Edgar Filing: ERICSSON LM TELEPHONE CO

Annual Report on Form 20-F

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

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

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

For the transaction period from to

Commission file number 0–12033

TELEFONAKTIEBOLAGET LM ERICSSON

(Exact Name of Registrant as Specified in Its Charter)

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s Name Into English)

Kingdom of Sweden

(Jurisdiction of Incorporation or Organization)

SE-164 83 Stockholm, Sweden

(Address of Principal Executive Offices)

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

None

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

Title of each class

American Depositary Shares

B Shares

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 issuer’s 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 ¨

Contents


Form 20-F 2003 Cross Reference Table		i
Forward-looking Statements		1
Letter from the President and Chief Executive Officer		2
Board of Directors’ Report		6
Financial Statements		19
Notes to the Financial Statements		29
Information on the Company		75
Directors, Corporate Management and Auditors		83
Five-year Summary		88
Risk Factors		90
Share Information		96
Shareholder Information		100
Supplemental Information		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

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

•

management’s 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. I’ve always thought so, and I believe it even more now. In my first year as CEO I’ve 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 world’s telecommunications revolution is still very much alive today.

Of course, times have been tough over the past few years and market conditions remain tight. We’ve 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 year’s 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, I’ll 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

Ericsson’s 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.

We’ve 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.

We’re 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.

I’m 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 Ericsson’s 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 world’s 20 largest mobile operators. These operators provide services to some 65 percent of all mobile subscribers. We’re 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.

We’re 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. We’re 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.

I’ve been greatly impressed with the technical innovations achieved by Ericsson over the years. However, yesterday’s successes mean little if we’re 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, we’ve 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 that’s 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. It’s 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 world’s population have a mobile phone, and every day, about 500,000 consumers sign up for mobile services.

I think it’s 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 Ericsson’s 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 world’s 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.

Today’s solutions are dependent on many aspects of an operator’s 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. We’re 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.

I’ve been talking about the sophistication of today’s services, technologies and networks. Of course, it’s 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 don’t want to worry about whether it’s 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.

We’re 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 we’re heading in the right direction.

I believe the efficient, robust and highly competitive Ericsson we are building confirms the faith you’ve 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

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 Company’s 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 1990’s 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.

LOGO

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 1990’s 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	%

Ericsson’s 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 generation’s 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 Ericsson’s 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 Ericsson’s 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 year’s 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 year’s rights issue, repayment of debt and this year’s 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.

Ericsson’s 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	1–3 years	3–5 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 Ericsson’s 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.)

Ericsson’s 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 group’s 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 6–9 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 Ericsson’s 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.

Ericsson’s 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 management’s 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 Ericsson’s 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.


		13


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 ITC’s 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 2001–2003, 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 segment’s 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 Compact’s 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.


		15


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

Ericsson’s 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.

Ericsson’s 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 Ericsson’s 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 UN’s 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 company’s 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.


		16


		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 Ericsson’s 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 Company’s 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 Company’s 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

FINANCIAL STATEMENTS

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


1.	Accounting Policies	30
2.	Segment Information	36
3.	Profit from Operations	38
4.	Revenues	39
5.	Other Operating Revenues and Costs	39
6.	Financial Income and Expenses	40
7.	Income Taxes for the Year	40
8.	Earnings per Share	43
9.	Intangible Assets	43
10.	Tangible Assets	44
11.	Financial Assets	45
12.	Investments	46
13.	Inventories	48
14.	Accounts Receivable - Trade	48
15.	Receivables and Payables - Subsidiaries	48
16.	Other Receivables	48
17.	Stockholders’ Equity	49
18.	Untaxed Reserves	50
19.	Provisions	51
20.	Long-term Liabilities	52
21.	Financial Instruments	53
22.	Other Current Liabilities	58
23.	Assets Pledged as Collateral	58
24.	Contingent Liabilities	58
25.	Statement of Cash Flows	59
26.	Leasing	59
27.	Tax Assessment Values in Sweden	60
28.	Special Information Regarding the Parent Company	61
29.	Information Regarding Employees, Members of the Board of Directors and Management	61
30.	Related Party Transactions	67
31.	Fees to Auditors	67
32.	Reconciliation to Accounting Principles Generally Accepted in the United States	68


		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 Ericsson’s financial statements, see Note 32.

The preparation of financial statements and the application of accounting policies in many cases involve management’s 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 Ericsson’s 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 arm’s 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 employee’s 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 employee’s 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. Ericsson’s 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 item’s 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.

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 stockholder’s 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 assets^{1) 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 liabilities^{3) 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 of tangible and 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 assets^{1) 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 liabilities^{3) 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 redundancy¹⁾	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 Ericsson’s 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 Company’s 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

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

—

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

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

1,078

—

Current income taxes related to prior years

–240

–1,456

216

205

–493

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

–21

—

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.