As filed with the Securities and Exchange Commission on March 31, 2004
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
þ | annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 |
For the Fiscal Year Ended December 31, 2003
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 012033
TELEFONAKTIEBOLAGET LM ERICSSON
(Exact Name of Registrant as Specified in Its Charter)
LM ERICSSON TELEPHONE COMPANY
(Translation of Registrants 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
STIBOR 1.5 percent Convertible Subordinated Debentures due June 30, 2003
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 issuers classes of capital or common stock as of the close of the period covered by the Annual Report:
B shares (SEK 1.0 nominal value) |
15,476,040,038 | |
A shares (SEK 1.0 nominal value) |
656,218,640 | |
C shares (SEK 1.0 nominal value) |
0 |
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 which financial statement item the registrant has elected to follow.
Item 17 x Item 18 ¨
i | ||
1 | ||
2 | ||
6 | ||
19 | ||
29 | ||
75 | ||
83 | ||
88 | ||
90 | ||
96 | ||
100 | ||
101 |
FORM 20 - F 2003 CROSS REFERENCE TABLE |
FORM 20-F 2003 CROSS REFERENCE TABLE
Our Annual Report on Form 20-F consists of the Swedish Annual Report for 2003, with certain adjustments to the financial statements to comply with U.S. restrictions on the use of non-GAAP financial measures, 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 |
Five Year Summary | 88 | ||||
Supplemental Information | ||||||
Exchange Rates |
101 | |||||
B Capitalization and Indebtedness |
Not applicable | |||||
C Reason for the Offer and Use of Proceeds |
Not applicable | |||||
D Risk Factors |
Risk Factors | 90 | ||||
4 | Information on the Company | |||||
A History and Development of the Company |
Board of Directors Report | |||||
Partnerships and Joint Ventures, Acquisitions/Divestitures |
9 | |||||
Information on the Company | ||||||
History and Development |
75 | |||||
Capital expenditures |
81 | |||||
B Business Overview |
Information on the Company | 75-82 | ||||
C Organizational Structure |
Information on the Company | |||||
Organizational Structure |
82 | |||||
Notes to the Financial Statements | ||||||
Note 12 Investments |
46 | |||||
D Property, Plants and Equipment |
Information on the Company | |||||
Property, Plants and Equipment |
81 | |||||
5 | Operating and Financial Review and Prospects | |||||
A Operating Results |
Board of Directors Report | |||||
Financial Results |
10 | |||||
Supplemental Information | ||||||
Operating Results |
101 | |||||
B Liquidity and Capital Resources |
Board of Directors Report | |||||
Balance sheet, cash flow, liquidity and capital resources |
11 | |||||
Notes to the Financial Statements | ||||||
Note 21 Financial Instruments |
53 | |||||
C Research and Development, Patents and Licenses |
Board of Directors Report | |||||
Products, Research and Development |
9 | |||||
Information on the Company | ||||||
Research and Development (R&D) |
81 | |||||
Intellectual Property and Licensing |
81 | |||||
D Trend Information |
Board of Directors Report | |||||
Market Environment and Trend information |
7 | |||||
E Off-Balance Sheet Arrangements |
Board of Directors Report | |||||
Off Balance Sheet Items |
11 | |||||
Notes to the Financial Statements | ||||||
Note 21 Financial Instruments |
53 | |||||
F Tabular Disclosure of Contractual Obligations |
Supplemental Information | |||||
Tabular disclosure of contractual obligations |
103 | |||||
i |
FORM 20 - F 2003 CROSS REFERENCE TABLE |
Form 20-F Item Heading | Location in this document | Page Number | ||||
6 | Directors, Senior Management and Employees | |||||
A Directors and Senior Management |
Directors, Senior Management and Auditors | 83 | ||||
B Compensation |
Board of Directors Report | |||||
Employee Compensation |
15 | |||||
Notes to the Financial Statements | ||||||
Note 29 Information Regarding Employees, |
||||||
Members of the Board of Directors and Management |
61 | |||||
C Board Practices |
Board of Directors report | |||||
Corporate governance |
16 | |||||
Directors, Senior Management and Auditors | ||||||
Board Procedures and Committees |
84 | |||||
D Employees |
Board of Directors Report | |||||
Organization and Employees |
15 | |||||
Notes to the Financial Statements | ||||||
Note 29 Information Regarding Employees, |
||||||
Members of the Board of Directors and Management |
61 | |||||
E Share Ownership |
Directors, Senior Management and Auditors | 83 | ||||
Notes to the Financial Statements | ||||||
Note 29 Information Regarding Employees, |
||||||
Members of the Board of Directors and Management |
61 | |||||
7 | Major Shareholders and Related Party Transactions | |||||
A Major Shareholders |
Share Information | |||||
Shareholders |
98 | |||||
B Related Party Transactions |
Notes to the Financial Statements | |||||
Note 30 Related Party Transactions |
67 | |||||
C Interests of Experts and Counsel |
Not applicable | |||||
8 | Financial Information | |||||
A Consolidated Statements and Other Financial Information |
Financial Statements | 20 | ||||
Please see also item 17 |
||||||
Board of Directors Report | ||||||
Legal and Tax Proceedings |
14 | |||||
Supplemental Information | ||||||
Dividends |
105 | |||||
Shareholder Information | ||||||
Dividend |
100 | |||||
B Significant Changes |
Board of Directors Report | |||||
Post Closing Events |
17 | |||||
9 | The Offer and Listing | |||||
A Offer and Listing Details |
Supplemental Information | |||||
Offer and Listing Details |
103 | |||||
B Plan of Distribution |
Not applicable | |||||
C Markets |
Share Information | 96 | ||||
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 |
105 | |||||
C Material Contracts |
Supplemental Information | |||||
Material Contracts |
107 | |||||
D Exchange Controls |
Supplemental Information | |||||
Exchange Controls |
107 | |||||
E Taxation |
Supplemental Information | |||||
Taxation |
108 | |||||
F Dividends and Paying Agents |
Not applicable | |||||
G Statement by Experts |
Not applicable |
ii |
Form 20-F Item Heading |
FORM 20 - F 2003 CROSS REFERENCE TABLE
Location in this document | Page Number | |||||
H Documents on Display |
Supplemental Information | |||||
Documents on Display |
112 | |||||
I Subsidiary Information |
Not applicable | |||||
11 | Quantitative and Qualitative Disclosures | Board of Directors Report | ||||
About Market Risks | Financial Risk Management |
12 | ||||
Notes to the Financial Statements | ||||||
Note 21 Financial Instruments |
53 | |||||
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 | Not applicable | ||||
of Security Holders and Use of Proceeds | ||||||
15 | Controls and Procedures | Supplemental Information | ||||
Controls and Procedures |
112 | |||||
16 | Reserved | |||||
A Audit Committee Financial Expert |
Supplemental Information | |||||
Audit Committee Financial Expert |
112 | |||||
B Code of Ethics |
Supplemental Information | |||||
Code of Ethics |
112 | |||||
C Principal Accountants Fees and Services |
Supplemental Information | |||||
Principal Accountants Fees and Services |
113 | |||||
D Exemptions from the Listing Standards for Audit Committees |
Not applicable | |||||
PART III | ||||||
17 | Financial Statements | Consolidated Income Statement | 20 | |||
Consolidated Balance Sheet | 21 | |||||
Consolidated Statement of Cash Flows | 22 | |||||
Parent Company Income Statement | 24 | |||||
Parent Company Balance Sheet | 25 | |||||
Parent Company Statement of Cash Flows | 26 | |||||
Changes in equity | 23,27 | |||||
Notes to the Financial Statements | 29 | |||||
18 | Financial Statements | Not applicable | ||||
19 | Exhibits | |||||
Exhibits 1 |
Articles of Association April 2003. | |||||
Exhibits 3 |
Not applicable | |||||
Exhibits 4.1 |
The Core DCP Master Purchase Agreement, dated August 28, 2001, entered into by and between Telefon-aktiebolaget LM Ericsson and Sony Ericsson Mobile Communications AB is included as an exhibit to our report on Form 20-F filed with the SEC on May 24, 2002. | |||||
Exhibits 4.2 |
The DNTC Master Purchase Agreement dated August 28, 2001, entered into by and between Sony Corporation and Sony Ericsson Mobile Communications AB, is included as an exhibit to our report on Form 20-F filed with the SEC on May 24, 2002. | |||||
Exhibits 5 |
Not applicable | |||||
Exhibits 6 |
Please see Note 1 to the Financial Statements, | |||||
Accounting Principles. | 30 | |||||
Exhibits 7 |
For definitions of certain ratios used in this report, | |||||
please see Five-Year Summary. | 89 | |||||
Exhibits 8 |
Please see Note 12 to the Financial Statements. | 46 | ||||
Exhibit 11 |
Our Code of Business Ethics and Conduct for all our employees, our CEO and senior financial officers is included at our web site on http://www.ericsson.com/about/code_business_ethics/index.shtml |
|||||
Exhibit 12 |
302 Certifications | |||||
Exhibit 13 |
906 Certifications | |||||
iii |
FORWARD - LOOKING STATEMENTS |
This Annual Report includes forward-looking statements about future market conditions, operations and results.
Words such as believe, expect, anticipate, intend, may, plan and similar expressions are intended to identify these statements. Forward-looking statements appear in a number of places including, without limitation, Letter from the President and Chief Executive Officer, Board of Directors Report, Risk Factors and Information on the Company, and include statements regarding:
| our strategies, goals and growth prospects |
| the growth of the mobile communications market |
| our liquidity, capital resources and capital expenditures, and our credit ratings |
| the growth in demand for our systems and services |
| our joint venture activities |
| the economic outlook and industry trends |
| developments of our markets and competition |
| the impact of regulatory initiatives |
| our research and development expenditures |
| our plans to launch new products, systems and services, and |
| expected cost savings from our various cost reduction measures. |
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we can give no assurance that these expectations will materialize. Because these statements involve assumptions and estimates that are subject to risks and uncertainties, results could differ materially from those set out in the forward-looking statements, including as a result of:
| conditions in the telecommunications industry and general economic conditions in the markets in which we operate, and our ability to adapt to rapid changes in market conditions |
| political, economic and regulatory developments in the markets in which we operate, including allegations of health risks from electromagnetic fields and increasing cost of licenses to use radio frequencies |
| managements ability to develop and execute a successful strategy, including partnerships, acquisitions, divestitures and ability to manage growth and decline and to execute cost-reduction efforts |
| market risks, including foreign exchange rate changes, interest rate changes, credit risks in relation to counterparties and risks of confiscation of assets in foreign countries |
| the impact of changes in product demand, pricing and competition, including erosion of sales prices, increased competition from existing or new competitors or new technology and the risk that new systems and services may fail to be accepted at the rates or levels we anticipate |
| our customer structure, where the number of customers may be reduced due to consolidation in the industry, and the negative business consequences of a loss of, or significant decline in, our business with such a customer |
| the impact of our credit rating |
| defaults by our customers under significant customer financing arrangements |
| product development risks, including our ability to adopt new technologies and to develop commercially viable systems and services, our ability to acquire licenses to necessary technology, our ability to protect our intellectual property rights through patents and trademarks and to defend them against infringement, and results of patent litigation |
| supply constraints, including component or production capacity shortages, suppliers abilities to deliver products on time with good quality, and risks related to concentration of purchases from a single vendor or proprietary or outsourced production in a single facility, and |
| our ability to recruit and retain highly qualified management and other employees. |
Certain of these factors are discussed in more detail elsewhere in this Annual Report, including under Letter from the president and Chief Executive Officer, Board of Directors Report, Risk Factors and Information on the Company. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchange regulation.
1 |
CEO LETTER |
Letter from the President and Chief Executive Officer
Dear fellow shareholder,
Lots of exciting things start with a phone call. Such was the case when I received a call in January 2003, inviting me to become CEO of Ericsson.
This is an extraordinary company. Ive always thought so, and I believe it even more now. In my first year as CEO Ive found that Ericsson has exceptionally good people dedicated, well-educated and thoroughly responsible people and their optimism has impressed me enormously.
I can tell you that the pioneering spirit that helped to lead the worlds telecommunications revolution is still very much alive today.
Of course, times have been tough over the past few years and market conditions remain tight. Weve had to adapt accordingly, becoming much more efficient, flexible and more responsive to our customers needs. So when I joined, in April, one of my first actions was to build a management team capable of guiding Ericsson through this period of transition and taking us to the next level.
Last years annual report stated that 2002 was a year for clarity, decisiveness and action. That was true then, it was true in 2003, and it will remain true in the year ahead. We know where we want to take the company, and we are acting decisively to improve our efficiency, reduce our costs, grow our revenues and increase our margins. These are our priorities.
In this letter I will describe the actions we have taken, and the opportunities we see ahead in a market that has potential for growth.
In particular, Ill discuss three fundamentally important points about Ericsson today:
| We kept our promise to return to profit |
| We have a clear strategy for continued margin improvement and sustainable growth |
| We are strengthening our leadership position |
WE KEPT OUR PROMISE TO RETURN TO PROFIT
Ericssons cost reduction programs were having positive effects before I arrived. This challenging work was initiated by my predecessor, Kurt Hellström, and led by Deputy CEO Per-Arne Sandström. In April, we expanded and accelerated these programs to further reduce cost of sales and operating expenses, creating a profitable cost basis, going forward.
Our commitment was rewarded when we returned to profit, before restructuring charges, ahead of plan in the third quarter of 2003.
We ended the year achieving one of the strongest fourth quarter performances in the industry.
Weve achieved this thanks to the exceptional motivation and loyalty of all of our employees. They understood that far reaching change was necessary, and responded with incredible energy. The management team and I are truly impressed by their dedication. We have reduced our workforce from 107,000 to 51,600 employees in just three years. Of course, this meant that many talented people had to leave us, but firm measures were required and our decisive actions mean that Ericsson is now well positioned for the future.
Putting more of our time, energy and money behind our most valuable products and services has paid off. We have concentrated our research and development activities from 85 development centers to 25, and reduced the number of technology platforms we use. These measures, together with effective management of working capital, have created a dramatic improvement in cash flow.
Were now well funded, with a net cash position of SEK 27 billion. Our focus on reducing capital employed has been far more successful than first anticipated. As a result, we have conserved most of the proceeds from our 2002 stock issue, giving us a much greater financial flexibility. I believe this is an important strength, given the challenges and opportunities ahead.
While restructuring and cutting back, we also managed to reach our operational goals. We have remained on schedule with the development and rollout of new products and services. We have also strengthened our leading position in mobile systems and successfully defended our market shares. We continue to hold the largest market share in both GSM (2G) and WCDMA (3G), and in certain strategically important areas of wireline technology.
Im pleased to report that the Sony Ericsson joint venture also transformed loss into profit in 2003. Their increased focus on the GSM and Japanese markets improved sales and streamlined costs. They attained one of the highest average sales prices in the industry, demonstrating the attractiveness of their advanced mobile phones.
2 |
CEO LETTER |
Sony Ericssons success is good news for us as co-owner. Not only has the company through hard work and cost adjustments returned to profit. Sony Ericsson has also improved their product portfolio, and are aiming for a leading position in high end products. Together we are creating unique customer experiences by combining telecom technology, attractive handsets and exciting content.
With telecommunication services becoming more sophisticated, and systems more technically complex, there is a growing interdependency between networks, applications, services and handsets. Together with Sony Ericsson and through our licensing of handset technology (Ericsson Mobile Platforms), we are involved in all four areas. This means we can assure operators that their entire network will work effectively, all the way from the consumer to the back office.
Ericsson has been on an arduous journey over the past few years and, as promised, we have done what was needed to return to profit.
However, we are determinded to create an even more competitive company by focusing on operational excellence with simplicity and clarity in all that we do.
WE HAVE A CLEAR STRATEGY FOR CONTINUED MARGIN IMPROVEMENT AND SUSTAINABLE GROWTH
Our objective is to generate sustainable growth and provide competitive returns to our investors regardless of day-to-day market developments.
Our cost-cutting enabled us to return to profit in 2003, but returning to profit is simply not enough. To ensure sustained profitability and growth we set the goal high to become world leaders in efficiency and the way we operate as a company.
For example, as market leader in mobile systems we should be generating more benefits from our economies of scale. We are a supplier to 18 of the worlds 20 largest mobile operators. These operators provide services to some 65 percent of all mobile subscribers. Were developing new ways to benefit from our scale by separating standardized, high-volume products from more complex, customized products. This approach will produce cost-savings across the entire sourcing, manufacturing and installation chain.
Were also working to get more from our common product platforms.
For example, our GSM/WCDMA and CDMA2000 products were once entirely different from one another, but today they use the same software and hardware in many areas of the core network and service layer. Were also developing access products, such as radio base stations, capable of working with both CDMA2000 and WCDMA, the main 3G technologies. In essence, the main difference between a CDMA2000 and a WCDMA radio base station will be the software inside.
Ive been greatly impressed with the technical innovations achieved by Ericsson over the years. However, yesterdays successes mean little if were not able to offer the best solutions today, and tomorrow. R&D is an extremely important part of our competitive advantage. About one-third of our employees are engaged in this area, making it one of the largest programs in the industry. We are now placing greater emphasis on the commercialization of our innovations, and we have established a more disciplined, customer-driven approach to our investments in R&D.
Along with improvements in operations and technology, weve analyzed our sales processes and found ways to improve our performance. For example, our regional market structure has been replaced by a simpler approach, enabling us to close the gap between our sales and technology functions. We involve operators more in our R&D process, and thats helping us to respond faster and to prioritize what we offer.
Looking at our market, we can confirm that it has stabilized and we are starting to see signs of return to growth. Having said that, financial stability remains a priority for many operators. We expect that the operator emphasis on operational excellence is here to stay, as well as a strong focus on financial returns.
Market conditions have not been easy and a number of operators are grappling with the new services and business models made possible by 3G. Its imperative for operators, and for us as their business partner, to understand what consumers want, what they are willing to pay and how to adapt our business models accordingly. We must be as good at delivering what consumers need as we are at developing technology.
Going forward, we believe that telecommunications will continue to be a growth business. Only 20 percent or so of the worlds population have a mobile phone, and every day, about 500,000 consumers sign up for mobile services.
I think its too simplistic to talk in terms of one market, however. Operators in emerging markets make very different demands from those in developed markets.
To meet the needs of customers in emerging markets, we have launched the Ericsson Expander program, designed to lower the cost of introducing mobile communications. Industry predictions show that it is likely to reach the second billion mobile users within the 2008 time frame, as services become more affordable. With more people subscribing, and with existing subscribers making voice calls more often, solutions for both coverage and capacity will be important opportunities for us to address.
Of course, developed markets have higher mobile penetration, but mobile calls still represent less than 20 percent of total voice traffic in these markets. Clearly, there is enormous potential for mobile operators to win a larger share of voice traffic.
Mobile data services also represent a significant opportunity for operators. The growth potential in this area is remarkable. More than one billion text messages are sent every day, and sales of camera phones have surpassed those of traditional and digital cameras. In Japan and South Korea some operators are
3 |
CEO LETTER |
already generating up to 20 percent of their revenue through data services such as text messages and pictures. This is a trend we expect to see repeated in other parts of the world as mobile multimedia services are introduced.
We see good prospects for growth within our markets. As operators feel more secure financially, we expect them to invest more in capacity and new services, in 2G as well as 3G.
Having said that, our objective is to ensure that we can prosper independent of short-term fluctuations on the market. Our efforts in terms of efficiency, flexibility and customer focus are moving us towards sustainable profitability and growth.
WE ARE STRENGTHENING OUR LEADERSHIP POSITION
We are thoroughly convinced that people will use mobile devices more and more for listening to music, taking pictures, and, for example, reading e-mails while riding the bus to work. We will surf the web, buy products, and get stock market reports, weather forecasts and news. We will check maps to find the closest pharmacy, or a good meeting place. Delivering all of these new types of services in a cost-efficient way demands increasingly sophisticated networks. This is where Ericssons greatest competitive strengths come into play.
For example, Ericsson has proven expertise in every one of the dominant technology standards within both mobile and fixed telecommunications. This is one of our true competitive strengths, and one reason why the worlds largest operators choose to work with us.
Indeed, since I joined the company I have been very impressed by the exceptionally long-term and very strong relationships we have with our customers. They trust us with critical areas of their operations, and look to us to guide them through the fast-changing and technically complicated telecommunications environment.
Todays solutions are dependent on many aspects of an operators total business. Old systems must work with new, and with products from other suppliers. So, skills such as network planning, systems integration and solutions for network evolution are essential parts of what we provide. Such services also enable us to further strengthen our relationships with customers.
We are are leading the introduction of layered architecture into mobile networks. This is all about building networks in a smarter way, and making things simpler for the operator. Our approach structures a network into independent functional areas of connectivity, control and services, and keeps the core elements within the network independent of one another. In this way, when the operator wants to introduce new services or equipment into one layer it is not necessary to re-engineer the entire network or completely replace the hardware. This gives the operator much greater flexibility than conventional networks, which are designed as a giant monolithic system, from top to bottom.
In the service layer, which functions like an open market place, we help operators to catch revenues from a whole range of data services. Were a world-leading supplier within service layer solutions. For example, more than 50 percent of MMS subscribers are using our solutions when sending and receiving multimedia messages. Our charging solutions enable more than 270 operators to charge for the services they deliver.
This position builds on our broad networking competence and range of solutions, including our integration skills and specialist products developed by us. We also support independent application developers and content providers through our Mobility World centers. We select valuable new innovations and transform them into working solutions for our customers.
Greater technical complexity is increasing demand for our Global Services expertise. We have provided services such as designing, building, integrating, optimizing and supporting networks for many years. This is becoming an even more valuable part of our business. We are already one of the largest suppliers of services to network operators, with more than one-quarter of our people working in this area. These experts are operating in 140 countries around the world and support networks that provide telecommunications for more than 500 million subscribers worldwide.
During 2003 we expanded our managed services business with eight new contracts, making us a market leader. Under these agreements, operators outsource all or some of their network operations to us, enabling them to reduce their operating expenses and devote greater time and resources to establishing new services and attracting more customers.
So, what about 3G? What role will the next generation of mobile technology play in our future? For me the business case is simple and powerful 3G is more cost-efficient and faster than 2G. The need for more capacity at lower cost is evident, because operators must cope with traffic growth and be able to expand their markets.
It also enables operators to offer new forms of higher value multimedia services to subscribers. Ericsson works at the heart of the industry and we see that 3G is gaining momentum. Indeed, it now accounts for more than 15 percent of our mobile systems sales.
3G is a major step forward in technology, but it is not a revolution.
GSM (2G) and WCDMA (3G) both use the same core network, so that 2G applications can work seamlessly with WCDMA technology. Similarly, applications based on 3G versions of CDMA2000 can work with their cdmaOne forerunners. This means that operators can test the market with new services such as multimedia messaging without having to invest too much or too soon in their radio network.
GSM is still developing, and our leading position has been strengthened, not least by our contribution to the development of EDGE. As a 3G radio technology, EDGE complements WCDMA and allows operators to significantly enhance the data
4 |
CEO LETTER |
speeds and capacity of their existing GSM networks with moderate investments.
Ive been talking about the sophistication of todays services, technologies and networks. Of course, its inevitable that the telecommunications environment of the future will be even more complex. There is a simple consumer-led reason for this. People are on the move more and more, yet we always need to communicate with one another. As consumers, we like to be connected in the best possible way, wherever we are. We dont want to worry about whether its technically possible, or whether our connection is called 2G, 3G, wireless LAN, fixed wireless or whatever. So the natural evolution of telecommunications is towards one seamless network, where we can all reach whoever we need, in whatever way we prefer.
The technology may be sophisticated and complex, but ease of use by the consumer is essential for market success. Only services that are easy to understand and simple to apply will be accepted and used. This requires all of the various ways to connect to work together in a transparent way. Consumers must be able to reach and to be reached, any place, any time, quick and simple.
Were developing mobile networks that can handle the enormous range of traffic this demand generates. In addition to 3G and mobile networks, fixed line multiservice networks also have an important role to play in an increasingly integrated world. This creates attractive opportunities for companies like Ericsson that can combine telephony and mobility with IP/Ethernet technology to deliver powerful multiservice solutions.
One seamless global telecommunications service is a simple and wonderful idea. It is also a major technical challenge, and one that suits our strengths as a company.
Our comprehensive experience with all relevant technologies and our commitment to develop open standards and initiatives such as layered architecture, will enable us to be our customers best business partner.
We can help them to thrive. And if our customers thrive, so will we.
I would like to end my letter by acknowledging how important the support of our shareholders has been in recent years. As I said earlier, conditions have been tough, but were heading in the right direction.
I believe the efficient, robust and highly competitive Ericsson we are building confirms the faith youve shown in us. I hope you share my enthusiasm for our future.
Yours sincerely, |
Carl-Henric Svanberg, President and Chief Executive Officer |
5 |
BOARD OF DIRECTORS REPORT |
In the following comments we will refer to measures such as: adjusted gross margin, adjusted operating expenses, adjusted operating income, and adjusted income after financial items. The adjustments are related to restructuring costs, effects of capitalization of development costs and non-operation capital gains, and, in our opinion, the adjusted measures better reflect the operations and will help the readers to understand the Companys performance during the periods reported in the statements. In the period 2001-2003, Ericsson carried out two major restructuring programs: in the Phones segment in 2001, to stop huge operating losses and to prepare for establishing a joint venture with Sony, and in Systems and Other Operations during 2001-2003 to adapt to the changing market. Due to the conditions in the telecom market during the last three years, as described below in Market environment and Trend Information, we were forced to undertake these extensive restructuring efforts, with costs so significant in relation to the underlying business that a clear separation is necessary for the understanding of our financial statements. To illustrate the magnitude of change, the number of employees was reduced from 107,000 to 52,000. The restructuring programs were substantially completed by the end of 2003. In 2001, we also incurred significant capital gains of a non-recurring nature, and income in 2002 and 2003 was favourably affected by initial effects of implementation of a new Swedish accounting standard regarding intangible assets. However, in order not to mislead readers, we do publish both unadjusted and adjusted measures.
The following text contains Forward Looking Statements please see Forward Looking Statements on page 1. Numbers in brackets refer to the prior year.
As reported |
Adjustments |
Adjusted |
||||||||||||||||||||||
2003 |
2002 1) |
2001 1) |
2003 |
2002 |
2001 |
2003 |
2002 |
2001 |
||||||||||||||||
Net sales |
117,738 | 145,773 | 231,839 | | | | 117,738 | 145,773 | 231,839 | |||||||||||||||
Gross margin |
38,837 | 41,549 | 57,939 | 4,790 | 5,589 | 8,345 | 43,627 | 47,138 | 66,284 | |||||||||||||||
- percent |
33 | % | 29 | % | 25 | % | | | | 37 | % | 32 | % | 29 | % | |||||||||
Total operating expenses |
51,013 | 62,401 | 93,002 | 9,392 | 3,092 | 6,655 | 41,621 | 59,309 | 86,347 | |||||||||||||||
- percent |
43 | % | 43 | % | 40 | % | | | | 35 | % | 41 | % | 37 | % | |||||||||
Share in earnings of JV and associated companies |
604 | 1,220 | 715 | 352 | 230 | | 252 | 1,450 | 715 | |||||||||||||||
Other operating revenues and costs |
1,541 | 773 | 8,398 | 358 | 353 | 5,800 | 1,899 | 1,126 | 2,598 | |||||||||||||||
Operating income |
11,239 | 21,299 | 27,380 | 14,892 | 8,804 | 9,200 | 3,653 | 12,495 | 18,180 | |||||||||||||||
- percent |
10 | % | 15 | % | 12 | % | | | | 3 | % | 9 | % | 8 | % | |||||||||
Income after financial items |
12,103 | 22,835 | 29,154 | 14,892 | 8,804 | 9,200 | 2,789 | 14,031 | 19,954 | |||||||||||||||
Items affecting comparability |
||||||||||||||||||||||||
Non-operational capital gains/losses, net (in other operating revenues and costs) |
13 | 42 | 5,800 | |||||||||||||||||||||
Capitalization of development expenses, net (in other operating expenses) |
1,584 | 3,200 | | |||||||||||||||||||||
Restructuring costs, net, |
16,463 | 11,962 | 15,000 | |||||||||||||||||||||
Total |
14,892 | 8,804 | 9,200 | |||||||||||||||||||||
Restructuring costs, of which in: |
||||||||||||||||||||||||
- Cost of sales |
4,790 | 5,589 | 8,345 | |||||||||||||||||||||
- Operating expenses |
10,976 | 6,292 | 6,655 | |||||||||||||||||||||
- Other operating revenues and costs |
345 | 311 | | |||||||||||||||||||||
- Share in earnings of JV and associated companies/Phones |
352 | 230 | | |||||||||||||||||||||
Total |
16,463 | 11,962 | 15,000 | |||||||||||||||||||||
1) | Restated for changes in accounting principles. |
6 |
BOARD OF DIRECTORS REPORT |
Highlights of 2003:
| Return to profit before restructuring costs with a positive adjusted income after financial items for the full year |
| Positive cash flow |
| Cost reductions delivered, focus now on operational efficiency, and |
| Market position strengthened. |
STRATEGY AND GOALS
Ericsson is a leading provider of infrastructure equipment for mobile and fixed networks and related products and services, as well as products for special applications, such as radar, cables and mobile handset platform technology. Our goal is to be the preferred business partner to the leading network operators as well as to customers in certain specialized markets such as microwave systems. In doing so, we strive to be the market and technology leader. We offer end-to-end solutions for operators, related to their infrastructure investments, network management and service offerings. Our products and services fit into the core and access parts of networks as well as into the increasingly important service layer. In addition, with our mobile platform products and through our Sony Ericsson joint venture for handsets, we extend the scope of our operations all the way to the consumer.
As a market leader, our strategy is to leverage our economies of scale to be able to develop superior products and services, offering our customers competitive advantages.
During recent years, we have adopted measures to cut costs and adapt Ericsson to the new market situation. We can now conclude that our actions have had the intended effects so far. Despite these rapid internal changes, we have been able to keep up deliveries and support towards our customers, including the roll out of advanced 3G technology, and we have carried out our most important development projects without significant delays.
The improved financial position is partially a result of the successful stock issue in 2002, which ensured that we would have resources to finance our operations during the phase of market decline and restructuring. This has enabled management to focus on the business and on the restructuring. The important result of this is that Ericsson has delivered on the promises to return to profit sometime in 2003, excluding restructuring costs, and to do this with a positive cash flow before financing activities. As indicated when we made the rights issue in 2002, certain maturing debts have been repaid, but the Company has not consumed any of the cash generated by the stock issue for operational purposes. It is still part of the very strong payment readiness.
Focus is now on operational improvement to become even more effective. The target is now to reach a sustainable and competitive profitability.
MARKET ENVIRONMENT AND TREND INFORMATION
The market for mobile and fixed infrastructure went through a number of significant changes during the last five years. From the mid 1990s until 2000, network operators invested heavily in mobile infrastructure driven by strong subscriber growth and increasing usage. Similarly, fixed networks were expanded to accommodate Internet traffic. This extraordinary growth peaked in 2000, and, since the beginning of 2001, the market for network equipment has contracted sharply.
The three years of decline can be characterized by:
| Auctions of 3G licenses, which led to spending by operators of the equivalent of seven years worth of infrastructure investments on the licenses. This created an investment pause in network equipment for 2G, in particular in many markets in Western Europe |
| Significant network capacity was deployed during the boom years and many operators reduced their capital expenditures to adjust for excess capacity |
| Due to over-investments in the sector, credit market restrictions for telecom operators and vendors caused a series of downgrades in credit ratings. Many operators prioritized cash flow over top-line growth and further limited their investments to focus on improved balance sheets to maintain their credit rating. |
| The resulting rapid and dramatic decline in demand forced equipment suppliers to reduce costs and adjust to the much lower demand |
| Macroeconomic difficulties in certain markets, for example Latin America, put further pressure on the decline in equipment demand, and |
| Technology changes dramatically altered the market, including such changes as: |
| The early implementation of 3G technology in Japan, which caused a sharp reduction in PDC investments. |
| System transition in the United States and Latin America from TDMA to GSM or CDMA to prepare for evolution to 3G-based networks. This led to significant reduction in our TDMA sales, but also increased GSM sales. |
| Increased demand for CDMA equipment. Ericsson addressed this market segment, focusing on new CDMA markets such as China and India. |
| Build out of 3G networks, but in most cases just according to basic license requirements. So far the limited supply of handsets has restricted commercial launches. |
| More complex networks, with additional features and a larger mix of equipment and software from multiple vendors, which is opening up possibilities for Ericsson to market professional services to support integration of such networks. Operators are also becoming more willing to outsource network management and focus on their service offerings to their customer base in the new technology environment. |
7 |
BOARD OF DIRECTORS REPORT |
| In fixed networks, operators are converting from circuit-switched to packet-switched networks reflecting the need to more efficiently handle voice and data traffic. This caused a very sharp reduction in demand for our circuit-switching products. |
Due to the sales decline, adjusted income after financial items dropped sharply during 2001 and 2002, with a recovery during 2003. Headcount was reduced by slightly more than 50 percent over these years.
During the last three years, we have been able to strengthen our leading market position in the mobile systems market. We have also established a leading position in the fixed infrastructure market for our packet-switched network solutions. Although the operators drastically reduced their investments in the last few years, the underlying subscriber and traffic growth continued. We are firmly convinced that our industry is a growth industry, but we believe the growth in the late 1990s and 2000 was extraordinary and will not likely be repeated.
While we do not yet see any solid evidence of a fast pick up in operator investments, we are seeing signs of a gradual return to growth. Operators are starting to address their operating expenses and seeking revenue growth from new services. Through increased activities in professional services and service layer applications, we aim for increased sales in these fast-growing segments. We are already a market leader within systems integration and managed services, and we have established a strong position within the service layer.
Orders booked of SEK 113.0 billion were 12 percent lower than last year, of which approximately 11 percentage points is due to negative foreign exchange impact, largely due to a weaker USD.
Orders by market in Systems and Other Operations
(SEK billion) |
2003 |
2002 |
Change |
2001 |
Change |
|||||||
Europe, Middle East & Africa (EMEA) |
54.2 | 65.4 | 17 | % | 92.7 | 29 | % | |||||
North America |
20.2 | 22.9 | 12 | % | 24.6 | 7 | % | |||||
Latin America |
9.1 | 9.6 | 5 | % | 31.1 | 69 | % | |||||
Asia Pacific |
29.5 | 30.5 | 3 | % | 53.4 | 43 | % | |||||
Total |
113.0 | 128.4 | 12 | % | 201.8 | 36 | % | |||||
Ericssons two largest markets, the United States and China, were also among the best performing markets, with an increase in China of 17 percent, despite a negative currency effect, and a 12 percent decline in the US, which was almost entirely currency related. During the last two years, operators in the United States have invested in GSM networks to prepare for next generations IP-based technology. This has benefited Ericsson as the largest GSM-vendor. Improved order development in China followed a weak year 2002. Ericsson is the largest GSM vendor in China, and China is Ericssons largest CDMA market. We look forward to late 2004/early 2005, when it is expected that system choices will be made with regard to 3G technologies, which will clarify the market situation and support new investment programs. Among the other markets in Asia Pacific, India, Sri Lanka, Taiwan and Australia also developed well, whereas Japan declined substantially. In EMEA, the decline is primarily attributable to low orders in Saudi Arabia compared to a very large order intake in 2002, as well as low orders in Sweden and other countries where 3G build out for initial coverage is currently ongoing and additional capacity orders have not yet started to come.
Segment orders in Systems and Other Operations
(SEK billion) |
2003 |
2002 |
Change |
2001 |
Change |
|||||||
Systems |
105.4 | 115.3 | 9 | % | 183.3 | 37 | % | |||||
Mobile |
79.5 | 85.5 | 7 | % | 143.1 | 40 | % | |||||
Fixed |
6.3 | 9.3 | 32 | % | 21.8 | 57 | % | |||||
Professional Services |
19.6 | 20.5 | 4 | % | 18.4 | 11 | % | |||||
Other Operations |
9.2 | 15.4 | 40 | % | 27.4 | 44 | % | |||||
Less: inter segment orders |
1.6 | 2.4 | | 8.9 | | |||||||
Total |
113.0 | 128.4 | 12 | % | 201.8 | 36 | % | |||||
Book-to-bill ratios were above one for each of the first three quarters in 2003. Due to the strong sales in the fourth quarter, the ratio fell below one, despite somewhat higher order bookings than in previous quarters. The order backlog corresponds to 5-6 months of sales, which we consider to be a normal level. For managed service contracts longer than one year, only the amounts related to the next twelve months are booked.
8 |
BOARD OF DIRECTORS REPORT |
Within Mobile Networks, orders for GSM declined 7 percent, while increases in 3G (WCDMA) and CDMA offset sharp declines for PDC and TDMA. The combined GSM/WCDMA track declined only 2 percent. It was also encouraging that Ericsson in its CDMA business received additional orders in China, the United States and Nigeria and in several new markets, including India, Ecuador and Kazakhstan.
Ericsson won a number of orders for broadband access and switching products, but this was not sufficient to offset the decline for circuit-switching equipment.
Professional services continued to develop well. Adjusting for foreign exchange effects, orders increased slightly year over year. A number of new customers signed managed services contracts and we now have 35 such customers.
The decline in Other Operations of 40 percent is partly attributable to the fourth quarter 2002 divestiture of our Microelectronics operations and deconsolidation of handset production in China for Sony Ericsson. Orders for comparable units declined 23 percent, mainly due to low orders in the Microwave and Mobile Platform businesses.
PRODUCTS, RESEARCH AND DEVELOPMENT
Notwithstanding the general industry conditions, Ericsson continued over the last three years to invest heavily in R&D to support our competitive position. The spending in relation to sales has been stable. The reductions in absolute amounts have been achieved through focusing on a narrower core product portfolio and through increased efficiency as an effect of restructuring efforts and have not had a major negative impact on the key R&D programs.
R&D expenditures excluding restructuring costs and capitalization |
2003 |
2002 |
2001 |
||||||
R&D SEK billion |
23.2 | 29.3 | 43.1 | ||||||
As percent of sales |
20 | % | 20 | % | 19 | % | |||
Number of R&D sites |
25 | 30 | 70 | ||||||
Employees in R&D |
16,500 | 20,500 | 25,200 | ||||||
Our product portfolio was strengthened during the year with competitive solutions and more cost-effective products for a number of applications. Some of the major developments were:
| Industrialized versions of volume products in 3G |
| Roll out of 3G in commercial networks |
| Platform commonality for CDMA2000 and WCDMA products to achieve volume leverage on cost and strengthen our market position in CDMA |
| First commercially launched EDGE network |
| Expander, a 2G solution for economic mobile network solutions in emerging markets |
| Mass deployment of MMS solutions also an important demonstration of our strong capabilities in systems integration, which is a large part of MMS contracts |
| Implementation of solutions for WLAN integration in mobile networks |
| Softswitch products for IP and multi-media in fixed networks |
| New generation of Ethernet-based broadband access products, and |
| Ericsson Mobile Platforms handset technology for WCDMA, was chosen by 6 of the top 10 largest suppliers of handsets |
PARTNERSHIPS AND JOINT VENTURES, ACQUISITIONS/DIVESTITURES
During 2003, the joint venture Sony Ericsson Mobile Communications successfully launched a number of new handsets. This enabled Sony Ericsson to return to profit during the second half of the year. A number of cost reduction actions were implemented and are expected to contribute to sustainable positive results. Mobile communications networks are becoming increasingly complex, and many new types of services will be launched. Since handsets are an important part of the realization of the new services, it is beneficial for Ericsson as a systems vendor and a supplier of handset platform technology to participate closely also in this area of the end-to-end solution through the joint venture.
In the first quarter of 2003, Sony and Ericsson made an additional capital contribution of EUR 150 million each to the joint venture. We believe that the joint venture is now self-sustaining and there are currently no plans for additional capital investments by the parent companies.
In January 2003, Ericsson sold its optoelectronics operations to Northlight Optronics AB.
During the year, in-house activities within IS/IT were outsourced to Hewlett-Packard (HP) and IBM, and five-year service agreements were signed, which will substantially reduce the operating costs for these activities. HP will provide services to Ericsson in more than 100 countries, including data center management, help desk support and desktop environment services. The agreement involves transfer of assets and around 1,000 employees to HP. IBM will provide development, implementation and maintenance services of internal applications. The agreement involves transfer of 1,000 employees to IBM.
No other significant acquisitions or divestments were made during 2003.
Please see also the section Information on the Company Joint Ventures, Cooperation Arrangements and Venture Capital.
9 |
BOARD OF DIRECTORS REPORT |
RESTRUCTURING PROGRAM
The restructuring program initiated in 2001 was completed ahead of schedule and delivered the targeted cost reductions. Gross margin and operating expense run-rate targets were surpassed for the year. The number of employees at year-end was 51,600, which is in line with our plan of 52,000. In the first quarter 2003 the cost reduction program was further expanded to include additional measures, aiming to reduce operating expenses beyond the originally planned level of SEK 38 billion per year down to SEK 33 billion by the third quarter 2004, and to reduce Cost of Sales by SEK 8 billion on an annual basis. The number of employees is expected to reach 47,000 during 2004. The expansion of the program was made to secure not only to reach a break-even result, but to deliver a competitive return on investment to the shareholders.
Total restructuring charges during the year were SEK 16.5 (12.0) billion. Included are SEK 0.4 billion of restructuring costs in Sony Ericsson. Cash flow in 2003 related to restructuring was SEK 10.5 (10.3) billion. For more detailed information on restructuring charges, please see Notes to the Financial Statements Note 3, Profit from Operations.
FINANCIAL RESULTS
Sales and Gross Margin
Sales in Systems and Other Operations
(SEK billion) |
2003 |
2002 |
Change |
2001 |
Change |
|||||||
Systems |
108.7 | 132.0 | 18 | % | 188.7 | 30 | % | |||||
Mobile |
82.1 | 101.1 | 19 | % | 143.8 | 30 | % | |||||
Fixed |
8.0 | 11.7 | 32 | % | 27.1 | 57 | % | |||||
Professional Services |
18.6 | 19.2 | 3 | % | 17.8 | 8 | % | |||||
Other Operations |
10.6 | 16.2 | 35 | % | 31.8 | 49 | % | |||||
Less: inter segment sales |
1.6 | 2.4 | | 9.7 | | |||||||
Total |
117.7 | 145.8 | 19 | % | 210.8 | 31 | % | |||||
In 2001, we established the Sony Ericsson joint venture for handsets. Their operations are included in our segment Phones, accounted for under the equity method with no sales included in Ericssons financial statements.
With strong sales in Systems and Other Operations in the fourth quarter, at the same level as the fourth quarter last year, the full year decline in sales stopped at 19 percent. Approximately 9 percentage points of the decline are attributable to foreign exchange effects. The decline in sales was widespread across almost all markets. Sales in the United States declined 26 percent due to lower TDMA volumes. China sales were flat year over year for comparable units, excluding the sales of handsets to Sony Ericsson last year. Price pressure remained strong, in particular regarding contracts with customers aquiring for them new technology.
Sales of mobile systems decreased 19 percent compared to 2002. Sharply reduced sales of the mature TDMA/PDC systems contributed to almost half of the decline and lower GSM sales the other half. The roll out of 3G systems continued at a moderate rate, as the availability of handsets was still rather limited. Sales of 3G (WCDMA) systems increased by 11 percent from 2002 to SEK 9.1 billion or to 11 (8) percent of Mobile Network sales. We expect a pick up in roll out activities during 2004.
Sales increased of products related to the service layer, which is becoming of increased importance in the networks based on new technology offering data and picture and similar services.
Fixed Network sales declined substantially due to a very weak market demand for circuit-switching.
Sales of professional services decreased by 3 percent from last year and now account for 17 (15) percent of Systems sales. Adjusted for foreign exchange effects sales increased approximately 6 percent.
Sales in Other Operations declined by 35 percent or SEK 5.6 billion, of which SEK 3.4 billion are related to the now deconsolidated handset production in China and the Microelectronics component business divested in 2002. The remaining reduction of 14 percent is largely attributable to the Mobile Platforms and Enterprise businesses. Mobile platform revenues are dependent on 3G handset or component production volumes by our licensed customers and production for 3G handsets has not yet picked up.
The adjusted gross margin, which declined sharply from 46 percent in year 2000 to 29 percent in 2001 and 32 percent in 2002 due to excess capacity costs and price competition, improved to 37 percent due to capacity adjustments and other restructuring efforts, continued outsourcing and effects of design cost reductions of products. Adjusted gross margin improved gradually during the year and in particular in the last quarter, reaching 42 percent due to leverage of a strong sales volume. This is well in line with our target.
Operating expenses
Operating expenses excluding restructuring costs were reduced by almost 30 percent, and as a percentage of sales from 38 percent to 34 percent. Annualized run-rate in the fourth quarter was SEK 37 billion, which is better than the targeted run-rate of SEK 38 billion and clearly on track to reach next years target level of SEK 33 billion. The net effect of risk provisions and credit losses for customer financing affecting operating expenses amounted to SEK 1.1 (1.3) billion, see Notes to the Financial Statements Note 21, Financial Instruments.
Other Income Statement items
Adjusted share in earnings of JV & associated companies improved by SEK 1.2 billion due to an improved performance by Sony Ericsson going from a result of SEK 1.3 billion last year to SEK 0.2 billion this year, excluding restructuring costs. Sony Ericsson successfully launched a number of new handsets.
10 |
BOARD OF DIRECTORS REPORT |
This and certain restructuring measures taken enabled Sony Ericsson to show a profit for the second half of 2003, before restructuring costs. Sony Ericsson sold 27 million handsets, with a product mix geared towards more high-end models with high functionality, many with camera and color screen. The overall market share is approximately 5 percent, and the market share in the served market segments is higher.
Other operating revenues increased from SEK 1.3 billion to SEK 1.9 billion, mainly as a result of increased focus on generating more license fees from intellectual property rights.
Financial net improved from SEK 1.5 billion in 2002 to SEK 0.9 billion due to the improved cash position following last years rights issue, repayment of debt and this years positive cash flow.
From 2002 to 2003, the average spot exchange rates of USD and related currencies, such as Saudi Arabian Riyals (SAR), to SEK declined by approximately 17 percent. Other currencies where Ericsson has material exposures, such as EUR, GBP and JPY, did not have similar significant exchange rate movements. The decline in average hedged rates year over year was lower for USD and related currencies, approximately 12 percent, and insignificant for other currencies. The effect on operating income of changed hedged rates year over year was SEK 3.1 billion, and on income after financial items SEK 3.5 billion. If the change in average spot rates had been used, the effect on operating income would have been SEK 4.0 billion.
Exchange rate differences in operating income for 2003 were SEK 0.1 billion, net, with SEK 3.1 billion of negative differences from spot rates almost fully offset by positive effects of hedging.
Income after financial items was SEK 12.1 (22.8) billion. Adjusted for items affecting comparability, the full year income after financial items was positive by SEK 2.8 (14.0) billion despite SEK 28 billion of lower sales, which is a confirmation of the impact of cost reduction measures taken.
Taxes in the period were positive SEK 1.5 (4.2) billion. The low effective tax rate of 12 (18) percent is a result of the write-down of deferred tax assets in a couple of jurisdictions and other provisions and write-downs of investments that are not tax deductible.
Net income was SEK 10.8 (19.0) billion and diluted earnings per share SEK 0.69 (1.51). Diluted earnings per share according to US GAAP were SEK 0.68 (1.58).
Balance sheet, cash flow, liquidity and capital resources
The capital usage and cash position improved substantially during 2003. Total assets were reduced by SEK 27 billion from SEK 209 billion to 182 billion. Excluding increased cash of SEK 7 billion, the reduction was SEK 34 billion, of which the largest items were customer financing, fixed assets plus trade- and other receivables.
Customer financing credits were substantially reduced through sales of credits.
Long-term debt and a convertible bond were repaid with SEK 10.9 billion. Accounts payable and other operating liabilities were reduced by SEK 5 billion. While working capital is sufficient for operations, it is still higher than needed for truly efficient operations and efforts to improve this continue.
Due to reassessment of the nature of leases according to the present interpretation of Swedish GAAP/IFRS, financial leases of SEK 1.7 billion were reflected in the balance sheet as assets and interest bearing liabilities.
Net cash developed favorably, with the excess of cash over debt increasing from SEK 5 billion to SEK 27 billion. Due to the net loss and cumulative translation effects, equity declined from SEK 73.6 billion to SEK 60.5 billion, and the equity ratio declined to 34.4 (36.4) percent.
Cash flow before financing activities was positive by SEK 19.5 billion, significantly above our target. The major drivers were the improved income, reduced customer financing and reduced other operating assets. Swedish pension liabilities of SEK 3.5 billion were settled through payment to Alecta, a pension administration company.
The investment in Sony Ericsson was increased by EUR 150 million or SEK 1.4 billion. Capital expenditures and proceeds from divested assets were almost equal.
Reduced debt and repaid convertible bonds were the major items in the SEK 11.9 billion of negative cash flow from financing. The payment readiness at year end was SEK 75.3 billion or 64 percent of sales. The cash position has improved since the rights issue, and no part of the stock issue proceeds has been used for operational purposes, only for reduction of debt.
We also refinanced debt of EUR 0.4 billion, or SEK 3.9 billion, extending the maturity from 2006 to 2010 with possibility to call after four years. A new USD 1.0 billion committed credit facility valid until 2007 was arranged, which will become available as an existing USD 1.0 billion facility expires in 2004. Thereby the financial flexibility and maturity profile was significantly improved. Currently and in the near term, Ericsson expects that its current cash position will satisfy short-term liquidity requirements.
Ericssons credit ratings are still below investment grade. The rating was lowered by S&P in the first quarter to BB. We expect that our subsequent improvements in income, cash position and financing will lead to improved ratings and thereby also lower interest costs on bonds with interest rates linked to our rating.
Off Balance Sheet items
Customer financing credits of SEK 2.0 (1.5) billion issued by third parties and guaranteed by Ericsson were outstanding as per December 31. See Notes to the Financial Statements Note 21, Financial Instruments, and Note 32, Reconciliation to Accounting Principles Generally Accepted in the United States.
11 |
BOARD OF DIRECTORS REPORT |
Contractual obligations
Payment due by period | ||||||||||
Total |
< 1 year |
13 years |
35 years |
>5 years | ||||||
Long-term debt |
34.3 | 7.3 | 16.0 | 3.2 | 7.8 | |||||
Capital lease obligations |
2.7 | 0.2 | 0.4 | 0.3 | 1.8 | |||||
Operating leases |
14.5 | 2.7 | 3.9 | 3.0 | 4.9 | |||||
Other long-term liabilities |
1.1 | | 0.2 | 0.6 | 0.3 | |||||
Credit commitments for customer financing |
6.1 | 1.7 | 4.4 | | | |||||
Total |
58.7 | 11.9 | 24.9 | 7.1 | 14.8 | |||||
The Company has purchase obligations, in particular in relation to outsourced manufacturing and IS/IT operations, divested R&D operations and for components for own manufacturing. Subcontracted manufacturing corresponds to demands related to Ericssons order backlog with a duration of five to six months.
FINANCIAL RISK MANAGEMENT
(A more detailed description of financial risk management and financial instruments used is included in Note 21 to the Financial Statements.)
Ericssons financial risk management is governed by a policy approved by the Board. The Finance Committee of the Board is responsible for approving certain matters regarding investments, loans, guarantees and customer financing commitments and is continuously monitoring the exposure to financial risks. Financial risks are defined as market risk, credit risk, country risk, funding and liquidity risk. Market risk is further divided into three types of risk: foreign exchange risk, interest rate risk, and market price risk in own shares and other listed equity instruments.
The Board has established risk limits for exposures to foreign exchange and interest rate risks. The market risk mandate of SEK 500 million is based on a five percent adverse change in foreign exchange rates of the total position and a one percentage point change in interest rates. This is complemented by a Value at Risk calculation, given a confidence level of 99 percent and a 5-day horizon.
Ericsson has a treasury function with the principal role to ensure that sufficient financing is in place through loans and committed credit facilities, to actively manage the groups liquidity as well as financial assets and liabilities, and to manage and control financial exposures in a manner consistent with underlying business risks and financial policies. Cash management and handling of hedging activities are centralized to the consolidated subsidiary Ericsson Treasury Services Aktiebolag in Stockholm.
Ericsson also has a customer finance function with the main objective to find suitable third-party financing solutions for customers and to minimize recourse to Ericsson. To the extent customer loans are not provided directly by banks, the consolidated subsidiary Ericsson Credit AB provides or guarantees vendor credits. The customer finance function monitors the exposure from outstanding vendor credits and credit commitments.
Our business operations and the resulting financial instruments and future commitments give rise to exposures to financial risks. Primary financial instruments are structured and designated to hedge the exposures to the extent possible. As a complement to the primary instruments also derivative instruments are used for hedging, mainly currency swaps and interest rate swaps. Except for the above described risk mandate, risks associated with the use of financial instruments correspond to actual and forecasted foreign exchange and interest rate commitments.
Foreign exchange risk
With a very large share of sales in currencies other than SEK, Ericsson has a net exposure of revenue in a number of currencies, mainly USD. The duration of this exposure is also considerable, as a result of many contracts with long lead-times between order and delivery. Changes in foreign exchange rates may have a large impact on our results, and the policy is to reduce this effect to the extent possible through a variety of hedging activities.
The transaction exposure is concentrated to Sweden, and all forecasted sales and purchases with a high degree of probability are hedged 69 months out.
Lending to customers and borrowings are hedged through offsetting of balances, and residual net borrowing exposure is hedged through offsetting cash positions or derivative instruments.
Ericsson has many subsidiaries operating outside Sweden. The values of such foreign investments are exposed to exchange rate fluctuations, which affect the consolidated balance sheet and income statement when translated to SEK. Translation exposure in foreign subsidiaries is hedged according to the following policy approved by the Board:
| Monetary net in companies translated using the temporal method, i.e. where translation effects in investments affect the income statement, is hedged to 100 percent. |
| Equity in companies translated using the current method, i.e. where translation effects are reported directly in stockholders equity in the balance sheet, is hedged up to 20 percent in selected companies. |
Other effects of translation of financial statements in foreign currencies are not hedged.
12 |
BOARD OF DIRECTORS REPORT |
Interest rate risk
Ericsson is exposed to interest rate risk through market value fluctuations of certain balance sheet items and through changes in interest expenses and revenues. In managing our interest rate exposure we use derivative instruments, such as forward rate agreements, interest rate swaps, and cross currency swaps.
Having large gross interest revenues and costs, the objective is to avoid risk in the form of a mismatch between fixed and floating interest bearing balance sheet items. To achieve this, we strive to reach a position where all interest rates are floating.
Risk related to our share price
We are exposed to the development of Ericssons own share price through stock option and stock purchase plans for employees. The obligation to deliver shares under these plans is covered by holding Ericsson Class B shares in treasury and warrants for issuance of new Ericsson Class B shares. An increase in the share price will result in social security charges, which represents a risk to both income and cash flow. The income statement exposure in some of the option programs is hedged through the purchase of call options. The cash flow exposure is fully hedged through the holding of Ericsson Class B shares in treasury and through the purchase of call options on Ericsson Class B shares.
Risk related to market prices of listed equity instruments
Through investments in equity instruments in listed companies, we are exposed to changes in the market values of such instruments. Such instruments, however, constitute a very limited part of our assets and are therefore not hedged.
Credit risk
Credit risk is divided into three categories: credit risk in trade receivables, customer finance risk and financial credit risk.
Credit risk in trade receivables
Extended payment terms for trade credits are to be approved by the CFO. Provisions for expected losses are regularly reviewed. Credit losses have historically been low, however, as a result of the customer structure, with a major share of sales to large and successful operators.
Customer finance risk
The Finance Committee of the Board shall approve all commitments in excess of USD 25 million (from 2004 USD 15 million) to extend financing support to customers. In most of our customer finance arrangements, Ericsson maintains security interests, normally in the form of pledges of equipment, certain of the borrowers and/or pledges of shares.
Financial credit risk
Financial instruments carry an element of risk in that counterparts may be unable to fulfill their obligations. These risks are mitigated by investing excess liquidity primarily in commercial papers, treasury bills, floating rate notes with short-term ratings of at least A2/P2 and long-term ratings of at least A/A2 and in liquidity funds holding a rating of at least single A.
Country risk
Tax, currency and other legal and economic restrictions in certain countries can affect our ability to transfer funds within the group and to provide funding to certain subsidiaries. However, the impact of such restrictions is currently very limited.
Funding and liquidity risk
We maintain sufficient liquidity through centralized cash management, with investments in highly liquid fixed income securities, and by having sufficient committed and uncommitted credit lines in place for potential funding needs.
Ericssons funding policy stipulates that the greater part of borrowings should be long-term.
CRITICAL ACCOUNTING POLICIES
(For more detailed descriptions, please see Notes to the Financial Statements Note 1, Accounting Policies and, for reconciliation to US GAAP, Note 32 to the Financial Statements.)
The preparation of financial statements and the application of accounting policies in many cases involve managements judgment or the use of estimates based on past experience and assumptions deemed to be reasonable and prudent. Actual results may differ from these estimates under different assumptions or conditions. We have identified below the accounting policies that might have the most significant impact on our reported results and financial position.
Revenue recognition
A substantial share of Ericssons sales is construction-type contracts to supply network systems configured according to customer specifications. Managerial judgment is applied regarding contractual performance and estimation of total contract costs, degree of completion, conformance with acceptance criteria and collectibility of receivables to define timing and amounts of revenue to be recognized. Due to the large number of sales contracts in process simultaneously, the overall impact on a consolidated level is limited.
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BOARD OF DIRECTORS REPORT |
Valuation of receivables and exposures in customer financing
Ericsson continuously monitors the financial stability of the customers and the environment in which they operate and apply judgment regarding the realization of these receivables and guarantees. Total allowances for doubtful accounts are SEK 2.1 billion or 6 percent of total receivables. The major part of the customer base has good creditworthness, and the impact of estimates regarding individual receivables is therefor limited in the consolidated accounts. Customer financing credits have higher risks, as such customers normally have less strong balance sheets and liquidity. Consequently, the total risk provisions are higher than for trade receivables. For outstanding customer financing credits and for third party credits under our guarantee we regularly assess the credit risk and make necessary provisions.
Inventory valuation and commitments related to outsourcing arrangements
Inventories are valued at the lowest of cost or market value, taking into account also risks of obsolescence. This valuation involves making estimates of obtainable market value, future customer demand and changes in technology and customer acceptance of new products.
More than half of our production is outsourced to contract manufacturing companies. In addition to valuation allowances regarding own inventories, we regularly assess the need for provisions for supplier compensation due to failure to reach minimum committed purchase volumes.
Customer warranties
Provision amounts for product warranties are based on assumptions, involving historic failure rates as well as estimates regarding failure rates for new products, and also estimates on costs to remedy various types of faults.
Deferred taxes
Deferred tax assets are recognized for temporary differences between reported and taxable income and for unutilized tax loss carry-forwards. This 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. The largest amounts of tax loss carry-forwards are in Sweden, with an indefinite period of utilization.
New Accounting Principles
Swedish GAAP 2004
Pensions
Starting 2004, Ericsson will apply a new mandatory IAS-based Swedish accounting standard for pensions. According to this standard, future salary increases will be considered in calculating the pension liability, whereas until 2003 only actual salaries were considered. This change will increase the current pension provisions by an estimated SEK 1.9 billion. The effect of this accounting change will be reported as a one-time charge to equity of SEK 1.4 billion, net of taxes. Pension liabilities are also subject to several other assumptions than future salaries, such as inflation rate, return on plan assets, discount rate, employee turnover and mortality. Different assumptions may change the liability significantly and Ericsson makes those assumptions in consultation with actuaries and applies a consistent set of assumptions to avoid volatility.
US GAAP 2004
FIN46R, Consolidation of Variable Interest Entities
In 2004, all Variable Interest Entities, where Ericsson is the primary beneficiary, will be consolidated. At present, certain real estate entities have been identified, which will only have a limited impact on the balance sheet.
Swedish GAAP 2005
International Financial Reporting Standards (IFRS)
From 2005, Ericsson will be required to report according to IFRS. An internal project is underway to identify differences to current GAAP and what changes will be necessary. The company is in the process of evaluating the impact. It is expected that IAS 39 regarding financial instruments and new standards regarding share-based compensation and business combinations will be the standards with the largest impact.
LEGAL AND TAX PROCEEDINGS
Ericsson and InterDigital Communications Corporation (InterDigital), along with its subsidiary InterDigital Technology Corporation (ITC), settled the companies long-standing patent infringement litigation.
Under the settlement agreement, the companies entered into a license agreement covering all of ITCs patents for GSM, TDMA (D-AMPS), GPRS, EDGE and PDC. In exchange, Ericsson will make an annual payment of a limited fixed amount through 2006 for sales of covered infrastructure equipment.
At the same time, Sony Ericsson and ITC have entered into a similar license agreement concerning handsets, under which Sony Ericsson will pay royalties to ITC through 2006.
We continue to be engaged in litigation proceedings with Harris Corporation in the United States regarding alleged infringement of their patents. We have contested the claim.
14 |
BOARD OF DIRECTORS REPORT |
The industry, including Ericsson, is named defendants in a number of class actions in the United States where plaintiffs allege that adverse health effects could be associated with the use of handsets. Together with the majority of the industry, Ericsson has been named defendant in six such lawsuits. The court has dismissed five of these cases. Plaintiffs have appealed the decision.
During 20012003, Swedish fiscal authorities disallowed, for corporate income tax purposes, the Parent Company and the subsidiaries Ericsson Telecom AB and Ericsson Radio Systems AB (renamed as Ericsson AB) deductions for commission payments via external service companies to agents in certain countries. The increase in corporate income taxes for all companies amounts to SEK 661 million, of which SEK 308 million were paid by the end of 2003. All decisions have been or will be appealed.
ORGANIZATION AND EMPLOYEES
Organization and Management
On April 8, Carl-Henric Svanberg, former Chief Executive Officer (CEO) of Assa Abloy, was appointed President and CEO of Ericsson, succeeding Kurt Hellström, who remained employed until the end of 2003, when he retired.
Chief Operating Officer Per-Arne Sandström was appointed Deputy CEO.
Karl-Henrik Sundström, head of business unit Global Services, was appointed Chief Financial Officer (CFO), succeeding Sten Fornell, who remained as advisor to the management for the balance of 2003.
An Executive Team was established, consisting of the CEO, the Deputy CEO and the CFO.
The organization was changed during 2003, effective January 1, 2004, to reflect that the group is now smaller than before and to promote more efficient operations with clear areas of responsibility and with a simpler structure than before and with fewer organizational layers.
The changes include:
| The market area organization is eliminated. The market units were reduced from 31 to 25 and now report to the Executive Team. |
| Within the Systems segment, the business unit Mobile Systems was split into two: Core Systems, headed by Björn Olsson, and Access, headed by Kurt Jofs. The Systems segments other three business units remained unchanged: CDMA Systems, Transmission and Transport Networks and Global Services. |
| A new group function Sales and Marketing was established. Bert Nordberg, previously head of the business unit Mobile Systems, was appointed to head this function. |
As a result of restructuring and outsourcing activities, the total headcount declined by 20 percent during 2003 from 64,600 to 51,600.
Please see Directors, Senior Management and Auditors for more information about employees and management.
Employee Compensation
The Annual General Meeting in 2003 approved an employee stock purchase plan based on 158 million Class B shares, including shares designated for social security payments. Employees may during 24 months purchase shares for up to 7.5 percent of their salary up to SEK 50,000 per 12-month period. If the shares are kept for three years and the employment is continued, the employee will be given matching shares at a ratio of 1:1.
For the President and CEO and the Group Management, the maximum level of variable salary is reduced from 80 percent to 60 percent of the base salary from 2004. This change is compensated by an increase of 5 percent of the fixed salary. The current stock purchase program may be complemented with acceleration features, so that multiple shares may be granted for each share purchased, depending on if performance targets are met, subjected to approval by the Annual General Meeting in 2004.
See to Note 29 in Notes to the Financial Statements for more information about employee compensation.
CORPORATE SOCIAL RESPONSIBILITY
We believe companies should act in a responsible way, maintaining high standards in corporate governance, and in employee and supplier conduct. Companies should also have a sustainable view in dealing with the environment and humanitarian aid. Ericsson has accepted the UN Global Compacts nine principles for human rights. We see these principles as a prerequisite for sound, long-term business. These are also guiding principles in our work and inspire us to find new ways to deploy our equipment and services in developing countries.
Sustainability and Environment
We are committed to continuous improvement of the environmental performance of our products, services and operations.
In 2003 we:
| Applied the results from our unique 3G life cycle to our environmental goals, with more emphasis given to decreasing mass and energy flows without jeopardizing quality. |
| Took action to further reduce the energy consumption of our products while in use. |
| Continued to phase out banned and restricted materials, including lead in solder and brominated flame retardant. |
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BOARD OF DIRECTORS REPORT |
| Consolidated a worldwide Ecology Management recycling scheme through which we take back and recycle our customers phased-out equipment. |
In 2004 we will evaluate the impact of the EU directive on prevention of waste of electrical and electronic equipment (WEEE).
Code of Conduct
Ericssons Code of Conduct regarding basic working conditions and environment protects the rights of people working with our products and services, including those working for our suppliers. We will, to the extent justifiable, discontinue cooperation with any party that persists in non-compliance.
The Code of Conduct includes directives on:
| Workers rights, including human rights and discrimination, wages and working hours. |
| Safety, including workplace conditions. |
| Environment, with suppliers required to comply with environmental laws and our environmental requirements. |
| Child labor, which we base on the child labor code in the UN Convention on the Rights of the Child, article 32.1. |
| Monitoring, with all suppliers obliged to inform us about their operations. |
Ericssons internal rules for ethical behavior and other important rules for all directors, officers and employees have long been established via group policies and directives. A Code of Business Ethics and Conduct for all employees, directors and officers that essentially summarizes the most important of these rules will be implemented during 2004.
Please refer to Ericssons investor website for further information: www.ericsson.com
Ericsson Response program
Ericsson Response is a global initiative aimed at responding to human suffering caused by disasters. Ericsson Response assists disaster relief operations by providing specialist volunteers and communications equipment. Key achievements in 2003 were:
| Relief work in Bam, Iran |
Set up of a complete GSM communications system, providing emergency communication to aid relief work in Bam, Iran, following the major earthquake on December 26. The network was up and running within 24 hours after deployment
| UN World Food Programme |
Ericsson Response signed an agreement with the UN World Food Programme for the use of volunteers in the UNs humanitarian operations worldwide
| Humanitarian assistance to Liberia |
Due to civil unrest in Liberia, hundreds of thousands of people fled their homes and were without access to adequate food supplies. Two volunteers helped the UN World Food Programme to re-establish IT and telecommunications systems in their looted offices in and around Monrovia.
| Humanitarian assistance to Iraq |
Ericsson Response worked with the UN World Food Programme at the Fast ICT Response team (FITTEST) base in Dubai, helping to prepare for the humanitarian operation in Iraq, and
| Relief operations in Algeria |
Assisted the Swedish Search and Rescue team and the International Federation of Red Cross and Red Crescent Societies (IFRC) by strenghtening the network to support relief operations outside of Alger after the severe earthquake in May.
CORPORATE GOVERNANCE
Board changes 2003
At the Annual General Meeting on March 31, 2003, Arne Mårtensson succeeded Tom Hedelius as member of the Board and as Deputy Chairman.
In recent years, several committees have been established to strengthen corporate governance within Ericsson, including:
| Audit Committee, which is appointed by the Board among its members and oversees financial statements, audit processes and audit fees |
| Finance Committee, which is appointed by the Board among its members and oversees major financial transactions and our exposure to financial risk |
| Remuneration Committee, which is appointed by the Board among its members and oversees salary levels, retirement compensation and incentive plans for employees |
| Nomination Committee, consisting of shareholders, which is appointed by the shareholders at the Annual General Meeting and is responsible for nominating Board Directors and proposing Directors fees, and |
| Disclosure Committee, appointed by the CEO and CFO to assist them in relation to the requirements on the companys disclosure controls and procedures and internal controls. |
The Board work during 2003
The work of the Board is subject to an established work procedure that defines the distribution of work between the Board and its three committees (Audit, Finance and Remuneration) and between the Board and the President. The work procedure is evaluated each year and revised if deemed appropriate. The Chairman has had individual discussions with each member regarding the work procedure and the evaluation of the Board work. The other members of the Board evaluate the work of the Chairman each year. The Board also evaluates the work of the President annually.
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BOARD OF DIRECTORS REPORT |
The main tasks of the committees are to work on behalf of the Board within their respective areas of responsibility. In certain matters, the Board has authorized the committees to resolve issues, i.a. the Finance Committee has the authority to resolve on customer financing and financing of the Group companies. Although a committee may have the authority to resolve a matter, they often refer it to the Board for resolution.
More information on Board and committee activities can be found in Directors, Senior Management and Auditors Board Procedures and Committees.
Through the work in the committees, various matters have been possible to handle much more in-depth, with better analysis and preparation for resolution by the Board. Each committee includes Board members that are employee representatives, which has been beneficial to the committee work. Before each Board meeting, the committees submit reports to the Board on the issues handled, resolved or referred to the Board. Each committee also prepares an annual report to the Board.
The Board adapted its work procedure in line with development in Sweden and the United States regarding reporting, disclosure and other requirements on listed companies from Stockholmsbörsen, the US Securities and Exchange Commission, NASDAQ and changes in legislation, such as the Sarbanes-Oxley Act in the United States. The Board has had 11 meetings during 2003. The Board also received training sessions regarding company matters and made a number of site visits to enhance the members knowledge about Ericsson.
The company auditors have presented to the Board their observations from the audit of the annual report as well as their reviews of interim reports and the evaluation of our internal controls.
The Audit Committee had 9 meetings in 2003 and reviewed the financial reporting, the scope and execution of audits performed, the independence of the external auditors, the internal audit function and audit fees. The committee together with the auditors reviewed the Auditors report prior to publishing of each interim report. The committee implemented pre-approval procedures for non-audit services by our auditors. The committee devoted significant time to review matters and observations arising from audits performed. The Audit Committee also reviewed and initiated a strengthening of our internal disclosure controls and procedures to improve them and to ensure adequate disclosure. Other matters reviewed by the committee include the handling of vacant premises, pension liabilities, provisions, fraud risk assessments, capitalization of development expenses and deferred tax assets. Procedures for confidential submission by employees of concerns regarding questionable accounting or auditing matters are under preparation and will be implemented in 2004. The committee established a procedure for the provisioning of audit services as a basis for a proposal for election of auditors by the Annual General Meeting and resolved to propose to the AGM that the fees to the auditors be based on work performed (i.e. on account).
The Finance Committee primarily resolved issues regarding restructuring of customer credits and trade receivables, guarantees, credit facility agreements, refinancing of Ericssons existing credit commitments, the financing strategy (including strategies for risk management, insurance and customer financing) and pension liabilities. The committee prepared for resolution by the Board a proposal to transfer certain Swedish pension liabilities to Alecta, to provide additional security to the insurance company for Swedish white-collar pension liabilities (FPG) for such pension liabilities, as well as capital contributions to companies inside and outside the Ericsson Group, including the contribution of EUR 150 million to Sony Ericsson. The Finance Committee also monitored the financial risk exposure and risk limits and reviewed the reporting to the committee in this respect. The committee had 8 meetings in 2003.
The Remuneration Committee reviewed and prepared for resolution by the Board, with the support of major Swedish shareholders, a proposal for a continued stock purchase program from 2003, which was resolved by the AGM in 2003. The committee also prepared an extended employee incentive stock purchase plan, including additional matching for 4,500 key contributors and acceleration possibilities for matching of multiple shares for 200 critical employees including senior management, depending on meeting performance targets. The committee approved certain remuneration packages for newly appointed members to the new Management Team. The committee also reviewed proposals for salaries and incentive pay for 2004, including the general compensation package for the Management Team. The committee had 8 meetings in 2003.
A Code of Ethics for the CEO and senior financial officers was implemented in 2003. Company policies have been updated and central policies regarding ethical and conduct issues have been summarized in a Code of Business Ethics and Conduct.
An information policy in accordance with the requirements of Stockholmsbörsen was adopted. Management established a Disclosure Committee to ensure accurate, complete and timely disclosure and related issues.
See Directors, Senior Managers and Auditors for more information.
POST-CLOSING EVENTS
In the beginning of 2004, Ericsson became involved in a patent litigation in Europe related to ATM technology. We have contested the claim.
17 |
BOARD OF DIRECTORS REPORT |
PARENT COMPANY
The Parent Company business consists mainly of corporate management and holding company functions. It also includes activities performed on a commission basis by Ericsson Treasury Services AB and Ericsson Credit AB regarding internal banking and customer credit management. The Parent Company is the owner of all 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 branch- and representative offices in 15 (16) countries.
Net sales for the year amounted to SEK 1.6 (2.0) billion and income after financial items excluding restructuring costs, was SEK 3.2 (2.5) billion.
The financial statements for 2002 have been revised due to changes in accounting principles. These changes have not affected the consolidated financial statements. Major changes in the Parent Companys financial position for the year include decreased current and long-term commercial and financial receivables from subsidiaries of SEK 25.2 billion and increased cash and short-term cash investments of SEK 9.1 billion. Short-and long-term internal borrowings decreased by SEK 11.8 billion. At year-end, cash and short-term investments amounted to SEK 68.4 (59.3) billion.
In the second quarter, as decided at the Annual General Meeting, a stock issue and subsequent stock repurchase related to the 2003 employee Stock Purchase Plan was carried out. 158 million of Ericsson Class C shares were issued and later repurchased as treasury stock. These shares have been converted to Ericsson Class B shares. The stock issue increased capital stock in restricted stockholders equity by SEK 158 million and the repurchase reduced non-restricted equity by SEK 158 million.
In accordance with the conditions of the Stock Purchase Plan and Option Plans for Ericsson employees, 6,220,352 shares from treasury stock were sold or distributed to employees during the year. The holding of treasury stock at December 31, 2003, was 306,139,953 Class B shares.
PROPOSED DISPOSITION OF EARNINGS
As of December 31, 2003, non-restricted equity in the Parent Company amounted to SEK 13,635,112,153.
The Board of Directors proposes that no dividend is paid and the whole amount is retained within the business.
Stockholm February 6, 2004
Telefonaktiebolaget LM Ericsson (publ)
Org. no. 556016-0680
Arne Mårtensson Deputy chairman |
Michael Treschow Chairman |
Marcus Wallenberg Deputy chairman | ||
Peter Sutherland | Peter L. Bonfield | Eckhard Pfeiffer | ||
Sverker Martin-Löf | Lena Torell | Per Lindh | ||
Åke Svenmarck | Carl-Henric Svanberg President and CEO |
Jan Hedlund |
18 |
FINANCIAL STATEMENTS |
REPORT OF INDEPENDENT ACCOUNTANTS
To: The Board of Directors and Shareholders of Telefonaktiebolaget LM Ericsson
We have audited the accompanying consolidated and parent company balance sheets of Telefonaktiebolaget LM Ericsson as of December 31, 2003 and 2002, and the related consolidated and parent company income statements, statements of cash flows and statements of changes in stockholders equity for each of the three years in the period ended December 31, 2003. These financial statements have been prepared on the basis of accounting principles generally accepted in Sweden. The financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Sweden and the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in all material respects, the consolidated and parent company financial position of Telefonaktiebolaget LM Ericsson at December 31, 2003 and 2002, and the consolidated and parent company results of its operations for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in Sweden.
As discussed in the Accounting Policy note to the financial statements, with effect from January 1, 2003, the Company adopted RR 22 Presentation of Financial Statements, RR 25 Segment reporting and RR 27 Financial instruments: disclosure and presentation. The Company retroactively adopted these standards.
Accounting principles generally accepted in Sweden 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 32 to the financial statements.
PricewaterhouseCoopers AB
Stockholm Sweden
February 6, 2004
19 |
CONSOLIDATED INCOME STATEMENT
Years ended December 31, SEK million |
Notes |
2003 |
2002 1) |
2001 1) | ||||
Net sales |
2 | 117,738 | 145,773 | 231,839 | ||||
Cost of sales |
78,901 | 104,224 | 173,900 | |||||
Gross margin |
38,837 | 41,549 | 57,939 | |||||
Research and development and other technical expenses |
27,136 | 30,510 | 46,640 | |||||
Selling expenses |
15,115 | 21,896 | 32,352 | |||||
Administrative expenses |
8,762 | 9,995 | 14,010 | |||||
Total operating expenses |
51,013 | 62,401 | 93,002 | |||||
Share in earnings of joint ventures and associated companies |
11 | 604 | 1,220 | 715 | ||||
Other operating revenues and costs |
5 | 1,541 | 773 | 8,398 | ||||
Operating income |
11,239 | 21,299 | 27,380 | |||||
Financial income |
6 | 3,995 | 4,253 | 4,815 | ||||
Financial expenses |
6 | 4,859 | 5,789 | 6,589 | ||||
Income after financial items |
12,103 | 22,835 | 29,154 | |||||
Income taxes for the year |
7 | 1,460 | 4,165 | 8,813 | ||||
Minority interest |
201 | 343 | 923 | |||||
Net income |
10,844 | 19,013 | 21,264 | |||||
Average number of shares, basic (million) |
15,823 | 12,573 | 10,950 | |||||
Average number of shares, diluted (million) |
15,841 | 12,684 | 11,072 | |||||
Earnings per share, basic (SEK) |
8 | 0.69 | 1.51 | 1.94 | ||||
Earnings per share, diluted (SEK) |
8 | 0.69 | 1.51 | 1.94 | ||||
1) | Restated for changed accounting principles. |
20 |
FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEET
December 31, SEK million |
Notes |
2003 |
2002 2) | |||
Assets |
||||||
Fixed assets |
||||||
Intangible assets |
9 | |||||
Capitalized development expenses |
4,784 | 3,200 | ||||
Goodwill |
5,739 | 8,603 | ||||
Other intangible assets |
687 | 806 | ||||
Tangible assets |
10, 26, 27 | 6,505 | 9,964 | |||
Financial assets |
11 | |||||
Equity in joint ventures and associated companies |
2,970 | 1,835 | ||||
Other investments |
433 | 2,243 | ||||
Long-term customer financing |
3,027 | 12,283 | ||||
Deferred tax assets |
27,130 | 26,047 | ||||
Other long-term receivables |
1,342 | 2,132 | ||||
52,617 | 67,113 | |||||
Current assets |
||||||
Inventories |
13 | 10,965 | 13,419 | |||
Receivables |
||||||
Accounts receivable trade |
14 | 31,886 | 37,384 | |||
Short-term customer financing |
979 | 1,680 | ||||
Other receivables |
16 | 12,718 | 23,303 | |||
Short-term cash investments |
56,622 | 48,252 | ||||
Cash and bank |
16,585 | 17,962 | ||||
129,755 | 142,000 | |||||
Total assets |
182,372 | 209,113 | ||||
Stockholders equity, provisions and liabilities |
||||||
Stockholders equity |
17 | |||||
Capital stock |
16,132 | 15,974 | ||||
Reserves not available for distribution |
40,298 | 39,950 | ||||
Restricted equity |
56,430 | 55,924 | ||||
Retained earnings |
14,895 | 36,696 | ||||
Net income |
10,844 | 19,013 | ||||
Non-restricted equity |
4,051 | 17,683 | ||||
60,481 | 73,607 | |||||
Minority interest in consolidated subsidiaries |
2,299 | 2,469 | ||||
Provisions |
||||||
Pensions |
19 | 8,005 | 10,997 | |||
Other provisions |
19 | 28,063 | 21,357 | |||
36,068 | 32,354 | |||||
Long-term liabilities |
20 | |||||
Notes and bond loans |
26,312 | 33,074 | ||||
Liabilities to financial institutions |
689 | 3,043 | ||||
Other long-term liabilities |
2,771 | 949 | ||||
29,772 | 37,066 | |||||
Current liabilities |
||||||
Current maturities of long-term debt |
7,262 | 11,083 | ||||
Current liabilities to financial institutions |
21 | 2,247 | 3,238 | |||
Advances from customers |
3,297 | 2,672 | ||||
Accounts payable trade |
8,895 | 12,469 | ||||
Income tax liabilities |
1,943 | 619 | ||||
Other current liabilities |
22 | 30,108 | 33,536 | |||
53,752 | 63,617 | |||||
Total stockholders equity, provisions and liabilities1) |
182,372 | 209,113 | ||||
Assets pledged as collateral |
23 | 8,023 | 2,800 | |||
Contingent liabilities |
24 | 2,691 | 3,116 | |||
1) | Of which total interest-bearing provisions and liabilities 46,209 (61,463), of which long-term 36,700 (47,142). |
2) | Restated for change in accounting principle in Sweden 2003 regarding financial instruments (RR27), and with all deferred tax assets reported as long-term. |
21 |
FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, SEK million |
Notes |
2003 |
2002 |
2001 1) | ||||
OPERATIONS |
25 | |||||||
Net income |
10,844 | 19,013 | 21,264 | |||||
Adjustments to reconcile net income to cash |
||||||||
Depreciation and amortization |
8,395 | 6,537 | 7,828 | |||||
Taxes |
2,352 | 9,171 | 16,983 | |||||
Write-downs and capital gains(-)/losses on sale of fixed assets, net |
924 | 721 | 6,126 | |||||
Other non-cash items |
580 | 81 | 1,724 | |||||
Changes in operating net assets |
||||||||
Inventories |
2,286 | 8,599 | 20,103 | |||||
Customer financing, short-term and long-term |
7,999 | 2,140 | 3,903 | |||||
Accounts receivable - trade |
4,131 | 9,839 | 19,653 | |||||
Provisions and pensions |
5,810 | 3,576 | 5,728 | |||||
Other operating assets and liabilities, net |
7,098 | 9,117 | 13,148 | |||||
Cash flow from operating activities |
22,867 | 10,088 | 1,418 | |||||
INVESTMENTS |
||||||||
Investments in tangible assets |
1,806 | 2,738 | 8,726 | |||||
Sales of tangible assets |
1,510 | 2,977 | 10,155 | |||||
Acquisitions/sales of shares and other investments, net |
25 | 818 | 2,703 | 5,393 | ||||
Capitalization of development expenses |
2,359 | 3,442 | | |||||
Net change in capital contributed by minority |
1 | 503 | 83 | |||||
Other |
60 | 2,981 | 1,488 | |||||
Cash flow from investing activities |
3,412 | 2,984 | 5,251 | |||||
Cash flow before financing activities |
19,455 | 7,104 | 6,669 | |||||
FINANCING |
25 | |||||||
Changes in current liabilities to financial institutions, net |
854 | 17,168 | 3,343 | |||||
Proceeds from issuance of other long-term debt |
32 | 540 | 35,169 | |||||
Repayment of long-term debt |
10,904 | 6,072 | 8,470 | |||||
Stock issue |
158 | 28,940 | 155 | |||||
Sale/repurchase of own stock |
150 | 2 | 156 | |||||
Dividends paid |
206 | 645 | 4,295 | |||||
Cash flow from financing activities |
11,924 | 5,597 | 25,746 | |||||
Effect of exchange rate changes on cash |
538 | 1,203 | 738 | |||||
Net change in cash and cash equivalents |
6,993 | 2,710 | 33,153 | |||||
Cash and cash equivalents, beginning of period |
66,214 | 68,924 | 35,771 | |||||
Cash and cash equivalents, end of period |
73,207 | 66,214 | 68,924 | |||||
1) | Restated for changed accounting principles in Sweden 2002 regarding consolidation of companies according to RR1:00. |
22 |
FINANCIAL STATEMENTS |
CONSOLIDATED STOCKHOLDERS EQUITY
Years ended December 31, SEK million |
2003 |
2002 |
2001 | |||
Opening Balance |
73,607 | 68,587 | 91,686 | |||
Stock issue, net |
158 | 28,940 | 155 | |||
Sale of own stock |
8 | 2 | | |||
Stock purchase and stock option plans |
151 | 12 | | |||
Conversion of debentures |
| | 11 | |||
Repurchase of own stock |
158 | | 156 | |||
Dividends paid |
| | 3,954 | |||
Changes in cumulative translation effects due to changes in foreign currency exchange rates |
2,444 | 4,921 | 2,110 | |||
Adjustment of accrued cost for stock issue 2002 |
3 | | | |||
Net income |
10,844 | 19,013 | 21,264 | |||
Other changes |
| | 1 | |||
Closing balance |
60,481 | 73,607 | 68,587 | |||
23 |
FINANCIAL STATEMENTS |
PARENT COMPANY INCOME STATEMENT
Years ended December 31, SEK million |
Notes |
2003 |
2002 1) |
2001 1) | ||||
Net sales |
2 | 1,645 | 2,017 | 1,374 | ||||
Cost of sales |
1,278 | 2,358 | 1,547 | |||||
Gross margin |
367 | 341 | 173 | |||||
Research and development and other technical expenses |
15 | 37 | 70 | |||||
Selling expenses |
1,539 | 3,099 | 3,446 | |||||
Administrative expenses |
2,920 | 1,345 | 1,386 | |||||
Total operating expenses |
4,474 | 4,481 | 4,902 | |||||
Other operating revenues |
5 | 2,408 | 2,769 | 3,066 | ||||
Operating income |
1,699 | 2,053 | 2,009 | |||||
Financial income |
6 | 9,177 | 12,997 | 19,224 | ||||
Financial expenses |
6 | 6,019 | 8,620 | 23,645 | ||||
Income after financial items |
1,459 | 2,324 | 6,430 | |||||
Transfers to/from untaxed reserves |
||||||||
Changes in depreciation in excess of plan |
18 | 40 | 20 | 4 | ||||
Changes in other untaxed reserves |
18 | | 1,977 | 1,172 | ||||
40 | 1,997 | 1,176 | ||||||
Income taxes for the year |
7 | 169 | 1,639 | 425 | ||||
Net income |
1,250 | 2,682 | 4,829 | |||||
1) | Restated according to URA7, Group contributions and shareholders contribution. |
24 |
FINANCIAL STATEMENTS |
PARENT COMPANY BALANCE SHEET
December 31, SEK million |
Notes |
2003 |
2002 1) | |||
Assets |
||||||
Fixed assets |
||||||
Intangible assets |
9 | 62 | 79 | |||
Tangible assets |
10, 27 | 505 | 38 | |||
Financial assets |
||||||
Investments |
||||||
Subsidiaries |
11, 12 | 58,991 | 50,600 | |||
Joint ventures and associated companies |
11, 12 | 4,507 | 3,210 | |||
Other investments |
11 | 17 | 39 | |||
Receivables from subsidiaries |
15 | 34,046 | 22,595 | |||
Long-term customer financing |
11 | 2,023 | 9,099 | |||
Other long-term financial assets |
11 | 2,122 | 1,496 | |||
102,273 | 87,156 | |||||
Current assets |
||||||
Inventories |
13 | 3 | 2 | |||
Receivables |
||||||
Accounts receivable - trade |
14 | 84 | 98 | |||
Short-term customer financing |
1,568 | 1,156 | ||||
Receivables from subsidiaries |
15 | 22,835 | 59,459 | |||
Other receivables |
16 | 6,523 | 12,542 | |||
Short-term cash investments |
55,820 | 47,752 | ||||
Cash and bank |
12,573 | 11,563 | ||||
99,406 | 132,572 | |||||
Total assets |
201,679 | 219,728 | ||||
Stockholders equity, provisions and liabilities |
||||||
Stockholders equity |
17 | |||||
Capital stock |
16,132 | 15,974 | ||||
Share premium reserve |
24,729 | 24,726 | ||||
Revaluation reserve |
20 | 20 | ||||
Statutory reserve |
6,741 | 6,741 | ||||
Restricted equity |
47,622 | 47,461 | ||||
Retained earnings |
12,385 | 11,719 | ||||
Net income |
1,250 | 2,682 | ||||
Non-restricted equity |
13,635 | 14,401 | ||||
61,257 | 61,862 | |||||
Untaxed reserves |
18 | 2,129 | 2,089 | |||
Provisions |
||||||
Pensions |
19 | 848 | 1,156 | |||
Other provisions |
19 | 3,183 | 2,430 | |||
4,031 | 3,586 | |||||
Long-term liabilities |
||||||
Notes and bond loans |
20 | 26,312 | 33,074 | |||
Liabilities to financial institutions |
20 | 290 | 411 | |||
Liabilities to subsidiaries |
15, 20 | 31,911 | 20,395 | |||
Other long-term liabilities |
20 | 63 | 102 | |||
58,576 | 53,982 | |||||
Current liabilities |
||||||
Current maturities of long-term debt |
5,905 | 10,931 | ||||
Current liabilities to financial institutions |
1,746 | 21 | ||||
Advances from customers |
2 | 14 | ||||
Accounts payable-trade |
230 | 264 | ||||
Liabilities to subsidiaries |
15 | 57,606 | 78,746 | |||
Income tax liability |
149 | 306 | ||||
Other current liabilities |
22 | 10,048 | 7,927 | |||
75,686 | 98,209 | |||||
Total stockholders equity, provisions and liabilities |
201,679 | 219,728 | ||||
Assets pledged as collateral |
23 | 698 | 1,918 | |||
Contingent liabilities |
24 | 10,517 | 16,587 | |||
1) | Restated according to URA7, Group contributions and shareholders contribution, restated for change in accounting principle in Sweden 2003 regarding financial instruments (RR27), and with all deferred tax assets reported as long-term. |
25 |
FINANCIAL STATEMENTS |
PARENT COMPANY STATEMENT OF CASH FLOWS
Years ended December 31, SEK million |
Notes |
2003 |
2002 1) |
2001 1) | ||||
OPERATIONS |
25 | |||||||
Net income |
1,250 | 2,682 | 4,829 | |||||
Adjustments to reconcile net income to cash |
||||||||
Depreciation and amortization |
152 | 49 | 56 | |||||
Taxes |
150 | 1,595 | 518 | |||||
Write-downs and capital gains (-)/losses on sale of fixed assets, net |
1,479 | 3,792 | 18,983 | |||||
Additions to/withdrawals from (-) untaxed reserves |
40 | 1,997 | 1,176 | |||||
Unsettled dividends |
196 | 3,108 | 3,700 | |||||
Changes in operating net assets |
||||||||
Inventories |
1 | | 1 | |||||
Customer financing, short-term and long-term |
6,335 | 6,164 | 2,858 | |||||
Accounts receivable-trade |
61 | 1,399 | 1,373 | |||||
Provisions and pensions |
445 | 1,469 | 2,222 | |||||
Other operating assets and liabilities, net |
5,010 | 2,749 | 7,748 | |||||
Cash flow from operating activities |
14,725 | 472 | 20,272 | |||||
INVESTMENTS |
||||||||
Investments in tangible assets |
653 | 2 | 20 | |||||
Sales of tangible assets |
23 | 7 | 23 | |||||
Acquisitions/sales of shares and other investments, net |
25 | 2,135 | 1,275 | 9,196 | ||||
Lending, net |
9,726 | 6,503 | 14,037 | |||||
Other |
1,809 | 2,219 | 1,343 | |||||
Cash flow from investing activities |
8,770 | 9,992 | 24,573 | |||||
Cash flow before financing activities |
23,495 | 10,464 | 4,301 | |||||
FINANCING |
||||||||
Changes in current liabilities to financial institutions, net |
1,930 | 293 | 4,400 | |||||
Changes in current liabilities to subsidiaries |
1,420 | 3,666 | 8,980 | |||||
Proceeds from issuance of other long-term debt |
342 | 232 | 28,244 | |||||
Repayment of long-term debt |
15,083 | 4,641 | 3,582 | |||||
Stock issue |
158 | 28,940 | 155 | |||||
Sale/repurchase of own stock |
150 | 2 | 156 | |||||
Dividends paid |
| | 3,953 | |||||
Settled contributions from/to (-)subsidiaries |
163 | 477 | 2,072 | |||||
Other |
31 | 287 | 94 | |||||
Cash flow from financing activities |
14,417 | 20,764 | 27,454 | |||||
Net change in cash and cash equivalents |
9,078 | 10,300 | 23,153 | |||||
Cash and cash equivalents, beginning of period |
59,315 | 49,015 | 25,862 | |||||
Cash and cash equivalents, end of period |
68,393 | 59,315 | 49,015 | |||||
1) | Restated according to URA7, Group contributions and shareholders contribution, and including all taxes to reconcile net income to cash. |
26 |
FINANCIAL STATEMENTS |
PARENT COMPANY STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
Years ended December 31, SEK million |
2003 |
2002 1) |
2001 1) | |||
Opening balance |
61,862 | 31,810 | 40,501 | |||
Stock issue, net |
158 | 28,940 | 155 | |||
Sale of own stock |
8 | 2 | | |||
Stock purchase and stock option plans |
3 | | | |||
Conversion of debentures |
| | 11 | |||
Repurchase of own stock |
158 | | 156 | |||
Dividends paid |
| | 3,954 | |||
Adjustment of accrued costs for stock issue 2002 |
3 | | | |||
Contributions from/to subsidiaries, net of taxes |
1,869 | 1,572 | 83 | |||
Capital discount |
| | 1 | |||
Net income |
1,250 | 2,682 | 4,829 | |||
Closing balance |
61,257 | 61,862 | 31,810 | |||
1) | Restated according to URA7, Group contributions and shareholders contribution. |
27 |
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28 |
NOTES TO THE FINANCIAL STATEMENTS |
Notes to the Financial Statements
CONTENTS
29 |
NOTES TO THE FINANCIAL STATEMENTS |
1 | ACCOUNTING POLICIES |
The consolidated financial statements of Telefonaktiebolaget LM Ericsson, the Parent Company and its subsidiaries (the Company) are prepared in accordance with accounting principles generally accepted in Sweden, applying all applicable standards (RR) and interpretations (URA) issued by the Swedish Financial Accounting Standards Council (Redovisningsrådet) and the Annual Accounts Act. These accounting principles differ in certain respects from generally accepted accounting principles in the United States (US GAAP). For a description of major differences, with respect to Ericssons financial statements, see Note 32.
The preparation of financial statements and the application of accounting policies in many cases involve managements judgment or the use of estimates based on past experience and assumptions deemed to be reasonable and prudent. Actual results may differ from these estimates under different assumptions or conditions. We have identified below the accounting policies where estimates and assumptions might have the largest impact on reported results and financial position:
| Revenue recognition |
| Valuation of Receivables and Exposures in Customer financing |
| Inventory valuation and commitments related to outsourcing arrangements |
| Customer warranties |
| Pensions |
| Deferred taxes |
In 2003 the following standards were adopted:
RR22 - Presentation of financial statements
RR22 requires compliance with all standards issued by the Swedish Financial Accounting Standards Council. Prior to 2003, Ericsson deviated from the standards in two aspects:
| In deviation from RR1:00, Consolidated Financial Statements, minority interests were divided in two items; share in income before taxes and share in taxes. From January 1, 2003, in accordance with RR1:00, we report minority interest net of taxes. |
| In deviation from RR9, Income tax, deferred tax assets were prior to 2003 reported as both current and long-term. From January 1, 2003, all deferred taxes are reported as long-term in accordance with RR9. |
| Previous years are restated. |
RR25 - Segment reporting
RR25 was adopted January 1, 2003. As a consequence, we have reviewed our segments and decided to transfer internal service units from segment Other Operations to segment Systems, since the major part of the services are provided to Systems. This reduces orders and sales previously reported in Other Operations and also reduced the amounts of eliminations of inter-segment sales. Employees in such service units were transferred from Other Operations to Systems.
RR26 - Events after the balance sheet date
This statement prescribes when a company should adjust its financial statements for events after the balance sheet date and the disclosures that a company should give about the date when the statements were authorized for issue and about events after the balance sheet date. No events after the balance sheet date have had any effect on Ericssons financial statements.
RR27 - Financial instruments. Disclosure and presentation
RR27 introduces changed rules for netting of assets and liabilities of similar nature. The effect in the consolidated statements is that certain receivables for which the credit risks have been transferred to third parties can no longer be reported net without a formal three-party agreement. The amounts for trade receivables and short-term borrowings were affected.
The adoption of RR27 has increased Parent Company financial receivables from and liabilities to subsidiaries. Year 2002 is restated.
RR28 - Accounting for Government Grants
This standard governs financial reporting and disclosure of government grants and other forms of government assistance. The effect of implementing RR28 did not have any impact on the results of operations or financial position of the Company.
URA7
From 2003, the Parent Company adopted URA7 Group contributions and shareholders contributions. As a consequence, contributions to/from subsidiaries are reported net of taxes in retained earnings. Previous years are restated.
Revenue recognition
Sales are recorded net of value added taxes, goods returned, trade discounts and allowances. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when the fee is fixed and determinable and when collection is reasonably assured.
We do not generally provide extended payment terms but may provide customer financing on construction-type contracts
For sales between consolidated companies we apply arms length pricing.
We offer a comprehensive portfolio of telecommunication and data communication systems and services covering a range of technologies.
30 |
NOTES TO THE FINANCIAL STATEMENTS |
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:
| construction-type |
| delivery-type |
| contracts for various types of services, for example managed services contract for several years |
A substantial share of our sales is construction-type contracts to supply network systems according to customer specifications.
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 milestones for progress billing of the customer, which also well reflect the degree of completion of the contract. Revenues from contracts associated with new technology are not recognized until specified functionality has been achieved, customer acceptance has been obtained and other contractual terms have been satisfied. The profitability of long-term contracts is periodically assessed and revised, if necessary, based on changes in circumstances. Provisions for losses are made when such losses become known.
For delivery-type contracts that have multiple elements, revenue is allocated to each element based on fair values. If there are undelivered elements that are 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 is recognized ratably over the contract period. Revenue for training, consulting, engineering, installation and similar services is generally recognized when the services are delivered.
Research and development costs
Costs incurred for development of software that will be sold, leased or otherwise marketed or that is 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. The capitalization is made on a prudent and conservative basis, given the inherent uncertainty in development activities.
Costs that are capitalized 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 either the straight-line method over periods not exceeding five years or the sales ratio method. 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.
Capitalized development costs are subject to regular assessment of recoverability based on anticipated future revenues and changes in technologies. Unamortized capitalized development costs determined to be in excess of net realizable value are expensed immediately.
Share-based employee compensation
Stock option plans
No compensation cost to the employee is recognized for any of our current stock option plans, as the employees strike price is equal to the market price at grant date. When the options are exercised, however, social security charges are to be paid in certain countries on the value of the employee benefit; based on the difference between the market price of the share and the strike price. During the vesting period, preliminary costs for such social security charges are accrued. In some plans, these costs are reduced by income from related hedging arrangements.
Stock purchase plans
For stock purchase plans, a compensation cost is accrued in the income statement during the vesting period, based on the market price of the share at the employees investment date. 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 based on the market value of the shares at the matching date. During the vesting period, preliminary social security charges are accrued.
31 |
NOTES TO THE FINANCIAL STATEMENTS |
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 received are linked to performing of research or development work or to subsidized capital expenditures as governmental stimulus to employment or investments in a certain country or region. Overall amounts are not significant. Government grants are normally deducted from development cost or cost of sales, depending on their nature.
Borrowing costs
The Company does not capitalize any interest costs, including interest cost related to financing of construction of tangible assets.
Earnings per share
Basic earnings per share are calculated by dividing net income by the average number of shares outstanding during the year.
Diluted earnings per share are calculated by dividing adjusted net income by the sum of the average number of shares outstanding plus all additional shares that would have been outstanding if all convertible debentures were converted and stock options were exercised (potential ordinary shares). Net income is adjusted by reversal of interest expense for convertible debentures net of tax.
Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares decrease earnings per share.
Principles of consolidation
The consolidated financial statements include the accounts of the Parent Company and all subsidiaries. Subsidiaries are all companies in which Ericsson has an ownership and directly or indirectly, including effective potential voting rights, has a voting majority or 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 have been prepared in accordance with the purchase method, whereby consolidated stockholders equity includes equity in subsidiaries and associated companies earned only after their acquisition.
Investments in subsidiary and associated companies are accounted for on a cost basis. The Parent Company income includes dividends received from subsidiaries and other inter-company revenues and costs, which are eliminated in the consolidated accounts.
Ericsson Treasury Services AB and Ericsson Credit AB conducted their operations on commission basis for the Parent Company during 2003 as in 2002 and 2001.
Associated companies and joint ventures
Investments in associated companies, including 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. Ericssons share of income before tax in these companies 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 subsidiaries 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 un-amortized goodwill (see Goodwill below).
Undistributed earnings of associated companies included in consolidated restricted equity are reported as Equity proportion reserve, as detailed in Note 17. Minor investments in associated companies for which financial statements could not be obtained within reasonable time are carried at the lower of acquisition cost and fair value.
All other equity instruments are accounted for as Other investments and carried at the lower of acquisition cost or fair value.
Goodwill
Goodwill resulting from acquisitions of consolidated companies is amortized according to individual assessment of each items estimated economic life, resulting in amortization periods of up to 20 years. Goodwill in foreign investments is remeasured at year-end exchange rates. Depending on the nature of the acquisition, goodwill amortization is reported under Research and development and other technical expenses, Selling expenses or Administrative expenses.
Translation of financial statements in foreign currency
For most subsidiaries, 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 using the current method, with translation adjustments reported directly in consolidated stockholders equity. When a company accounted for in accordance with these principles is sold, accumulated translation adjustments are included in consolidated income.
Financial statements of companies with finance activities and other companies, having such close relations with the Swedish operations that their functional currency is considered to be SEK, are remeasured using the monetary method. Adjustments from remeasurement of financial statements of these companies are included in the consolidated Income Statement (see Note 17).
Financial statements of companies operating, for example, in countries with highly inflationary economies, whose functional
32 |
NOTES TO THE FINANCIAL STATEMENTS |
currency is another than the local currency, are translated in two steps. In the first step, remeasurement is made into the functional currency, resulting exchange rate gains/losses are reported in the Income Statement. In the second step, from the functional currency to SEK, the financial statements are translated using the current method. The resulting translation adjustments are reported directly in consolidated stockholders equity. The remeasurement method gives a more fair view of these financial statements than a translation directly to SEK, since companies concerned operate in de facto USD- or EUR-based economies.
Translation of foreign currency items in individual companies
In the financial statements, receivables and liabilities in foreign currencies have been translated at year-end exchange rates.
Gains and losses on foreign exchange are divided into operational and financial. Net operational gains and losses are included in Cost of sales, 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.
Translation effects related to permanent financing of foreign subsidiaries are reported directly to consolidated stockholders equity, net of tax effects.
Cash investments and derivative financial instruments
Short-term cash investments in the consolidated accounts are valued at the lower of acquisition cost plus accrued interest and market value. In the Parent Company, short-term investments and interest and foreign exchange related derivatives are valued at the lower of acquisition cost and fair value.
Interest rate related derivatives and foreign exchange derivatives are in the consolidated accounts valued according to the lower of acquisition cost and market value, determined on a portfolio basis.
Derivative financial instruments are used to hedge foreign exchange and interest rate risks. Foreign exchange derivatives hedging items on the balance sheet have been valued at fair value to offset the changed value of the hedged item. Foreign exchange derivatives hedging forecasted transactions with gains are not carried on the balance sheet, as unrealized gains are not recognized in income. Derivatives not fulfilling the requirements for hedge accounting are valued at the lowest of acquisition cost and fair value. Premium/discount on currency forward contracts is amortized during time to maturity. Interest rate-related derivatives linked to specific investments or loans, or which are applied to hedge interest rate positions are valued in the same manner as the hedged position.
Gains and losses from derivatives in the Parent Company are reported net as other financial income/expenses. In the consolidated accounts, gains and losses on commercial hedges are reported in the same manner as the underlying position.
Financial assets and liabilities of a similar nature are offset and reported net in the balance sheet when there is a legally enforceable right for setoff and there is intent to settle on a net basis or to realize the asset and settle the liability simultaneously.
Intangible and tangible fixed assets
Intangible and tangible fixed assets are stated at cost less accumulated amortization/depreciation, adjusted with net value of revaluations.
Annual depreciation is reported as plan depreciation, generally 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. Intangible assets excluding goodwill are amortized over a period of maximum 5 years. See Goodwill above for amortization of goodwill. Amortization and depreciation is included in Cost of Sales and in the respective functional operating expenses.
Costs for development of computer software to be sold, leased or otherwise marketed or developed or obtained for internal use are capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated. As technological feasibility often cannot be established until late in each project, the capitalized portion of total development costs is limited. No development costs, than costs for software are capitalized. The reason is that software development is the largest part of our development work and other costs are relatively small. As capitalization shall not be made until feasibility is established, which in many cases can not be made for hardware products until software is finalized to enable testing, the amounts to capitalize for hardware would be immaterial. Other development costs are charged to the income statement as incurred. See also Research and Development Costs.
Impairment reviews of tangible and intangible fixed assets, including goodwill, are performed whenever there is an indication of possible impairment. The carrying values of fixed assets, including goodwill related to those assets, are not considered to be recoverable when the expected discounted cash flows from those assets are less than their carrying values. An impairment loss is determined based on the amount by which the carrying value exceeds the fair value of those assets. Losses on fixed assets to be disposed of are determined in a similar manner, taking into account the selling price reduced by the costs of disposal. Provisions or write-downs are made for expected costs for restoration of land or buildings due to environmental obligations or obligations in leasing contracts.
33 |
NOTES TO THE FINANCIAL STATEMENTS |
Leasing
Financial leasing contracts where the company is a lessee are capitalized and reported as tangible assets and as other current liabilities and other long-term liabilities.
Leases with the company as lessor are normally accounted for as sales-type leases, with recognition of sales revenue at the inception of the lease as well as interest revenue over the lease term. On an exceptional basis only are financial leases or operating leases used.
Deferred taxes
Deferred tax assets attributable to temporary differences between the book values of assets and liabilities and their tax values, and also deferred tax receivables attributable to unutilized tax loss carry-forwards, are reported to the extent that it is probable that future taxable profits will be available against which the tax losses 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.
Appropriations and Untaxed reserves are not reported in the consolidated financial statements. Such items reported by consolidated companies have been reversed, applying the current tax rate applicable in each country. The deferred tax so calculated is included in the consolidated income statement in Income taxes for the year. The after-tax effect is stated in the income statement as part of net income for the year, and in the balance sheet as restricted stockholders equity.
The accumulated deferred tax asset/liability is adjusted each year by applying the current tax rate in each country. Adjustments of deferred tax assets/liabilities attributable to changes in tax rates are included in the consolidated income statement in Income taxes for the year.
Receivables and customer financing
Receivables are reported at anticipated net realizable value. Sales of trade receivables and customer financing credits are reflected as a reduction of receivables in the balance sheet and the proceeds received are included in cash flows from operating activities.
For sale of receivables with recourse, provisions are recorded for estimated value of recourse liabilities. The excess of the recourse obligation over the recorded provision is included in contingent liabilities.
We provide financing to certain customers in connection with significant sales of network infrastructure equipment. Financing may include funding for the direct purchase of our products and services or, in exceptional cases, for working capital purposes. We have credit approval procedures where all major customer finance contracts are subject to approval by the Finance Committee of the Board of Directors. We assess the collectibility of our receivables for purposes of initial revenue recognition and to record receivables at anticipated realizable value. In instances where we have sold credits with recourse or where we have exposure related to guarantees to third parties for customer financing, we have reported the extent of our exposure as contingent liabilities. We accrue risk provisions based on our assessment of the risks relating to these contingent liabilities, and contingent liabilities are reported net of such provisions.
Inventories
Inventories are valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Consideration has been given to risks of obsolescence.
More than half of our production is outsourced to contract manufacturing companies. In addition to valuation allowances regarding inventories, we also need to assess the need for provisions for supplier compensation due to failure to reach minimum committed purchase volumes. This valuation involves making estimates of obtainable market value, future customer demand and changes in technology and customer acceptance of new products.
Provisions
Provisions are recognized when the company has a present obligation, an outflow of resources is probable and a reliable estimate can be made of the obligation.
Provision amounts for product warranties are based on assumptions, involving historic failure rates as well as estimates regarding failure rates for new products, and also estimates on costs to remedy various types of faults.
Statement of cash flows
Foreign subsidiaries transactions are translated at the average exchange rate during the period. Subsidiaries purchased and/or sold, net of cash acquired/sold, are reported as cash flow from investment activities and do not affect reported cash flow from operations.
Cash and cash equivalents consist of cash, bank and short-term investments. Included are all highly liquid financial instruments which are easily converted to cash and insignificantly affected by changes in value and used by our treasury function for cash management purposes.
34 |
NOTES TO THE FINANCIAL STATEMENTS |
Segment reporting
Our three operating segments are defined based on customers served:
| Systems, addressing operators of mobile and fixed line public telephone networks |
| Phones, addressing distributors of mobile handsets to end users |
| Other operations, which consists of a number of different operations with different types of customers. Each unit is deemed too small to be reported as a segment in itself. Included operations are: Microwave Systems, Network Technologies, Enterprise Systems, Mobile Platform Technology, Power Modules and other. |
New accounting standards 2004-2005
The standard Employee Benefits (RR29), which is based on IAS19, will be adopted from January 1, 2004. The effect of this standard is a change in timing of pension costs compared to current Swedish GAAP, so that pension costs for future salary increases are estimated and recognized at the time of service. The net effect of the accounting change at adoption will be charged to stockholders equity. The effect of adopting RR29 is an estimated increase of the pension liability as of January 1, 2004, by approximately SEK 1.9 billion. The effect on equity, net after taxes, is estimated to approximately SEK 1.4 billion.
From 2005, Ericsson will report according to full IFRS. An internal project is underway to identify differences to current GAAP and what changes will be necessary. The company is in the process of evaluating the impact. Provided that the standards are endorsed for application within the EU, it is expected that IAS39 regarding financial instruments and a new standard regarding share-based compensation and business combinations will be the standards with the largest impact.
35 |
NOTES TO THE FINANCIAL STATEMENTS |
2 | SEGMENT INFORMATION |
Business segments
2003 |
Systems |
Phones |
Other Operations |
Unallocated |
Eliminations |
Group |
|||||||||
Orders booked |
104,694 | | 8,306 | | | 113,000 | |||||||||
Inter segment orders |
748 | | 886 | | 1,634 | | |||||||||
Total Orders Booked |
105,442 | | 9,192 | | 1,634 | 113,000 | |||||||||
Net sales |
107,995 | | 9,743 | | | 117,738 | |||||||||
Inter segment sales |
671 | | 836 | | 1,507 | | |||||||||
Total Net Sales |
108,666 | | 10,579 | | 1,507 | 117,738 | |||||||||
Share in earnings of JV and associated companies |
125 | 521 | 65 | 273 | | 604 | |||||||||
Operating Income |
6,163 | 521 | 3,511 | 1,044 | | 11,239 | |||||||||
Financial income |
| | | 3,995 | | 3,995 | |||||||||
Financial expenses |
| | | 4,859 | | 4,859 | |||||||||
Income after financial items |
6,163 | 521 | 3,511 | 1,908 | | 12,103 | |||||||||
Taxes |
| | | 1,460 | | 1,460 | |||||||||
Minority interest |
| | | 201 | | 201 | |||||||||
Net Income |
6,163 | 521 | 3,511 | 649 | | 10,844 | |||||||||
Segment assets1) 2) |
65,478 | | 6,649 | 107,275 | | 179,402 | |||||||||
Associates |
563 | 1,752 | 491 | 164 | | 2,970 | |||||||||
Total Assets |
66,041 | 1,752 | 7,140 | 107,439 | | 182,372 | |||||||||
Segment liabilities3) 4) |
58,536 | | 7,610 | 53,446 | | 119,592 | |||||||||
Total Liabilities |
58,536 | | 7,610 | 53,446 | | 119,592 | |||||||||
1) Segment assets include tangible assets, intangible assets, short and long term customer financing, accounts receivable, inventory, prepaid expenses, accrued revenues and other current assets.
2) Unallocated assets comprise of cash, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses, prepaid revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest bearing liabilities and provisions. |
| ||||||||||||||
Other segment items |
|||||||||||||||
Tangible and intangible assets |
|||||||||||||||
Additions/capitalization |
6,348 | | 373 | 8 | 757 | 5,972 | |||||||||
Depreciation |
3,028 | | 699 | 26 | | 3,753 | |||||||||
Amortization |
1,807 | | 666 | 107 | | 2,579 | |||||||||
Write-downs |
1,126 | | 337 | | | 1,463 | |||||||||
Number of employees |
45,176 | | 6,110 | 297 | | 51,583 | |||||||||
Operating income |
6,163 | 521 | 3,511 | 1,044 | | 11,239 | |||||||||
Income after financial items |
| | | | | 12,103 | |||||||||
Non-operational capital gains/losses, net |
| | 13 | | | 13 | |||||||||
Restructuring costs, net |
12,809 | 338 | 3,064 | 252 | | 16,463 | |||||||||
Capitalization of development expenses, net |
1,412 | | 172 | | | 1,584 | |||||||||
Adjusted operating income |
5,234 | 183 | 606 | 792 | | 3,653 | |||||||||
Adjusted operating margin (%) |
5 | % | | 6 | % | | | 3 | % | ||||||
Adjusted income after financial items |
| | | | | 2,789 | |||||||||
Geographical segments
2003 |
Net sales |
Orders booked |
Total assets |
Additions/ capitalization intangible assets |
Number of employees | |||||
Europe, Middle East and Africa |
62,843 | 54,167 | 145,928 | 5,264 | 38,379 | |||||
- of which EU |
35,235 | 30,228 | 140,888 | 5,201 | 35,671 | |||||
- of which Sweden |
5,868 | 4,417 | 119,834 | 4,849 | 24,408 | |||||
Asia Pacific |
27,343 | 29,514 | 16,845 | 96 | 6,468 | |||||
- of which China |
10,473 | 12,701 | 7,625 | 67 | 2,850 | |||||
North America |
17,627 | 20,237 | 10,398 | 505 | 4,460 | |||||
- of which United states |
16,357 | 18,971 | 9,876 | 301 | 2,581 | |||||
Latin America |
9,925 | 9,082 | 9,201 | 107 | 2,276 | |||||
Total |
117,738 | 113,000 | 182,372 | 5,972 | 51,583 | |||||
36 |
NOTES TO THE FINANCIAL STATEMENTS |
Business segments
2002 |
Systems |
Phones |
Other Operations |
Unallocated |
Eliminations |
Group |
|||||||||
Orders booked |
114,177 | | 14,174 | | | 128,351 | |||||||||
Inter segment orders |
1,164 | | 1,210 | | 2,374 | | |||||||||
Total Orders Booked |
115,341 | | 15,384 | | 2,374 | 128,351 | |||||||||
Net sales |
130,842 | | 14,931 | | | 145,773 | |||||||||
Inter segment sales |
1,113 | | 1,270 | | 2,383 | | |||||||||
Total Net Sales |
131,955 | | 16,201 | | 2,383 | 145,773 | |||||||||
Share in earnings of JV and associated companies |
161 | 1,331 | 45 | 5 | | 1,220 | |||||||||
Operating Income |
12,497 | 1,331 | 5,846 | 1,625 | | 21,299 | |||||||||
Financial income |
| | | 4,253 | | 4,253 | |||||||||
Financial expenses |
| | | 5,789 | | 5,789 | |||||||||
Income after financial items |
12,497 | 1,331 | 5,846 | 3,161 | | 22,835 | |||||||||
Taxes |
| | | 4,165 | | 4,165 | |||||||||
Minority interest |
| | | 343 | | 343 | |||||||||
Net Income |
12,497 | 1,331 | 5,846 | 661 | | 19,013 | |||||||||
Segment assets1) 2) |
88,121 | | 9,048 | 110,109 | | 207,278 | |||||||||
Associates |
693 | 799 | 531 | 188 | | 1,835 | |||||||||
Total Assets |
88,814 | 799 | 9,579 | 109,921 | | 209,113 | |||||||||
Segment liabilities3) 4) |
53,435 | | 9,470 | 70,132 | | 133,037 | |||||||||
Total Liabilities |
53,435 | | 9,470 | 70,132 | | 133,037 | |||||||||
1) Segment assets include tangible assets, intangible assets, short and long term customer financing, accounts receivable, inventory, prepaid expenses, accrued revenues and other current assets.
2) Unallocated assets comprise of cash, short term investments and deferred tax assets.
3) Segment liabilities include accounts payable, provisions, accrued expenses, prepaid revenues, advances from customers and other current liabilities.
4) Unallocated liabilities include accrued interests, tax liabilities and interest bearing liabilities and provisions. |
| ||||||||||||||
Other segment item |
|||||||||||||||
Tangible and intangible assets |
|||||||||||||||
Additions/capitalization |
5,896 | | 553 | 32 | 30 | 6,451 | |||||||||
Depreciation |
4,877 | | 597 | 135 | 95 | 5,514 | |||||||||
Amortization |
1,049 | | 221 | 365 | | 1,635 | |||||||||
Write-downs |
612 | | | | | 612 | |||||||||
Number of employees |
56,590 | | 7,646 | 385 | | 64,621 | |||||||||
Operating income |
12,497 | 1,331 | 5,846 | 1,625 | | 21,299 | |||||||||
Income after financial items |
| | | | | 22,835 | |||||||||
Non-operationql capital gains/losses, net |
| | 42 | | | 42 | |||||||||
Restructuring costs, net |
10,441 | | 1,438 | 83 | | 11,962 | |||||||||
Capitalization of development expenses, net |
2,851 | | 349 | | | 3,200 | |||||||||
Adjusted operating income |
4,907 | 1,331 | 4,715 | 1,542 | | 12,495 | |||||||||
Adjusted operating margin (%) |
4 | % | | 29 | % | | | 9 | % | ||||||
Adjusted income after financial items |
| | | | | 14,031 | |||||||||
Geographical segments
2002 |
Net sales |
Orders booked |
Total assets |
Additions/ capitalization of tangible and intangible assets |
Number of employees | |||||
Europe, Middle East and Africa |
74,124 | 65,448 | 165,465 | 5,693 | 47,700 | |||||
of which EU |
43,396 | 34,003 | 159,030 | 5,548 | 44,467 | |||||
of which Sweden |
8,303 | 7,620 | 129,056 | 4,908 | 30,241 | |||||
Asia Pacific |
35,905 | 30,451 | 17,907 | 294 | 7,771 | |||||
of which China |
12,559 | 10,852 | 6,189 | 151 | 3,034 | |||||
North America |
23,068 | 22,877 | 14,201 | 392 | 6,328 | |||||
of which United states |
22,036 | 21,673 | 13,633 | 357 | 4,562 | |||||
Latin America |
12,676 | 9,575 | 11,540 | 72 | 2,822 | |||||
Total |
145,773 | 128,351 | 209,113 | 6,451 | 64,621 | |||||
37 |
NOTES TO THE FINANCIAL STATEMENTS |
2 | SEGMENT INFORMATION (CONTINUED) |
Net Sales
Parent Company |
2003 |
2002 |
2001 | |||
Europe1), Middle East & Africa |
1,404 | 1,715 | 1,143 | |||
North America |
| | | |||
Latin America |
241 | 302 | 231 | |||
Asia Pacific |
| | | |||
Total |
1,645 | 2,017 | 1,374 | |||
1) Of which Sweden |
1 | | | |||
1) Of which EU |
1 | | | |||
Parent Company sales are mainly related to business segment Systems.
3 | PROFIT FROM OPERATIONS |
Restructuring |
2003 |
2002 |
2001 | |||
Restructuring charges |
||||||
Asset write-downs |
3,966 | 1,074 | 4,111 | |||
Employee redundancy 1) |
7,728 | 10,556 | 7,539 | |||
Unused real estate |
3,883 | 562 | | |||
Other |
886 | 230 | 3,350 | |||
Total |
16,463 | 11,962 | 15,000 | |||
Of which |
||||||
Cost of sales |
4,790 | 5,589 | 8,345 | |||
Research and development |
5,361 | 4,124 | 3,546 | |||
Other technical expenses |
| | | |||
Selling expenses |
3,150 | 1,474 | 1,508 | |||
Administrative expenses |
2,465 | 694 | 1,601 | |||
Other operating revenue and costs |
345 | 311 | | |||
Share in earnings of JV and associated companies |
352 | 230 | | |||
Total |
16,463 | 11,962 | 15,000 | |||
Restructuring provisions |
||||||
Opening balance |
7,535 | 7,075 | 3,378 | |||
Provisions made |
10,835 | 7,195 | 15,000 | |||
Provisions utilized |
9,146 | 6,593 | 11,303 | |||
Other |
109 | 142 | | |||
Closing balance |
9,115 | 7,535 | 7,075 | |||
Restructuring charges |
||||||
Provisions made |
10,835 | 7,195 | 15,000 | |||
Direct charges |
5,628 | 4,767 | | |||
Total |
16,463 | 11,962 | 15,000 | |||
Restructuring in Statement of cash flows |
||||||
Charges in Net income, net |
16,463 | 11,962 | 15,000 | |||
Share in earnings of JV and associated companies |
352 | | | |||
Write-downs |
3,966 | 1,074 | | |||
Provisions made |
10,835 | 7,195 | 15,000 | |||
Provisions utilized |
9,146 | 6,593 | 11,303 | |||
Total cash flow effect |
10,456 | 10,286 | 11,303 | |||
1) | Number of employees at December 31, 2003 were 51,583 (64,621 in 2002 and 85,198 in 2001) |
Items affecting comparability |
2003 |
2002 |
2001 |
||||||
Non-operational capital gains/losses, net |
13 | 42 | 5,800 | ||||||
Capitalization of development expenses, net |
1,584 | 3,200 | | ||||||
Restructuring costs, net |
16,463 | 11,962 | 15,000 | ||||||
Key measurements, excluding items affecting comparability |
2003 |
2002 |
2001 |
||||||
Net sales |
117,738 | 145,773 | 231,839 | ||||||
Adjusted gross margin |
43,627 | 47,138 | 66,284 | ||||||
as percentage of net sales |
37 | % | 32 | % | 29 | % | |||
Adjusted operating expenses |
41,621 | 59,309 | 86,347 | ||||||
as percentage of net sales |
35 | % | 41 | % | 37 | % | |||
Adjusted share in earnings of joint ventures and associated companies |
252 | 1,450 | 715 | ||||||
Adjusted other operating revenue and costs |
1,899 | 1,126 | 2,598 | ||||||
Adjusted operating income |
3,653 | 12,495 | 18,180 | ||||||
Adjusted operating margin (%) |
3 | % | 9 | % | 8 | % | |||
Financial net |
864 | 1,536 | 1,774 | ||||||
Adjusted income after financial items |
2,789 | 14,031 | 19,954 | ||||||
38 |
NOTES TO THE FINANCIAL STATEMENTS |
4 | REVENUES |
The majority of Ericssons 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:
Consolidated |
2003 |
2002 |
2001 | |||
Equipment sales |
98,726 | 125,112 | 214,237 | |||
Of which: |
||||||
Construction-type contracts1) |
73,165 | | | |||
Delivery-type contracts1) |
25,561 | | | |||
Service sales |
18,458 | 19,493 | 17,424 | |||
Royalties |
554 | 1,168 | 178 | |||
Total |
117,738 | 145,773 | 231,839 | |||
Capital gains, license fees and |
||||||
other operating revenues |
2,645 | 1,928 | 10,064 | |||
Interest income |
3,913 | 3,592 | 2,684 | |||
Dividends |
7 | 83 | 473 | |||
1) | Figures for 2002 and 2001 not available. |
See Note 1, Accounting Policies, Revenue recognition for more information about the different types of contracts.
5 | OTHER OPERATING REVENUES AND COSTS |
Consolidated |
2003 |
2002 1) |
2001 1) | |||
Gains on sales of intangible and tangible assets |
213 | 166 | 1,962 | |||
Losses on sales of intangible and tangible assets |
28 | 251 | 1,317 | |||
Capital losses on tangible assets related to restructuring |
345 | 311 | | |||
Gains on sales of investments and operations |
493 | 267 | 5,830 | |||
Losses on sales of investments and operations |
731 | 593 | 349 | |||
Sub-total |
398 | 722 | 6,126 | |||
Commissions, license fees and other operating revenues |
1,939 | 1,265 | 2,272 | |||
Restructuring costs net, Phones |
| 230 | | |||
Total |
1,541 | 773 | 8,398 | |||
1) | Restated for changed accounting principles. |
Parent Company |
2003 |
2002 |
2001 | |||
Commissions, license fees and other operating revenues |
2,441 | 2,770 | 3,068 | |||
Net losses (-) on sales of tangible assets |
33 | 1 | 2 | |||
Total |
2,408 | 2,769 | 3,066 | |||
39 |
NOTES TO THE FINANCIAL STATEMENTS |
6 | FINANCIAL INCOME AND EXPENSES |
Consolidated |
2003 |
2002 |
2001 | |||
Financial Income |
||||||
Result from securities and receivables accounted for as fixed assets |
470 | 1,049 | 2,677 | |||
Other interest income and similar profit/loss items |
3,525 | 3,204 | 2,138 | |||
Total |
3,995 | 4,253 | 4,815 | |||
Financial Expenses |
||||||
Interest expenses and similar profit/loss items |
4,859 | 5,789 | 6,589 | |||
Financial Net |
864 | 1,536 | 1,774 | |||
Interest expenses on Swedish pension liabilities are included in the interest expenses shown above.
Parent Company |
2003 |
2002 |
2001 | |||
Financial Income |
||||||
Result from participations in subsidiaries |
||||||
Dividends |
1,565 | 5,077 | 14,442 | |||
Net gains on sales |
36 | 20 | 7 | |||
Result from participations in associated companies |
||||||
Dividends |
93 | 48 | 23 | |||
Net losses on sales |
| | 6 | |||
Result from other securities and receivables accounted for as fixed assets |
||||||
Dividends |
4 | 58 | | |||
Net gains on sales |
153 | 24 | 37 | |||
Other interest income and similar profit/loss items |
||||||
Subsidiaries |
2,629 | 3,346 | 3,674 | |||
Other1) |
4,697 | 4,424 | 1,047 | |||
Total |
9,177 | 12,997 | 19,224 | |||
1) | Of the total amount, SEK 1,384 million in 2003, SEK 2,161 million in 2002 and SEK 978 million in 2001 is attributable to hedge of net investments in foreign subsidiaries. |
Parent Company |
2003 |
2002 |
2001 | |||
Financial Expenses |
||||||
Losses on sales of participations in subsidiaries |
21 | | 5 | |||
Write-down of investments in subsidiaries |
1,526 | 3,800 | 19,000 | |||
Write-down of investments in associated companies |
86 | 35 | 12 | |||
Write-down of participations in other companies |
2 | 2 | | |||
Interest expenses and similar profit/loss items: |
||||||
Subsidiaries |
1,680 | 2,399 | 2,080 | |||
Other |
2,693 | 2,370 | 2,536 | |||
Other financial expenses |
11 | 14 | 12 | |||
Total |
6,019 | 8,620 | 23,645 | |||
Financial Net |
3,158 | 4,377 | 4,421 | |||
Parent Companys interest expenses on pension liabilities are included in the interest expenses shown above.
7 | INCOME TAXES FOR THE YEAR |
Income Statement
The following items are included in Income taxes for the year:
Consolidated |
Parent Company | |||||||||||
2003 |
2002 |
2001 |
2003 |
2002 |
2001 | |||||||
Current income taxes for the year |
1,613 | 2,579 | 5,108 | 738 | 799 | 209 | ||||||
Current income taxes related to prior years |
240 | 1,456 | 216 | 205 | 493 | 22 | ||||||
Deferred income/expense () taxes related to temporary differences |
3,138 | 7,996 | 13,680 | 364 | 347 | 612 | ||||||
Share of taxes in joint ventures and associated companies |
175 | 204 | 25 | | | | ||||||
Income taxes for the year |
1,460 | 4,165 | 8,813 | 169 | 1,639 | 425 | ||||||
40 |
NOTES TO THE FINANCIAL STATEMENTS |
Deferred tax income and expenses
The amounts of deferred tax income and expenses are shown in the following table:
Consolidated |
Parent Company | |||||||||||
2003 |
2002 |
2001 |
2003 |
2002 |
2001 | |||||||
Deferred tax income |
6,414 | 10,269 | 17,429 | 551 | 29 | 612 | ||||||
Deferred tax expenses |
3,276 | 2,273 | 3,749 | 187 | 376 | | ||||||
Deferred taxes income/expense, net |
3,138 | 7,996 | 13,680 | 364 | 347 | 612 | ||||||
Consolidated
Deferred income taxes refer to tax loss carryforwards of SEK 2,829 million (SEK 5,615 million in 2002, SEK 7,986 million in 2001) and to certain provisions mainly for restructuring, inventory write-downs, warranty commitments and allowances for doubtful receivables.
Deferred tax expenses refer to reversals of temporary differences regarding certain provisions for mainly restructuring and warranty commitments.
Parent Company
Deferred income taxes refer mainly to provision for restructuring costs, reserve for doubtful receivables and certain pension obligations. Deferred tax expenses refer to reversal of temporary differences regarding provisions for customer financing commitments.
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:
Consolidated |
Parent Company | |||||||||||
2003 |
2002 1) |
2001 1) |
2003 |
2002 |
2001 | |||||||
Income before taxes |
12,103 | 22,835 | 29,154 | 1,419 | 4,321 | 5,254 | ||||||
Tax rate in Sweden (28%) |
3,389 | 6,393 | 8,163 | 397 | 1,210 | 1,471 | ||||||
Effect of foreign tax rates |
438 | 39 | 1,078 | | | | ||||||
Current income taxes related to prior years |
240 | 1,456 | 216 | 205 | 493 | 22 | ||||||
Tax effect of expenses that are non-deductible for tax purpose |
1,457 | 1,091 | 864 | 659 | 584 | 220 | ||||||
Tax effect of income that are non-taxable for tax purpose |
556 | 365 | 260 | 1,143 | 1,712 | 4,472 | ||||||
Tax effect of changes in tax rates |
3 | 21 | 83 | | | | ||||||
Tax effect related to write-downs of investments in subsidiaries |
| | | 461 | 1,064 | 5,320 | ||||||
Tax effect of tax losses carryforwards, net |
353 | 64 | 123 | | | | ||||||
Income taxes for the year |
1,460 | 4,165 | 8,813 | 169 | 1,639 | 425 | ||||||
1) | In compliance with RR9, figures have been restated to report minority interest net of tax. |
Consolidated
Income taxes related to prior years consist mainly of foreign withholding taxes that were not deductible due to insufficient taxable income and other costs.
Tax effect of expenses that are non-deductible include amortization of goodwill, write-downs of investments, certain costs related to customer financing and other non-tax deductible expenses.
Parent Company
Income taxes related to prior years consist mainly of write-off of receivables.
Tax effect of expenses that are non-deductible refer mainly to costs related to customer financing and other costs.
Tax effect of income that are non-taxable refer mainly to dividends, and change of permanent differences related to provisions for customer financing commitments in prior years.
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:
Consolidated |
Parent Company | |||||||
2003 2) |
2002 1) |
2003 2) |
2002 1) | |||||
Deferred tax assets |
27,130 | 26,047 | 1,646 | 1,282 | ||||
Deferred tax liabilities |
462 | 1,511 | | | ||||
1) | Restated for changes in accounting principle with all deferred taxes reported as long-term. |