. Please also see Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Employees, Members of the Board of Directors and Management.”

Executive Compensation

The remuneration committee continues to be mindful of the debates around the world on executive salaries and benefits. We remain confident that current policies and practices concerning authorization, compliance and control of senior executive compensation within Ericsson are appropriate and reasonable.

As of December 31, 2005, there were no loans outstanding from, and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management.

LEGAL AND TAX PROCEEDINGS

Together with most of the mobile communications industry, Ericsson has been named a defendant in five class actions in the United States where plaintiffs allege that adverse health effects could be associated with the use of mobile phones. Three of those cases are pending in federal court and the other two are pending in state court in New York and the District of Columbia.

Ericsson is engaged in litigation with an Australian company, QPSX, in the Federal Court of Australia. QPSX’s claim relates to an alleged breach by Ericsson of a patent license agreement. Ericsson has contested the claim.

Atmel Corporation was awarded approximately USD 43.1 million in damages after the International Centre for Dispute Resolution, International Arbitration Tribunal found Ericsson liable for breaches of contract and misappropriation of trade secrets relating to Atmel’s proprietary AVR microcontroller technology. This lawsuit came about as a result of reorganizing our Phones segment, i.e. formation of the Sony Ericsson Mobile Communications joint venture and establishment of Ericsson Mobile Platforms. We believed the new structure was covered by the original agreement with Atmel. Ericsson Mobile Platforms no longer uses this technology and the ruling will not affect either unit’s business going forward.

Ericsson filed a complaint to the European Commission requesting that it investigate and stop Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology. At the same time, Broadcom, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments each filed similar complaints claiming Qualcomm is violating EU competition law and failing to meet the commitments Qualcomm made to international standardization bodies around the world that it would license its technology on fair, reasonable and non-discriminatory terms.

 

37


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

The Swedish National Economic Crimes Bureau has added to the indictment against some current and former employees of Ericsson for evasion of tax control. The addition concerns the way the accounting of some payments from Ericsson to Bank Austria during the years 1999 and 2000 was handled.

From 2001 to the beginning of 2005, Swedish fiscal authorities disallowed, for corporate income tax purposes, the Parent Company and the subsidiary companies Ericsson Telecom AB and Ericsson Radio Systems AB (renamed Ericsson AB) deductions for sales commission payments via external service companies to sales agents in certain countries. Most of these taxes have been paid with the rest provisioned for.

BOARD OF DIRECTORS

More information regarding the Board Of Directors and its members as well as the Board and its committee activities can be found in the Corporate Governance section.

Changes to the Board membership

The Board of Directors is elected yearly at the Annual General Meeting for the period until the end of the next Annual General Meeting. At the Annual General Meeting on April 6, 2005, Ulf J. Johansson was elected to succeed Lena Torell. Sir Peter L. Bonfield, Sverker Martin-Löf, Nancy McKinstry, Eckhard Pfeiffer and Carl-Henric Svanberg were re-elected as members of the Board. Michael Treschow was re-elected chairman of the Board. Arne Mårtensson and Marcus Wallenberg were re-elected deputy chairmen.

Board compensation

Members of the Board, who are not employees of the Company, have not received any compensation other than the fees paid for Board duties as outlined in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Employees, Members of the Board of Directors and Management.” Members and Deputy Members of the Board, who are employees, i.e. the CEO and the employee representatives, have not received any remuneration or benefits other than their normal employee entitlements, with the exception of a small fee paid to the employee representatives for each board meeting attended.

PARENT COMPANY

The Parent Company business consists mainly of corporate management, holding company functions and, from January 1, 2005, internal banking activities previously performed on a commission basis by Ericsson Treasury Services AB. The Parent Company business also includes customer credit management performed on a commission basis by Ericsson Credit AB.

The Parent Company is the owner of the majority of intellectual property rights and manages the patent portfolio, including patent applications, licensing and cross licensing of patents and defending of patents in litigations.

The Parent Company has 8 (11) branch offices. In total, the Group has 51 (45) branch and representative offices.

Net sales for the year amounted to SEK 1.1 (2.6) billion and income after financial items was SEK 14.0 (7.4) billion. Exports accounted for 96 percent of net sales in 2005 (98 percent in 2004). No consolidated companies were customers of the Parent Company’s sales in 2005 or 2004, while 27 percent (21 percent in 2004) of the Company’s total purchases of goods and services were from such companies. Profits from disposal of shares to a subsidiary contributed SEK 6.8 billion to income.

 

38


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

Major changes in the Parent Company’s financial position for the year include increased current and non-current receivables from subsidiaries of SEK 11.3 billion, increased investments in subsidiaries of SEK 4.2 billion and decreased other current receivables of SEK 4.5 billion. At year-end, cash and short-term cash investments amounted to SEK 75.0 (71.7) billion.

In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 31,649,876 shares from treasury stock were sold or distributed to employees during the year. The nominal amount of these shares is SEK 31.6 million, representing less than one percent of capital stock, and compensation received amounted to SEK 179.1 million. The holding of treasury stock at December 31, 2005 was 268,065,241 Class B shares. The nominal amount of these shares is SEK 268.1 million, representing 2 percent of capital stock, and related acquisition cost amounts to SEK 596.5 million.

SUBSEQUENT EVENTS

For information on subsequent events, please see Notes to the Consolidated Financial Statements—Note C33, “Subsequent Events”.

PROPOSED DISPOSITION OF EARNINGS

The Board of Directors proposed that a dividend of SEK 0.45 (0.25) per share be paid to shareholders duly registered on the Record date of April 13, 2006, and that the Company retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company were not entitled to receive a dividend.

Assuming that no treasury shares remained within the Company on the Record date, the Board of Directors proposed that earnings be distributed as follows:

 

Amount to be paid to the shareholders

   SEK 7,259,516,405

Amount to be retained by the Parent Company

   SEK 21,709,793,259
    

Total non-restricted equity of the Parent Company

   SEK 28,969,309,664

As basis for its proposal for a dividend, the Board of Directors made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Company’s and the Group’s need for financial resources as well as the Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet its commitments. The company reports an equity ratio of 50.5% and net cash amounts to SEK 53.4 billion.

The Board of Directors also considered the Company’s and the Group’s position in general. In this respect, the Board of Directors took into account known commitments that may have an impact on the Company’s financial position. Such commitments are for example the acquisition of certain operations from Marconi and repayment of debts during 2006.

The proposed dividend does not limit the Company’s ability to make investments or its need of funds.

It was the Board of Directors’ assessment that the proposed dividend is well-balanced considering the type, scope and risks of the business activities and the Company’s and the Group’s capital requirements.

At the Annual General Meeting held April 10, 2006, the proposed dividend of SEK 0.45 was approved.

 

39


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Telefonaktiebolaget LM Ericsson (publ),

In our opinion, the accompanying consolidated balance sheets, the related consolidated statements of income, of cash flows and of changes in stockholders’ equity present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson (publ) and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with International Financial Reporting Standards as adopted by the EU. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in the accounting policies, note C1, the Group adopted International Accounting Standards (IAS) 32 Financial Instruments: Disclosure and Presentation and IAS39 Financial Instruments: Recognition and Measurement in accordance with IFRS as adopted by the EU. The change has been accounted for prospectively from 1 January 2005.

International Financial Reporting Standards adopted by the EU vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note C32 to the consolidated financial statements.

PricewaterhouseCoopers AB

Stockholm, Sweden

February 24, 2006

 

40


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CONSOLIDATED INCOME STATEMENT

 

Years ended December 31, SEK million

   Notes    2005    2004

Net sales

   C4, C5    151,821    131,972

Cost of sales

      -82,369    -70,864
            

Gross margin

      69,452    61,108

Research and development and other technical expenses

      -24,454    -23,421

Selling and administrative expenses

      -16,800    -15,921
            

Operating expenses

      -41,254    -39,342

Other operating income

   C7    2,491    2,617

Share in earnings of joint ventures and associated companies

   C13    2,395    2,323
            

Operating income

      33,084    26,706

Financial income

   C8    2,653    3,541

Financial expenses

   C8    -2,402    -4,081
            

Income after financial items

      33,335    26,166

Taxes

   C9    -8,875    -8,330
            

Net income

      24,460    17,836
            

Of which:

        

Net income attributable to stockholders of the parent company

      24,315    17,539

Net income attributable to minority interest

      145    297

Other information

        

Average number of shares, basic (million)

      15,843    15,829

Earnings per share, basic (SEK)

   C10    1.53    1.11

Earnings per share, diluted (SEK)

   C10    1.53    1.11

 

41


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CONSOLIDATED BALANCE SHEET

 

December 31, SEK million

   Notes    2005    2004

ASSETS

        

Non-current assets

        

Intangible assets

        

Capitalized development expenses

   C11    6,161    8,091

Goodwill

      7,362    5,766

Other

      939    748

Property, plant and equipment

   C12, C27, C28    6,966    5,845

Financial assets

   C13      

Equity in joint ventures and associated companies

      6,313    4,155

Other investments in shares and participations

      805    543

Customer financing, non-current

      1,322    2,150

Other financial assets, non-current

      3,514    1,236

Deferred tax assets

   C9    17,294    20,766
            
      50,676    49,300

Current assets

        

Inventories

   C14    19,208    14,003

Financial assets

        

Accounts receivable—trade

   C15    41,242    32,644

Customer financing, current

      3,624    1,446

Other current receivables

   C16    12,574    12,239

Short-term investments

   C21    39,767    46,142

Cash and cash equivalents

   C21    41,738    30,412
            
      158,153    136,886

Total assets

      208,829    186,186
            

EQUITY AND LIABILITIES

        

Equity

        

Stockholders’ equity

   C17    104,677    80,445

Minority interest in equity of consolidated subsidiaries

      850    1,057
            
      105,527    81,502

Non-current liabilities

        

Post-employment benefits

   C18    3,125    10,087

Other provisions, non-current

   C19    904    1,146

Deferred tax liabilities

      391    421

Borrowings, non-current

   C20, C21    14,185    21,837

Other non-current liabilities

      2,740    1,856
            
      21,345    35,347

Current liabilities

        

Other provisions, current

   C19    17,764    23,632

Borrowings, current

   C20, C21    10,784    1,719

Accounts payable

   C23    12,584    10,988

Other current liabilities

   C22    40,825    32,998
            
      81,957    69,337

Total equity and liabilities 1)

      208,829    186,186
            

Assets pledged as collateral

   C24    549    7,985

Contingent liabilities

   C25    1,708    1,014

1) Of which interest-bearing provisions and liabilities 28,094 (33,643).

 

42


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

Years ended December 31, SEK million

   Notes    2005    2004

OPERATIONS

        

Net income attributable to stockholders of the parent company

      24,315    17,539

Adjustments to reconcile net income to cash

   C26    10,845    10,490
            
      35,160    28,029

Operating net assets

        

Inventories

      -3,668    -3,432

Customer financing, current and non-current

      -641    -65

Accounts receivable

      -5,874    -1,403

Provisions and post-employment benefits

      -15,574    -1,990

Other operating assets and liabilities, net

      7,266    1,340
            

Cash flow from operating activities

      16,669    22,479
            

Investing activities

        

Investments in property, plant and equipment

   C12    -3,365    -2,452

Sales of property, plant and equipment

      362    358

Acquisitions and sales of shares and other investments, net

   C26    -957    -1,549

Product development

   C11    -1,174    -1,146

Net change in capital contributed by minority

      20    71

Other investing activities

      -230    -70
            

Cash flow from operating investing activities

      -5,344    -4,788
            

Cash flow before financial investing activities

      11,325    17,691
            

Short-term investments

      6,375    -26,050
            

Cash flow from investing activities

      1,031    -30,838
            

Cash flow before financing activities

      17,700    -8,359
            

Financing activities

        

Changes in borrowings, current, net

      -1,216    -1,502

Proceeds from issuance of non-current borrowings

      93    870

Repayment of non-current borrowings

      -947    -13,649

Sale/repurchase of own stock

      117    15

Dividends paid

      -4,133    -292
            

Cash flow from financing activities

      -6,086    -14,558
            

Effect of exchange rate changes on cash

      -288    214
            

Net change in cash

      11,326    -22,703
            

Cash and cash equivalents, beginning of period

      30,412    53,115
            

Cash and cash equivalents, end of period

   C21    41,738    30,412
            

 

43


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

     2005    2004

Years ended December 31, SEK million

   Stock-
holders’
equity 1)
   Minority
interest
   Total
equity
   Stock-
holders’
equity 1)
   Minority
interest
   Total
equity

Opening balance

   80,445    1,057    81,502    63,820    2,299    66,119

Adjustment for IAS 39, net

   1,489    —      1,489    —      —      —  
                             

Adjusted opening balance

   81,934    1,057    82,991    63,820    2,299    66,119

Changes in hedge reserve, net

   -1,859    —      -1,859    —      —      —  

Revaluation of other investments in shares and participations, net

   -150    —      -150    —      —      —  

Changes in cumulative translation effects due to changes in foreign currency exchange rates

   4,037    147    4,184    -1,135    -65    -1,200

Business combinations

   —      -342    -342    —      -1,182    -1,182

Net income

   24,315    145    24,460    17,539    297    17,836
                             

Total income and expenses for the period

   26,343    -50    26,293    16,404    -950    15,454

Stock issue, net

   —      17    17    —      —      —  

Sale of own shares

   117    —      117    15    —      15

Stock Purchase and Stock Option Plans

   242    —      242    204    —      204

Dividends paid

   -3,959    -174    -4,133    —      -292    -292

Adjustment of cost for stock issue 2002

   —      —      —      2    —      2
                             

Total transactions with owners

   -3,600    -157    -3,757    221    -292    -71
                             

Closing balance

   104,677    850    105,527    80,445    1,057    81,502
                             

1) For further information, please see “Notes to the consolidated statements, Note C17, “Stockholders’ equity”.

 

44


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

 

C1

   Significant Accounting Policies    45

C2

   Critical Accounting Estimates and Judgments    55

C3

   Transition to IFRSs    57

C4

   Segment Information    64

C5

   Revenues    67

C6

   Expenses by nature    68

C7

   Other Operating Income    68

C8

   Financial Income and Expenses    68

C9

   Taxes    68

C10

   Earnings per Share    71

C11

   Intangible Assets    71

C12

   Property, Plant and Equipment    73

C13

   Financial Assets    74

C14

   Inventories    76

C15

   Accounts Receivable—Trade    77

C16

   Other Current Receivables    78

C17

   Stockholders’ Equity    78

C18

   Post-employment Benefits    80

C19

   Other Provisions    85

C20

   Interest-bearing Provisions and Liabilities    86

C21

   Financial Risk Management and Financial Instruments    87

C22

   Other Current Liabilities    94

C23

   Accounts and Notes Payable—Trade    94

C24

   Assets Pledged as Collateral    94

C25

   Contingent Liabilities    95

C26

   Statement of Cash Flows    95

C27

   Leasing    98

C28

   Tax Assessment Values in Sweden    99

C29

   Information Regarding Employees, Members of the Board of Directors and Management    100

C30

   Related Party Transactions    108

C31

   Fees to Auditors    110

C32

   Reconciliation to Accounting Principles Generally Accepted in the United States    110

C33

   Subsequent Events    117

C1    SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Telefonaktiebolaget LM Ericsson, the Parent Company and its subsidiary companies (“the Company”) for 2005 and 2004 are prepared in accordance with International Financial Reporting Standards. IFRS below refer to all these standards. For Ericsson, there is no difference between IFRS and IFRS as adopted by the EU by December 31, 2005 and the Swedish Annual Accounts Act. We have also applied URA 43 Accounting for special payroll tax and tax on investment returns and URA 46 IFRS 2 and accounting for social security expenses, issued by the Swedish Financial Accounting Standards Council (Redovisningsradet). IFRSs differs in certain aspects from generally accepted accounting principles in the United States (US GAAP). For a description of major differences, with respect to Ericsson’s financial statements, see Note C32, Reconciliation to Accounting Principles Generally Accepted in the United States.

 

45


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Ericsson has applied IFRSs since January 1, 2005. All amounts related to 2004 have been restated in accordance with IFRSs, except for IAS 39 which has been applied as from January 1, 2005. In Note C3, Transition to IFRSs, a reconciliation of the restatement is made for the transition to IFRSs.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Parent Company and all subsidiary companies. Subsidiary companies are all companies in which Ericsson has an ownership and directly or indirectly, including effective potential voting rights, has a voting majority or Ericsson by agreement has control or retains the majority of the residual or ownership risk of the entity.

Inter-company transactions have been eliminated. Elimination of unrealized profits in inventory is made in full without consideration of minority interests.

The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiary companies and associated companies earned only after their acquisition.

ASSOCIATED COMPANIES AND JOINT VENTURES

Investments in associated companies and joint ventures, where voting stock interest including effective potential voting rights is at least 20 percent but not more than 50 percent, or where a corresponding influence is obtained through agreement, are accounted for according to the equity method. IFRS 3 has been applied for the accounting of these companies. Ericsson’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies”, included in Operating Income. Taxes are included in item “Taxes”. Unrealized internal profits in inventory in associated companies purchased from subsidiary companies are eliminated in the consolidated accounts in proportion to ownership. Investments in associated companies are shown at equity after adjustments for unrealized inter-company profits and goodwill (see “Goodwill” below).

Undistributed earnings of associated companies included in consolidated equity are reported as Retained earnings, as detailed in Note C17, Stockholders’ equity.

All other equity instruments are accounted for as Other investments in shares and participations and carried at fair value. Fair values 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.

GOODWILL

At the acquisition of a business, an allocation is made of the purchase price in which fair values are assigned to acquired assets, for example intangible assets such as customer relations, brands and patents, based upon appraisals made. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets.

Goodwill resulting from acquisitions of businesses is subject to impairment review at least annually in the fourth quarter and when there are indications that the carrying value may not be recoverable. The carrying values are not considered to be recoverable when the expected discounted cash flows are less than the carrying values. An impairment loss is determined based on the amount by which the carrying value exceeds the recoverable amount. Goodwill related to assets in foreign currency is remeasured at period-end exchange rates.

 

46


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

TRANSLATION OF FINANCIAL STATEMENTS IN FOREIGN CURRENCY

For most subsidiary companies, joint ventures and associated companies, the local currency is the currency in which the companies primarily generate and expend cash, and is thus considered their functional (business) currency. Their financial statements plus goodwill related to such companies, if any, are translated to SEK by translating assets and liabilities to the closing rate at the balance sheet day and income statement items at average exchange rates, with translation adjustments reported directly in consolidated equity. When a company is sold, accumulated translation adjustments are included in consolidated income.

For a limited number of companies, the functional currency is a currency other than the local currency. The financial statements of such companies are translated in two steps. In the first step, remeasurement is made into the functional currency and resulting exchange rate gains/losses are reported in income. In the second step, from the functional currency to SEK, the financial statements are translated as above. Effective portion of foreign exchange gains and losses on hedge instruments designated to hedge the net investments in foreign entities are reported directly in consolidated equity, net of tax effects, to offset the translation adjustments above. Ineffective and undesignated portions of foreign exchange gains and lossed are reported in operating income.

REVALUATION OF FOREIGN CURRENCY ITEMS IN INDIVIDUAL COMPANIES

In the financial statements, receivables and liabilities in foreign currencies are revalued at year-end exchange rates.

Foreign exchange gains and losses are divided into operational and financial. Effects of hedging are in the income statement reported together with the hedged item.

The net difference between foreign exchange gains/losses on operating transactions and gains/losses on hedging through foreign exchange derivatives are included in cost of goods sold. Gains and losses on foreign exchange attributable to financial assets are included in financial income and gains and losses related to financial liabilities are included in financial expenses.

IAS 39 was adopted as from January 1, 2005 with early adoption of the amendment related to hedging of group internal transactions. In 2004, Foreign exchange derivatives hedging off-balance exposures were treated off-balance, also referred to as “Deferral hedge accounting”. When the hedged transaction occurred, the hedged spotrate was used for the transaction and the derivative was moved on-balance. The theoretical interest portion was accrued over the life of the derivative. Interest rate derivatives used as hedges were valued at amortized cost, which was in-line with the underlying transaction.

REVENUE RECOGNITION

Sales are recorded net of value added taxes, goods returned, trade discounts and rebates. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when the revenue amount is fixed or determinable and when collection is reasonably assured.

We offer a comprehensive portfolio of telecommunication and data communication systems and services covering a range of technologies. The majority of our products and services are sold as parts of contracts including several items. The nature of the products and services being sold, and the contractual terms taken as a whole, determine the appropriate revenue recognition method. The contracts are of three main types:

 

    delivery-type

 

47


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    construction-type

 

    contracts for various types of services, for example multi-year managed services contracts

Large customer frame agreements may include different types of undertakings and may result in a mix of construction-type contracts, delivery-type contracts and service contracts.

Different revenue recognition methods are applied based on the solutions provided to our customers, the nature and sophistication of the technology involved and the contract conditions in each case. Specific contractual performance and acceptance criteria impact the timing and amounts of revenue recognized.

Revenues from construction-type contracts are generally recognized using the percentage-of-completion method. The degree of completion is measured using either the milestone output method or, to a very limited extent, the cost-to-cost method. The terms of construction-type contracts generally define deliverables or milestones for progress billing to the customer, which also well reflect the degree of completion of the contract. In construction-type contracts where we apply the milestone output method, costs incurred pending the completion of milestones are reported as contract work in progress and included in Inventory. Such milestones are normally frequent, and the resulting amount in contract work in process is limited.

The profitability of contracts is periodically assessed and adjusted, if necessary, based on changes in circumstances. Provisions for losses, with full amounts, are immediately made when losses are probable.

For delivery-type contracts revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in terms of trade. Delivery-type contracts that have multiple elements, revenue is allocated to each element based on relative fair values. If there are undelivered elements essential to the functionality of the delivered elements, or, if fair values are not available for all elements, we defer the recognition of revenue until all elements essential to the functionality have been delivered or fair values exist for the undelivered elements.

Revenue for period service contracts and managed services contracts, covering longer periods is recognized pro rata over the contract period. Revenue for training, consulting, engineering, installation and similar services is generally recognized when the services are provided.

Mobile platform license revenues are included in reported Net Sales and contracted based on the number of handsets or components produced by the customer. Revenue is recognized when the customer production has been made.

For sales between consolidated companies, associated companies, joint ventures and segments we apply arm’s length pricing.

SHARE-BASED EMPLOYEE COMPENSATION

Stock option plans

Ericsson has chosen to not apply IFRS 2 to equity instruments granted before November 7, 2002, in accordance with IFRS 1 and IFRS 2.

IFRS 2 is applied for one employee option program granted after November 7, 2002. The vesting period for this program ended during 2005, and Ericsson recognized compensation costs representing the fair value at grant

 

48


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

date of the outstanding employee options. In the balance sheet the corresponding amounts are accounted for as equity. The fair value of the options was calculated using an option-pricing model. The total costs were recognized during the vesting period (3 years), i.e. the period during which the employees had to fulfil vesting requirements. When the options are exercised, social security charges are to be paid in certain countries on the value of the employee benefit; generally based on the difference between the market price of the share and the strike price. Until exercise, estimated costs for such social security charges are accrued.

Stock purchase plans

For stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the share at the employee’s investment date. The fair value is based upon the share price at investment date adjusted for that no dividends will be received prior to matching. The investment date is considered as the grant date. In the balance sheet the corresponding amounts are accounted for as equity. Vesting conditions affect the number of shares that Ericsson will match. For shares under performance-based matching programs, the Company assesses the probability of meeting the performance targets when calculating the compensation costs. Compensation expenses are based on estimates of the number of shares that will match at the end of the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. The employee benefit is generally based on the market value of the shares at the matching date. During the vesting period, estimated social security charges are accrued.

BORROWING COSTS

The Company does not capitalize any borrowing costs, including borrowing cost related to financing of construction of tangible assets. Costs are expensed as incurred.

NON-CURRENT ASSETS HELD FOR SALE

Non-current assets held for sale are valued at the lower of carrying amount and fair value less cost to sell. At present, the occurrence of assets held for sale are very limited.

EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income attributable to shareholders of the parent company by the average number of shares outstanding during the year.

Diluted earnings per share are calculated by dividing net income attributable to shareholders of the parent company by the sum of the average number of ordinary shares outstanding and potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares decrease earnings per share.

CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS

IAS 39 was adopted as from January 1, 2005 with early adoption of the amendment related to hedging of group internal transactions.

 

    Short-term investments are valued at fair value through profit and loss in the consolidated accounts.

 

    Loans and borrowings are valued using the amortized cost method. Derivative financial instruments are used to hedge foreign exchange and interest rate risks.

 

49


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Foreign exchange derivatives are valued at fair value through profit and loss. However, those foreign exchange derivatives fulfilling the requirements for cash flow hedge accounting are valued at fair value and effective portions of the designated risk are deferred in consolidated stockholders’ equity net of tax effects. Ineffective and undesignated portions are reported through profit and loss. The amount deferred in equity is released to profit or loss when the hedged transaction affects consolidated profit or loss, affecting net sales or cost of goods sold based on the nature of the hedge.

 

    Interest rate-related derivatives are valued at fair value through profit and loss.

 

    Ericsson’s listed debt instruments (outstanding notes and bond loans) are valued at amortized cost, unless designated as hedged item in a fair value hedge, when the hedged risk is valued at fair value through profit and loss.

Foreign exchange gains and losses on operating assets and liabilities are reported as adjustments to Cost of Sales. The corresponding reporting for financial items is adjustments to financial income and expenses respectively.

In the consolidated accounts, gains and losses on operational hedges are reported together with losses and gains on the underlying position.

Financial assets and liabilities are offset and reported net in the balance sheet when there is a legally enforceable right for offset and there is an intent to settle on a net basis.

Fair values of financial instruments 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.

INTANGIBLE ASSETS OTHER THAN GOODWILL

These assets consist of capitalized development expenses and aquired intangible assets, such as patents and software, and are stated at cost less accumulated amortization/write-down. Amortization, depreciation and any write-downs are included in “Research and development and other technical expenses” and “Cost of Sales”.

Costs incurred for development of products to be sold, leased or otherwise marketed or intended for internal use are capitalized as from when technological and economical feasibility has been established until the product is available for sale or use. These capitalized costs are mainly generated internally and include direct labor and related overhead. Amortization of capitalized development costs begins when the product is available for general release. Amortization is made on a product or platform basis according to the straight-line method over periods not exceeding five years. Research and development costs directly related to orders from customers are accounted for as a part of “Cost of sales”. Other research and development costs are charged to expense as incurred.

Impairment tests are performed on a regular basis whenever there is an indication of possible impairment. However, intangible assets not yet available for use are tested annually. The carrying values are not considered to be recoverable when the expected discounted cash flows are less than the carrying values. An impairment loss is determined based on the amount by which the carrying value exceeds the recoverable amount.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation and any write-down due to impairment.

 

50


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Annual depreciation, based upon the component approach, is generally made using the straight-line method, with estimated useful lives of, in general, 40 years on buildings, 20 years on land improvements, 3 to 10 years on machinery and equipment, and up to 5 years on rental equipment. Depreciation and any write-downs are included in “Cost of Sales” and in the respective functional operating expenses.

Impairment tests of property, plant and equipment are made whenever there is an indication of possible impairment. Impairment losses occur, as for intangible assets, when the carrying value exceeds the recoverable amount. The recoverable amount is based upon either expected discounted cash flows or the selling price reduced by the costs of disposal. Provisions are made for expected costs for restoration of land or buildings due to environmental obligations.

LEASING

Leasing when the company is the lessee

Finance lease contracts are capitalized and reported as property, plant and equipment and as other current and non-current liabilities. Depreciations are made as for property, plant and equipment. Operating lease contracts are not capitalized.

Leasing when the company is the lessor

Leasing contracts with the company as a lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. Under a finance lease, we recognize a receivable at an amount equal to the net investment in the lease and recognize revenue in accordance with our revenue recognition principles. For operating leases, an asset is reported as property, plant and equipment and revenues and depreciation are recognized on a straight-line basis over the lease term.

DEFERRED TAXES

Deferred tax assets consist of (i) temporary differences between the book values of assets and liabilities and their tax values and (ii) unutilized tax loss carry-forwards. These assets are recognized to an amount not larger than probable future taxable profits, against which the tax deductions can be utilized.

The valuation of deferred tax assets involves assumptions regarding the deductibility of costs not yet subject to taxation and regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. All deferred tax assets are subject to annual review of possible utilization. The largest amounts of tax loss carry-forwards are in Sweden, with indefinite period of utilization.

The accumulated deferred tax assets/liabilities are remeasured regularly by applying the current tax rate in each country. Adjustments of deferred tax assets/liabilities attributable to changes in tax rates are included in current year income.

RECEIVABLES AND CUSTOMER FINANCING

Receivables are reported at amortized cost, less allowances for impairment charges.

When selling a receivable we de-recognize the receivable if we have transferred substantially all the risks and rewards of ownership of the receivable and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer.

 

51


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We assess the collectibility of our receivables for purposes of initial revenue recognition and to record receivables at fair value. In instances where we have exposures related to guarantees to third parties for customer financing, we have reported the extent of our exposure as contingent liabilities. These contingent liabilities are reported net of risk provisions.

INVENTORIES

Inventories are valued at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.

Risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products.

PROVISIONS

Provisions are made when we have 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 estimated reliably. However, the actual outflow as a result of the obligation may vary from that estimate.

Our provisions mainly relate to warranty commitments, restructuring, customer financing guarantees and other obligations, such as litigation obligations, contractual discounts, customer contract loss provisions, penalties or claims as well as unresolved income tax and value added tax issues.

In the ordinary course of business, the company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. These matters are often resolved over long periods of time. We regularly assess the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of possible losses. Provisions are recognized when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated based on a detailed analysis of each individual issue.

For losses on customer contracts we record provisions when a loss from a contract is anticipated and is possible to estimate reliably. We provide for the estimated future settlements related to patent infringements based on the probable outcome of each infringement. The ultimate outcome or actual cost of settling an individual infringement may vary from our estimates. We estimate the outcome of all potential patent infringements made known to us through assertion and through our own monitoring of patent-related cases in the relevant legal systems. To the extent that we determine that an identified potential infringement will more probably than not result in an outflow of resources, we record a provision based on our best estimate of the expenditure required to settle infringement proceedings.

At various intervals we give our suppliers and/or subcontractors forecasts of expected purchases and also sometimes commit to minimum levels during a certain period. The agreements often include compensation clauses for the event that material deviations from original plans regarding production volumes or product mix should occur. As a result of actual deviations from committed purchase levels or of received actual claims from these suppliers and/or subcontractors, we make provisions for estimated compensation to such suppliers and/or subcontractors. Additionally, provisions are estimated and accrued for charges as a result of known changes in design specifications that are provided to production subcontractors. Amounts for provisions and subsequent net amounts at settlements are charged to the corresponding item in the income statement (i.e. costs related to component suppliers, production subcontractors and installation subcontractors are included in “Cost of Sales”. Costs regarding development subcontractors are included in “R&D and other technical expenses”, and costs

 

52


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

related to IT-providers and other services are included in operating expenses or “Cost of Sales” depending on the nature of the service. Such provisions are monitored closely on a regular basis, with any additions/reversals charged to the same account as the initial provision.

PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS

Pensions and other post-employment benefits are classified as either defined contribution plans or defined benefit plans. Under a defined contribution plan, the company’s only obligation is to pay a fixed amount to a separate entity (a fund), and will have no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The related actuarial and investment risk falls on the employee. Under a defined benefit plan it is the Company’s obligation to provide agreed benefits to current and former employees. The related actuarial and investment risks fall on the Company.

The present value of the defined benefit obligations for current and former employees is calculated using the Projected Unit Credit Method. The calculations are based upon actuarial assumptions and are as a minimum prepared annually. Actuarial assumptions are the Company’s best estimate of the variables that determine the cost of providing the benefits. When using actuarial assumptions, it is possible that the actual result will differ from the estimated result. 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, the effect of changes in the discount rate and differences between actual return on plan assets and the expected return on plan assets. Actuarial gains and losses are amortized over the employees expected average remaining service period if the gains/ losses exceed the greater of 10 percent of the present value of the defined benefit obligation or 10 percent of the fair value of plan assets at the beginning of period (the corridor).

The net of return on plan assets and interest on pension liabilities is reported as financial income or expense.

STATEMENT OF CASH FLOWS

Foreign subsidiary companies’ amounts are translated at the average exchange rate during the period. Subsidiary companies purchased and/or sold are reported as cash flow from investment activities, net of cash acquired/sold, and do not affect reported cash flow from operations.

Cash and cash equivalents consist of cash, bank and short-term investments and are highly liquid financial instruments that have a remaining maturity of three months or less at the date of acquisition.

SEGMENT REPORTING

Primary segments

Ericsson has the following business segments:

 

    Systems, addressing operators of mobile and fixed line public telephone networks.

 

    Phones, addressing distributors of mobile handsets to end users. Financial information for this segment consists of our investment and share in earnings of Sony Ericsson.

 

    Other operations, which consists of a number of different operations with different types of customers. Each included operation represents, however, less than 10 percent of total net sales and is therefore considered too small to be reported separately. Included operations are: Microwave Systems, Network Technologies, Enterprise Systems, Mobile Platform Technology, Power Modules and other.

 

53


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

When determining our business segments, we have looked at which market and to what type of customers our products are aimed and through what distribution channels they are sold, as well as to commonality regarding technology, research and development. We regard the Systems segment as on business segment, where the business units Access, Systems, Global Services and Transmission and Transport Networks represent different product lines within the segment. This is due to the close technical relation between included products—they are all integrated components in public telecommunications networks for fixed or mobile communication, subject to common technical systems standards for e.g. GSM, TDMA, CDMA and WCDMA—and due to the common supply and sales through our own sales organization to operators of public networks, with contracts that as a rule include a mix of products and services as well as installation from several product lines.

Our second segment, Phones, is carried out through a joint venture with Sony and develops and sells handsets for mobile telecommunications to distributors.

Our segment Other Operations is composed of a number of smaller operating units, each too small to be reported individually as a separate segment, and each with different characteristics in terms of products, customers and distribution channels.

Secondary segments

Ericsson operates in five main geographical areas: (1) Western Europe, (2) Central and Eastern Europe, Middle East and Africa, (3) Asia Pacific, (4) North America and (5) Latin America. These areas represent our geographical segments.

Financial information is provided to the Board for both primary and secondary segments. These are subject to risk and returns that are different from those of other segments.

GOVERNMENT GRANTS

Government grants are recognized when there is a reasonable assurance of compliance with conditions attached to the grants and that the grants will be received.

For Ericsson, government grants are linked to performance of research or development work or to subsidized capital expenditures as governmental stimulus to employment or investments in a certain country or region. The occurance of government grants is very limited. Government grants are normally reported as reductions of development costs or reductions of capital expenditure, depending on their nature.

NEW IFRSs STANDARDS, AMENDED IAS STANDARDS AND IFRIC INTERPRETATIONS AS FROM JANUARY 1, 2006

 

    IAS 19 Employee Benefits. As from January 1, 2006, the company will apply the option for recognition of actuarial gains and losses in equity. The amendment will be applied retrospectively as from January 1, 2004. The effect of the application is an increase of pension liability of approximately SEK 3.5 b. and accruals for social security of SEK 0.8 billion at January 1, 2006. The effect on stockholders’ equity net of tax is approximately SEK 3.1 b, as per January 1, 2006.

 

    IAS 39 Financial instruments: Recognition and Measurement. An amendment requires a company to include liabilities resulting from financial guarantee contracts in the balance sheet. This amendment is not expected to have a significant impact on the financial position and result.

 

54


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    IFRIC 4 Determining whether an Arrangement contains a Lease. This interpretation is not expected to have a significant impact on the financial position and result.

 

    IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste of Electric and Electronical Equipment. This interpretation is not expected to have a significant impact on the financial position and result.

C2    CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements and application of accounting standards often involve management’s judgment or the use of estimates and assumptions deemed to be reasonable and prudent at the time they are made. However, other results may be derived using different assumptions or estimates. Following are the accounting policies subject to such estimates or assumptions that we believe could have the most significant impact on our reported results and financial position.

REVENUE RECOGNITION

Parts of our sales is generated from large and complex customer contracts. Managerial judgment is applied, among other aspects, regarding contractual performance, estimated total contract costs, degree of completion and conformance with acceptance criteria to determine the amounts of revenue to be recognized and any loss provisions to be made.

INVENTORY VALUATION

Inventories are valued at the lower of cost or net realizable value. Total inventory reserves as of December 31, 2005 amount to SEK 2.5 (3.1) billion or 12 (18) percent of gross inventory. Of the total inventory of SEK 19.2 billion, SEK 11.6 billion is contract work in progress and SEK 7.6 billion is mainly related to components and finished goods. For the contract work in progress inventory, risks are related to the judgements made in relation to revenue recognition, while for the component and finished goods parts, the inventory risks are more related to technological obsolescence and estimates of net realizable values.

DEFERRED TAXES

Deferred tax assets are recognized for temporary differences between reported and taxable income and for unutilized tax loss carry-forwards. The largest amounts of tax loss carry-forwards are in Sweden, with an indefinite period of utilization (i.e. with no expiry date). The valuation of tax loss carry-forwards and our ability to utilize tax losses is based upon our estimates of future taxable income in different tax jurisdictions and involves assumptions regarding the deductibility of costs not yet subject to taxation.

At December 31, 2005, the value of unutilized tax loss carry forwards amounted to SEK 28.0 (34.1) billion. The deferred tax amounts related to loss carry-forwards are reported as non-current assets.

ACCOUNTING FOR INCOME-, VALUE ADDED- AND OTHER TAXES

Accounting for these items is based upon evaluation of income, value added tax rules and other taxes in all jurisdictions where we perform activities. The total complexity of all rules related to taxes and the accounting for these require management involvement in estimates and judgments of probable outcomes.

 

55


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

CAPITALIZED DEVELOPMENT COSTS

Development costs for products that will be sold, leased or otherwise marketed as well as those intended for internal use are capitalized. The starting point for capitalization is based upon management’s judgment that the technological and economical feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. Capitalization ceases and amortization of capitalized development amounts begins when the product is available for general use with impairment testing performed annually. The definition of amortization period also requires management’s judgment.

At December 31,2005, the amount of capitalized development costs amounted to SEK 6.2 (8.1) billion.

PROVISIONS

Valuation of receivables and exposures in customer financing

We monitor the financial stability of our customers and the environment in which they operate to judge their guarantees and the likelihood that we will get paid for individual receivables. Most of our customers have good creditworthiness. Total allowances for doubtful accounts as of December 31, 2005, were SEK 1.4 (1.8) billion or 3.3 (5.3) percent of our gross accounts receivable.

We regularly assess the credit risk and based on these assessments, we record provisions for outstanding customer financing credits and contingent liabilities, i.e. third party credits under our guarantees. These risk provisions are included in “Selling and administrative expenses”.

Warranty commitments

Provisions for product warranties are based on historic quality rates as well as assumptions on estimated quality rates for new products and costs to remedy the various types of faults predicted. Total provisions for product warranties as of December 31, 2005, amounted to SEK 4.8 (6.4) billion.

Pension and other post-employment benefits

Accounting for the costs of defined benefit pension plans and other applicable post-employment benefits is based on actuarial valuations, relying on key assumptions for discount rates, expected return on plan assets, future salary increases, turnover rates and mortality tables. The discount rate assumptions are based on rates for high-quality fixed-income investments with durations similar to our pension plans. Expected return on plan assets consider long-term historical returns, allocation of assets and estimates of future long-term investment returns. At December 31, 2005, provisions for pensions and other post-employment benefits amounted to net SEK 2.0 (10.1) billion.

Other provisions

Other provisions are mainly comprised of contractual obligations and penalties with most of the rest for risks associated with patent and other litigations, contractual discounts and penalties of uncertain timing or amount, supplier or subcontractor claims and/or disputes, as well as provisions for income tax and value added tax unresolved issues and estimated losses on customer contracts. The nature and type of risks for these provisions differ and judgments related to them receive special attention from the management. At December 31, 2005, Other provisions amounted to SEK 11,5 (14.5) billion.

 

56


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

HEDGE ACCOUNTING AND FOREIGN EXCHANGE RISKS

Foreign exchange risk in highly probable sales in future periods are hedged using foreign exchange derivative instruments designated as cash-flow hedges.

Establishing highly probable sales volumes involves gathering and evaluating sales forecasts for future periods as well as analyzing actual outcome on a regular basis in order to fulfill effectiveness testing requirements for hedge accounting. Deviations in outcome of sales might result in that the requirements for hedging accounting is not fulfilled.

C3    TRANSITION TO IFRSs FROM SWEDISH GAAP

The International Financial Reporting Standards (“IFRSs”) were adopted in 2005. New IFRSs standards, amended IAS standards and IFRIC Interpretations up to December 31, 2005, as endorsed by EU have been applied.

In the transition to IFRSs, IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. January 1, 2004, is the date of transition to IFRSs for Ericsson. IAS 32 and IAS 39 were adopted as from January 1, 2005, as allowed by IFRS 1. The comparison year 2004 is restated in accordance with IFRSs.

Of the IAS and IFRSs standards, intangible assets, business combinations, share-based payment and financial instruments have had the most significant impact on the financial position and result.

IAS 38—INTANGIBLE ASSETS

When adopting the Swedish accounting standard RR 15 Intangible assets in 2002, the standard was implemented prospectively only, i.e. no restatement of previous periods was allowed, whereas IAS 38 Intangible assets was implemented retrospectively. The capitalization according to Swedish GAAP during 2002-2004 was the same as per IFRSs. Retrospective application under IFRSs lead to an increase in the opening balance of intangible assets as of January 1, 2004, due to capitalized development costs in years prior to 2002, and increased amortizations on such assets during 2004 and onwards. The opening balance for 2004 was equal to the closing balance according to US GAAP per December 31, 2003, since capitalization of development costs has been made for US GAAP purposes historically. Due to the restatement to IFRSs, intangible assets increased by SEK 6, 408 million, deferred tax assets decreased by SEK 1,794 million and equity increased by SEK 4,614 million respectively. As a result, amortization for 2004 increased by SEK 2,660 million under IFRSs.

IFRS 3—BUSINESS COMBINATIONS INCLUDING GOODWILL

The standard for reporting of business combinations (IFRS 3) has resulted in changes in reporting of acquisitions of companies. Compared to previous standard, IFRS 3 requires a more detailed purchase price allocation, in which fair values to a larger extent are assigned to acquired intangible assets, such as customer relations, brands and patents. Goodwill arises when the purchase price exceeds the fair value of acquired net assets. Goodwill arising from acquisitions is no longer amortized but instead subject to impairment review; at least annually and when there are indicators that the carrying value may not be recoverable.

In Ericsson’s reporting during 2005, acquisitions carried out in 2004 have been accounted for in accordance with IFRS 3. As allowed by IFRS 1, no adjustments for acquisitions prior to the transition date, January 1, 2004, were made. The value of goodwill has been frozen at January 1, 2004, and amortization reported under Swedish GAAP for 2004 has been reversed in IFRSs restatements.

For Ericsson, the new standard has resulted in an increase in reported operating profit for 2004 of SEK 475 million. No difference in reported earnings has arisen as a result of acquisitions carried out in 2004.

 

57


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

IFRS 2—SHARE-BASED PAYMENT

As allowed by IFRS 1, Ericsson has chosen not to apply IFRS 2 to equity instruments granted before November 7, 2002. For one employee option program, granted after November 7, 2002, and not yet vested by January 1, 2005, Ericsson recognizes a charge to income representing the fair value at grant date of the outstanding employee options. The fair value of the options was calculated using an option-pricing model. The total costs are recognized over the vesting period (3 years). The impact on operating profit was a charge of SEK 45 million in 2004.

For other programs there are no material differences.

IAS 32 AND 39—FINANCIAL INSTRUMENTS AND HEDGING

IAS 32 and 39 are standards that deal with disclosure, presentation, recognition and measurement of financial instruments. These standards are applied prospectively from January 1, 2005.

A major effect is that all derivatives are recognized at fair value on the balance sheet. Subsequent changes in fair value of derivatives are recognized in the income statement, unless the derivative is a hedging instrument in (i) a cash flow hedge or (ii) a hedge of a net investment in a foreign operation. In those cases, the effective portion of fair value changes of the derivative will be recognized in equity until the hedged transaction affects the income statement, at which moment the accumulated deferred amount in equity is recycled to the income statement.

For derivatives assigned as (iii) fair value hedges, fair value changes on both the derivative and the hedged item, attributable to the hedged risk, are recognized in the income statement and offset each other to the extent the hedge is effective.

The opening balance January 1, 2005, was affected by SEK 3,556 million in assets, SEK 1,952 million in liabilities and SEK 1,155 million in equity net of SEK 449 million deferred tax as a result of accounting for derivatives at fair value.

Other investments in shares and participations are classified as available-for-sale in accordance with IAS 39 and will thus be reported at fair value.

For investments in quoted companies, fair values are determined based on share prices at the balance sheet date and for non-quoted investments, fair values are estimated.

As disclosed under “Revaluation of foreign currency items in individual companies” in note C1, “Significant Accounting Policies”, IAS 39 was adopted as from January 1, 2005. The effect on the opening balance January 1, 2005, was an increase of SEK 411 million in assets and an increase of SEK 334 million in equity, net of deferred tax of SEK 77 million.

IAS 19—EMPLOYEE BENEFITS

Ericsson reports pensions and other post-employment benefits according to IFRSs (IAS 19), which is similar to RR 29 that was implemented from January 1, 2004.

Actuarial gains and losses were recognized in the opening balance January 1, 2004.

 

58


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

RECLASSIFICATION OF PROVISIONS

In accordance with IAS 1 Presentation of Financial Statements, provisions need to be presented as both current and non-current. A liability shall be classified as current when it satisfies any of the following criteria: a) it is expected to be settled in the entity’s normal operating cycle; b) it is held primarily for the purpose of being traded; c) it is due to be settled within twelve months after the balance sheet date; or d) the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. All other liabilities shall be classified as non-current. Accordingly, Ericsson has reclassified provisions in the balance sheet to current and non-current liabilities under IFRSs.

 

59


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

SUMMARY OF TRANSITION EFFECTS:

The effects of the adoption of IFRSs on the consolidated income statement, balance sheet, cash flow and equity are shown in the tables below.

RECONCILIATION OF CONSOLIDATED INCOME STATEMENT

 

     Jan-Dec 2004

SEK million

   Swedish
GAAP
   IFRSs
adjustments
   IFRSs

Net sales

   131,972       131,972

Cost of sales

   -70,864       -70,864
            

Gross margin

   61,108       61,108
            

Research and development and other technical expenses

   -20,861    -2,558    -23,421

Selling expenses and administrative expenses

   -16,244    323    -15,921
              

Operating expenses

   -37,105    -2,235    -39,342
              

Other operating income

   2,617       2,617

Share in earnings of joint ventures and associated companies

   2,318    5    2,323
              

Operating income

   28,938    -2,230    26,706
              

Financial income

   3,541       3,541

Financial expenses

   -4,081       -4,081
              

Income after financial items

   28,398    -2,230    26,166
              

Taxes

   -9,077    745    -8,330

Minority interest

   -297    297   

Net income

   19,024    -1,188    17,836
              

Of which:

        

Net income attributable to stockholders of the parent company

         17,539

Net income attributable to minority interest

         297

Other information

        

Average number of shares, basic (million)

   15,829       15,829

Earnings per share, basic (SEK)

   1.20    -0.09    1.11

Earnings per share, diluted (SEK)

   1.20    -0.09    1.11

Reconciliation of Net income from Swedish GAAP to IFRSs

        

Net income, Swedish GAAP

         19,024

Reclassification of minority interest

         297

Reversal of amortization of goodwill

         475

Stock option plans

         -45

Amortization of capitalization of development costs

         -2,660

Taxes

         745
          

Net income, IFRSs

         17,836
          

 

60


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

RECONCILIATION OF CONSOLIDATED BALANCE SHEET JAN 1, 2004

 

SEK million

  

Jan 1, 2004

Swedish GAAP1)

  

IFRSs

adjustments

  

Jan 1, 2004

IFRSs

ASSETS

        

Non-current assets

        

Intangible assets

        

Capitalized development expenses

   4,784    6,408    11,192

Goodwill

   5,739       5,739

Other

   687       687

Property, plant and equipment

   6,505       6,505

Financial assets

        

Equity in joint ventures and associated companies

   2,970       2,970

Other investments in shares and participations

   433       433

Customer financing, non-current

   3,027       3,027

Other financial assets, non-current

   1,342       1,342

Deferred tax assets

   27,735    -1,794    25,941
              
   53,222    4,614    57,836

Current assets

        

Inventories

   10,965       10,965

Financial assets

        

Accounts receivable—trade

   31,886       31,886

Customer financing, current

   979       979

Other current receivables

   12,718       12,718

Short-term investments

      20,092    20,092

Cash and cash equivalents

   73,207    -20,092    53,115
            
   129,755       129,755
              

Total assets

   182,977    4,614    187,591
              

EQUITY AND LIABILITIES

        

Equity

        

Stockholders’ equity

   59,206    4,614    63,820

Minority interest in equity of consolidated subsidiaries

      2,299    2,299
              
   59,206    6,913    66,119

Minority interest in equity of consolidated subsidiaries

   2,299    -2,299   
              

Non-current liabilities

        

Post-Employment benefits

   9,827       9,827

Other provisions, non-current

      2,095    2,095

Deferred tax liabilities

   520       520

Borrowings, non-current

   27,001       27,001

Other non-current liabilities

   2,771       2,771
              
   40,119    2,095    42,214
              

Current liabilities

        

Other provisions, current

   27,601    -2,095    25,506

Borrowings, current

   9,509       9,509

Accounts payable

   8,895       8,895

Other current liabilities

   35,348       35,348
              
   81,353    -2,095    79,258
              

Total equity and liabilities

   182,977    4,614    187,591
              

1) Restated for changed accounting principle, IAS 19

 

61


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

RECONCILIATION OF CONSOLIDATED BALANCE SHEET DEC 31, 2004 AND JAN 1, 2005

 

SEK million

 

Dec 31, 2004

Swedish GAAP

  IFRSs
adjustments
  Dec 31, 2004
IFRSs
 

IAS 39

adjustments

  Jan 1, 2005
IFRSs

ASSETS

         

Non-current assets

         

Intangible assets

         

Capitalized development expenses, net

  4,343   3,748   8,091     8,091

Goodwill

  5,324   442   5,766     5,766

Other

  748     748     748

Property, plant and equipment

  5,845     5,845     5,845

Financial assets

         

Equity in joint ventures and associated companies

  4,150   5   4,155     4,155

Other investments in shares and participations

  543     543   411   954

Customer financing, non-current

  2,150     2,150     2,150

Other financial assets, non-current

  1,236     1,236   937   2,173

Deferred tax assets

  21,815   -1,049   20,766   -77   20,689
                   
  46,154   3,146   49,300   1,271   50,571

Current assets

         

Inventories

  14,003     14,003     14,003

Financial assets

         

Accounts receivable—trade

  32,644     32,644   -956   31,688

Customer financing, current

  1,446     1,446     1,446

Other current receivables

  12,239     12,239   3,575   15,814

Short-term investments

    46,142   46,142     46,142

Cash and cash equivalents

  76,554   -46,142   30,412     30,412
                 
  136,886     136,886   2,619   139,505
                   

Total assets

  183,040   3,146   186,186   3,890   190,076
                   

EQUITY AND LIABILITIES

         

Equity

         

Stockholders’ equity

  77,299   3,146   80,445   1,489   81,934

Minority interest in equity of consolidated subsidiaries

    1,057   1,057     1,057
                   
  77,299   4,203   81,502   1,489   82,991

Minority interest in equity of consolidated subsidiaries

  1,057   -1,057      
                   

Non-current liabilities

         

Post-employment benefits

  10,087     10,087     10,087

Other provisions, non-current

    1,146   1,146     1,146

Deferred tax liabilities

  421     421   449   870

Borrowings, non-current

  21,837     21,837   937   22,774

Other non-current liabilities

  1,856     1,856     1,856
                   
  34,201   1,146   35,347   1,386   36,733
                   

Current liabilities

         

Other provisions, current

  24,778   -1,146   23,632     23,632

Borrowings, current

  1,719     1,719     1,719

Accounts payable

  10,988     10,988   -206   10,782

Other current liabilities

  32,998     32,998   1,221   34,219
                   
  70,483   -1,146   69,337   1,015   70,352
                   

Total equity and liabilities

  183,040   3,146   186,186   3,890   190,076
                   

 

62


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

IMPACT OF IFRSs ON THE STATEMENT OF CASH FLOWS

According to IAS 7 “Cash Flow”, Ericsson defines cash and cash equivalents to include only short-term highly liquid investments with remaining maturity at acquisition date of three months or less. Under Swedish accounting standards, a broader interpretation was earlier made, where also readily marketable securities designated for liquidity management purposes only and with a low risk for value changes and with a maturity exceeding three months were included. The restated statements of cash flow for 2004 and the opening balance for the Ericsson group according to IAS 7 therefore reflects cash and cash equivalents that are different to those previously reported under Swedish GAAP.

 

(SEK million)

   January 1,
2004
   December 31,
2004

Cash and cash equivalents under Swedish GAAP

   73,207    76,554

Less: amounts with maturity exceeding three months

   -20,092    -46,142

Cash and cash equivalents under IFRSs

   53,115    30,412

RECONCILIATION OF EQUITY

Reconciliation of equity, Dec 31, 2003, according to Swedish GAAP and Jan 1, 2004, according to IFRSs

 

Closing balance, Swedish GAAP

   60,481

Effect of changed accounting principle, IAS 19

   -1,275

Opening balance according to Swedish GAAP

   59,206

Reclassification of minority interest

   2,299

Capitalization of development costs, net

   4,614

Opening balance, IFRSs

   66,119

Reconciliation of equity, Dec 31, 2004, from Swedish GAAP to IFRSs

 

Closing balance, Swedish GAAP

   77,299

Reclassification of minority interest

   1,057

Capitalization of development costs, net

   2,699

Goodwill

   447

Closing balance, IFRSs

   81,502

Reconciliation of equity Dec 31, 2004 according to IFRSs and Jan 1, 2005 including IAS 39

 

Closing balance, IFRSs

   81,502

Hedge reserve, net

   1,155

Revaluation of other investments, net

   334

Opening balance Jan 1, 2005

   82,991

 

63


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

C4    SEGMENT INFORMATION

BUSINESS SEGMENTS (PRIMARY)

 

2005

   Systems    Phones    Other
operations
   Unallocated    Eliminations    Group

Net sales

   141,986    —      9,835    —      —      151,821

Inter segment sales

   113    —      1,061    —      -1,174    —  
                             

Total net sales

   142,099    —      10,896    —      -1,174    151,821
                             

Share in earnings of JV and associated companies

   118    2,257    20    —      —      2,395
                             

Operating income

   30,885    2,257    283    -341    —      33,084
                             

Financial income

   —      —      —      2,653    —      2,653

Financial expenses

   —      —      —      -2,402    —      -2,402
                             

Income after financial items

   30,885    2,257    283    -90    —      33,335
                             

Taxes

   —      —      —      -8,875    —      -8,875
                             

Net income

   30,885    2,257    283    -8,965    —      24,460

Of which:

                 

Net income attributable to stockholders of the parent company

   30,914    2,257    270    -9,126    —      24,315

Net income attributable to minority interest

   —      —      —      145    —      145

Segment assets1)2)

   85,958    —      10,541    106,017    —      202,516

Associates

   1,185    5,044    84    —      —      6,313
                             

Total assets

   87,143    5,044    10,625    106,017    —      208,829
                             

Segment liabilities3)4)

   60,670    —      6,461    36,171    —      103,302
                             

Total liabilities

   60,670    —      6,461    36,171    —      103,302
                             

1) Segment assets include property, plant and equipment, intangible assets, current and non-current customer financing, accounts receivable, inventory, prepaid expenses, accrued revenues, derivatives and other current assets.
2) Unallocated assets include cash and cash equivalents, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest-bearing provisions and liabilities.

 

64


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other segment items

 

2005

   Systems     Phones    Other
operations
    Unallocated    Eliminations    Group  

Property, plant and equipment and intangible assets

               

Additions/capitalization

   5,166     —      438     —      —      5,604  

Depreciation

   -2,676     —      -127     -1    —      -2,804  

Amortization

   -2,976     —      -377     84    —      -3,269  

Write-downs/reversals of write-downs

   271     —      —       —      —      271  

Number of employees

   50,107     —      5,948     —      —      56,055  
                                 

Operating income

   30,885     2,257    283     -341    —      33,084  

Operating margin (%)

   22 %   —      3 %   —      —      22 %

Income after financial items

   30,885     2,257    283     -90    —      33,335  
                                 

GEOGRAPHICAL SEGMENTS (SECONDARY)

 

2005

   Net sales    Total assets   

Additions/

capitalization of

PP&E and

intangible assets

  

Number of

employees

Western Europe

   41,940    153,155    4,565    35,679

—of which Sweden

   6,110    132,442    3,502    21,178

Central and Eastern Europe, Middle East and Africa

   39,948    7,421    107    4,360

Asia Pacific

   31,426    20,867    291    8,723

—of which China

   11,544    8,964    123    3,601

North America

   19,432    13,974    552    3,911

—of which United States

   17,904    13,207    453    2,113

Latin America

   19,075    13,413    89    3,382
                   

Total

   151,821    208,829    5,604    56,055
                   

—of which EU

   45,288    153,101    4,628    36,482
                   

 

65


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

BUSINESS SEGMENTS (PRIMARY)

 

2004

   Systems    Phones    Other
operations
   Unallocated    Eliminations    Group

Net sales

   121,549    —      10,423    —      —      131,972

Inter segment sales

   1,348    —      966    —      -2,314    —  
                             

Total net sales

   122,897    —      11,389    —      -2,314    131,972
                             

Share in earnings of JV and associated companies

   90    2,143    68    22    —      2,323
                             

Operating income

   23,187    2,143    1,298    78    —      26,706
                             

Financial income

   —      —      —      3,541    —      3,541

Financial expenses

   —      —      —      -4,081    —      -4,081
                             

Income after financial items

   23,187    2,143    1,298    -462    —      26,166
                             

Taxes

   —      —      —      -8,330    —      -8,330
                             

Net income

   23,187    2,143    1,298    -8,792    —      17,836
                             

Of which:

                 

Net income attributable to stockholders of the parent company

   23,187    2,143    1,298    -9,089    —      17,539
                             

Net income attributable to minority interest

   —      —      —      297    —      297
                             

Segment assets1) 2)

   66,973    —      9,452    105,606    —      182,031
                             

Associates

   961    3,092    97    5    —      4,155
                             

Total assets

   67,934    3,092    9,549    105,611    —      186,186
                             

Segment liabilities3) 4)

   54,728    —      6,627    43,329    —      104,684
                             

Total liabilities

   54,728    —      6,627    43,329    —      104,684
                             

1) Segment assets include property, plant and equipment, intangible assets, current and non-current customer financing, accounts receivable, inventory, prepaid expenses, accrued revenues, derivatives and other current assets.
2) Unallocated assets include cash and cash equivalents, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses and deferred revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest-bearing provisions and liabilities.

 

66


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other segment items

 

2004

   Systems     Phones    Other
operations
    Unallocated    Eliminations    Group  

Property, plant and equipment and intangible assets

               

Additions/capitalization

   3,898     —      399     —      —      4,297  

Depreciation

   -2,224     —      -209     -1    —      -2,434  

Amortization

   -4,381     —      -82     11    —      -4,452  

Write-downs

   -22     —      -61     -35    —      -118  

Number of employees

   45,500     —      5,034     —      —      50,534  
                                 

Operating income

   23,187     2,143    1,298     78    —      26,706  

Operating margin (%)

   19 %   —      11 %   —      —      20 %

Income after financial items

   23,187     2,143    1,298     -462    —      26,166  
                                 

GEOGRAPHICAL SEGMENTS (SECONDARY)

 

2004

   Net sales    Total assets   

Additions/

capitalization of

PP&E and

intangible assets

  

Number of

employees

Western Europe

   40,542    148,532    3,571    32,826

—of which Sweden

   6,180    128,398    2,868    21,296

Central and Eastern Europe, Middle East and Africa

   32,929    3,874    83    3,527

Asia Pacific

   28,552    14,282    230    7,493

—of which China

   12,298    7,018    130    2,897

North America

   15,471    9,360    320    4,139

—of which United States

   13,984    9,115    165    2,156

Latin America

   14,478    10,139    93    2,549
                   

Total

   131,972    186,186    4,297    50,534
                   

—of which EU1)

   42,366    148,528    3,620    33,625
                   

1) Restated due to new members in EU as of May, 2004.

C5    REVENUES

The majority of Ericsson’s products and services are sold as parts of contracts including multiple elements. The nature of the products and services being sold, and the contractual terms taken as a whole, determine the appropriate revenue recognition method. The contracts are of three main types:

 

     2005    2004

Equipment sales

   125,856    110,985

Of which:

     

—Construction-type contracts

   18,012    23,319

—Delivery-type contracts

   107,844    87,666

Service sales

   23,477    19,301

Licenses

   2,488    1,686
         

Total

   151,821    131,972
         

Capital gains, license fees and other operating revenues

   2,760    3,119

Interest income

   2,310    3,346

Dividends

   9    8

 

67


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

C6    EXPENSES BY NATURE

 

         2005            2004    

Employee benefits expenses1)

   34,458    32,356

Depreciation and amortization expense1)

   5,802    7,004

1) Booked amount prior to adjustments for recognition and derecognition in inventory and capitalized development costs.

C7    OTHER OPERATING INCOME

 

         2005            2004    

Gains on sales of intangible assets and PP&E

   29    111

Losses on sales of intangible assets and PP&E

   -120    -229

Gains on sales of investments and operations

   205    510

Losses on sales of investments and operations

   -149    -273
         

Capital gains/losses, net

   -35    119
         

Other operating revenues mainly including license fees

   2,526    2,498
         

Total other operating income

   2,491    2,617
         

C8    FINANCIAL INCOME AND EXPENSES

 

         2005            2004    

Financial income

     

Result from securities and receivables accounted for as non-current assets

   293    354

Other interest income and similar profit/loss items

   2,360    3,187
         

Total

   2,653    3,541
         

Financial expenses

     

Interest expenses and similar profit/loss items

   -2,402    -4,081
         

Financial net

   251    -540
         

C9    TAXES

INCOME STATEMENT

The following items are included in Taxes:

 

         2005            2004    

Current income taxes for the year

   -3,635    -2,324

Current income taxes related to prior years

   138    -637

Deferred tax income/expense (-) related to temporary differences

   -4,753    -4,635

Share of taxes in joint ventures and associated companies

   -625    -734
         

Taxes

   -8,875    -8,330
         

 

68


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Deferred tax income and expenses

The amounts of deferred tax income and expenses are shown in the following table:

 

         2005            2004    

Deferred tax income

   1,888    3,082

Deferred tax expenses

   -6,641    -7,717
         

Deferred tax income/expense, net

   -4,753    -4,635
         

Deferred tax income refers mainly to certain provisions and consolidation adjustments on group level.

Deferred tax expenses SEK 2,666 million out of SEK 6,641 million refer to utilization of tax loss carry forwards. The remaining amount refers to reversals of temporary differences regarding certain provisions for mainly warranty commitments, provisions for customer financing commitments and inventory write-downs.

A reconciliation between actual tax income (– expense) for the year and the theoretical tax income (– expense) that would arise when applying statutory tax rate in Sweden, 28 percent on income before taxes is shown in the table:

 

         2005            2004    

Income after financial items

   33,335    26,166

Tax rate in Sweden (28%)

   -9,334    -7,327

Effect of foreign tax rates

   -489    -286

Current income taxes related to prior years

   138    -637

Benefits from temporary differences of prior periods used to reduce deferred tax expense

   380    —  

Tax effect of expenses that are non-deductible for tax purpose

   -515    -910

Tax effect of income that are non-taxable for tax purpose1)

   944    855

Tax effect of changes in tax rates

   4    -18

Tax effect of tax loss carryforwards, net

   -3    -9
         

Taxes

   -8,875    -8,330
         

1) Income that is non-taxable includes R&D credits and other non-taxable income.

BALANCE SHEET

Deferred tax assets and liabilities

Tax effects of temporary differences, including unutilized tax loss carryforwards, have resulted in deferred tax assets and liabilities as follows:

 

         2005            2004    

Deferred tax assets

   17,294    20,766

Deferred tax liabilities

   391    421

Deferred tax assets relate to tax loss carryforwards, temporary differences due to certain provisions and consolidation adjustments on group level. We estimate that approximately 40 percent of total deferred tax assets will be recovered within 12 months. Deferred tax assets regarding tax loss carryforwards amount to SEK 8,187 million (SEK 9,865 million in 2004).

 

69


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Deferred tax asset are amounts recognized in countries where we expect to be able to generate corresponding taxable income in the future to benefit from tax reductions. The significant tax loss carryforwards are related to countries with long or indefinite periods of utilization, mainly Sweden and the U.S. Of the total deferred tax assets for tax loss carryforwards, SEK 8,187 million, SEK 7,965 million will expire 2011 or later, of which SEK 6,363 million relate to Sweden with indefinite time of utilization.

With our strong current financial position and profitability during 2005, we have been able to use part of our tax loss carryforwards during the year, and we are convinced that Ericsson will be able to generate sufficient income in the coming years to utilize these deferred tax assets.

Investments in subsidiary companies, joint ventures and associated companies

Due to losses in certain subsidiary companies, the book value of certain investments in those subsidiary companies, joint ventures and associated companies are less than the tax value of these investments. Since deferred tax assets have been reported with respect also to losses in these companies, and due to the uncertainty as to which deductions can be realized in the future, no additional deferred tax assets are reported.

Tax loss carryforwards

Deferred tax assets regarding unutilized tax loss carryforwards are reported to the extent that realization of the related tax benefit through the future taxable profits is probable also when considering the period during which these can be utilized, as described below.

At December 31, 2005, these unutilized tax loss carryforwards amounted to SEK 28,034 million. The tax effect of these tax loss carryforwards are reported as assets.

The final years in which these loss carryforwards can be utilized are shown in the following table:

 

Year of expiration

   2005

2006

   499

2007

   163

2008

   32

2009

   33

2010

   49

2011 or later

   27,258
    

Total

   28,034
    

Tax effects reported directly to stockholders’ equity

Tax effects reported directly to stockholders’ equity amount to SEK 807 million (negative SEK 384 million for 2004 restated to IFRSs), the amount reported is related to hedge accounting.

 

70


Table of Contents

ERICSSON ANNUAL REPORT ON FORM 20-F 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

C10    EARNINGS PER SHARE

 

         2005            2004    

Net income attributable to stockholders of the parent company
(SEK million)

   24,315    17,539

Average number of shares, basic (millions)

   15,843    15,829

Earnings per share, basic (SEK)

   1.53    1.11
         

Net income attributable to stockholders of the parent company
(SEK million)

   24,315    17,539

Average number of shares after exercise of stock options (million)

   15,907    15,895
         

Earnings per share, diluted (SEK)

   1.53    1.11
         

C11    INTANGIBLE ASSETS

 

2005

  Capitalized
development
costs, to be
marketed
  Capitalized
acquired
development
costs, for
internal use
  Capitalized
internal
development
costs, for
internal use
  Capitalized
development
costs, total
  Goodwill   Licenses
trademarks
and similar
rights
  Patents and
acquired
research
and
development
  Other
intangible
assets,
total

Accumulated acquisition costs

               

Opening balance

  11,876   1,638   1,094   14,608   5,766   1,022   1,118   2,140

Acquisitions/capitalization

  1,174   —     —     1,174   512   38   515   553

Balances regarding acquired and sold companies

  —     —     —     —     —     11   —     11

Sales/disposals

  -1,067   —     —     -1,067   —     -73   -276   -349

Translation difference for
the year

  —     —     —     —     1,084   67   16   83
                               

Closing balance

  11,983   1,638   1,094   14,715   7,362   1,065   1,373   2,438
                               

Accumulated amortization

               

Opening balance

  -3,458   -1,424   -950   -5,832   —     -901   -477   -1,378

Amortization for the year1)

  -2,801   -125   -83   -3,009   —     -8   -252   -260

Balances regarding acquired and sold companies

  —     —     —     —     —     -7   —     -7

Sales/disposals

  1,067   —     —     1,067   —     78   134   212

Translation difference for
the year

  —     —     —     —     —     -44   -8   -52
                               

Closing balance

  -5,192   -1,549   -1,033   -7,774   —     -882   -603   -1,485
                               

Accumulated write-downs

               

Opening balance

  -621   -38   -26   -685   —     —     -14   -14

Write-downs for the year

  -95   —     —     -95   —     —     —     —  

Sales/disposals

  —     —     —     —     —     —     —     —  

Translation difference for
the year

  —     —     —     —     —     —     —     —  
                               

Closing balance

  -716   -38   -26   -780   —     —     -14   -14
                       <