UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

 

☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2018

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☐	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-12033

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)

Jonas Stringberg, Vice President, Head of Financial Control and Business Services

Telephone: +46 10 716 53 20, jonas.stringberg@ericsson.com

SE-164 83 Stockholm, Sweden

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

 

Title of Each Class		Name of Each Exchange on which Registered
American Depositary Shares (each representing one B share)		The NASDAQ Stock Market LLC
B Shares *		The NASDAQ Stock Market LLC

 

*	Not for trading, but only in connection with the registration of the American Depositary Shares representing such B Shares pursuant to the requirements of the Securities and Exchange Commission.

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

None

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 5.00 nominal value)			3,072,395,752
A shares (SEK 5.00 nominal value)			261,755,983
C shares (SEK 5.00 nominal value)			0

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

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

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  ☐    No  ☐

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

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Emerging growth company		☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

☐  U.S. GAAP		☒		International Financial Reporting Standards as issued by the International Accounting Standards Board		☐  Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 

TABLE OF CONTENTS

 

				Page
PART I INTRODUCTIONT					1
ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			2
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE			2
ITEM 3.		KEY INFORMATION			2
		A. Selected Financial Data			2
		B. Capitalization and Indebtedness			4
		C. Reasons for the Offer and Use of Proceeds			4
		D. Risk Factors			4
ITEM 4.		INFORMATION ON THE COMPANY			4
		A. History and Development of the Company			4
		B. Business Overview			6
		C. Organizational Structure			8
		D. Property, Plant and Equipment			10
ITEM 4A.		UNRESOLVED STAFF COMMENTS			11
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS			11
		A. Operating Results			11
		B. Liquidity and Capital Resources			17
		C. Research and Development, Patents and Licenses			19
		D. Trend Information			19
		E.  Off-Balance Sheet Arrangements			20
		F.  Tabular Disclosure of Contractual Obligations			20
ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			20
		A. Directors and Senior Management			20
		B. Compensation			20
		C. Board Practices			21
		D. Employees			21
		E.  Share Ownership			22
ITEM 7.		MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			23
		A. Major Shareholders			23
		B. Related Party Transactions			23
		C. Interests of Experts and Counsel.			23
ITEM 8.		FINANCIAL INFORMATION			23
		A. Consolidated Statements and Other Financial Information.			23
		B. Significant Changes			24

 

i

ITEM 9.		THE OFFER AND LISTING			24
		A. Offer and Listing Details			24
		B. Plan of Distribution			24
		C. Markets			24
		D. Selling Shareholders			24
		E.  Dilution			24
		F.  Expenses of the Issue			25
ITEM 10.		ADDITIONAL INFORMATION			25
		A. Share Capital			25
		B. Memorandum and Articles of Association			25
		C. Material Contracts			28
		D. Exchange Controls			28
		E.  Taxation			28
		F.  Dividends and Paying Agents			32
		G. Statement by Experts			32
		H. Documents on Display			33
		I.   Subsidiary Information			33
ITEM 11.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			33
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			33
		A. Debt Securities			33
		B. Warrants and Rights			34
		C. Other Securities			34
		D. American Depositary Shares			34
PART II					35
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			35
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			35
ITEM 15.		CONTROLS AND PROCEDURES			35
		A. Disclosure Controls and Procedures			35
.		B. Management’s Annual Report on Internal Control Over Financial Reporting			35
.		C. Attestation Report of the Registered Public Accounting Firm			35
		D. Changes in Internal Control Over Financial Reporting			35
ITEM 16.		[RESERVED]			36
ITEM 16A.		AUDIT COMMITTEE FINANCIAL EXPERT			36
ITEM 16B.		CODE OF ETHICS			36
ITEM 16C.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			36
ITEM 16D.		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			37

 

ii

ITEM 16E.		PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			37
ITEM 16F.		CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT			37
ITEM 16G.		CORPORATE GOVERNANCE			38
ITEM 16H.		MINE SAFETY DISCLOSURE			39
PART III					39
ITEM 17.		FINANCIAL STATEMENTS			39
ITEM 18.		FINANCIAL STATEMENTS			39
ITEM 19.		EXHIBITS			39

 

 

iii

PART I

INTRODUCTION

Unless otherwise indicated, all references herein to “Ericsson,” the “Company,” “the Group,” “we,” “us,” or “our” or “our company” are references to Telefonaktiebolaget LM Ericsson and its consolidated subsidiaries.

This document is our Annual Report on Form 20-F for the year ended December 31, 2018 (the “2018 Form 20-F”). Reference is made to the English version of our Swedish Annual Report for 2018, with certain adjustments made to comply with U.S. requirements, which is attached hereto as Exhibit 15.1 (the “2018 Swedish Annual Report”). Only (i) the information included in this 2018 Form 20-F, (ii) the information in the 2018 Swedish Annual Report that is incorporated by reference in this 2018 Form 20-F, and (iii) the exhibits to the 2018 Form 20-F that are required to be filed pursuant to the Form 20-F shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statement on Form F-3 filed on March 27, 2018 (File No. 333-223954) and any other document filed by us pursuant to the Securities Act of 1933, as amended, which incorporates by reference the 2018 Form 20-F. Any information in the 2018 Swedish Annual Report that is not referenced in the 2018 Form 20-F or filed as an exhibit thereto shall not be deemed to be so incorporated by reference. Certain industry, technical and financial terms used in this 2018 Form 20-F are defined in the subsections entitled “Glossary” and “Financial Terminology” of the 2018 Swedish Annual Report, which are incorporated herein by reference.

Market data and certain industry forecasts used herein were obtained from internal surveys, market research, publicly available information and industry publications. While we believe that market research, publicly available information and industry publications we use are reliable, we have not independently verified market and industry data from third-party sources. Moreover, while we believe our internal surveys are reliable, they have not been verified by any independent source.

The information included on www.ericsson.com and other websites that appear in this 2018 Form 20-F is not incorporated by reference herein. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding our company is routinely posted on and accessible at www.ericsson.com.

Forward-Looking Statements

This 2018 Form 20-F includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, in particular the following:

 

•

Our goals, strategies, planning assumptions and operational or financial performance expectations;

 

•

Industry trends, future characteristics and development of the markets in which we operate;

 

•

Our future liquidity, capital resources, capital expenditures, cost savings and profitability;

 

•

The expected demand for our existing and new products and services as well as plans to launch new products and services including research and development expenditures;

 

•

The ability to deliver on future plans and to realize potential for future growth;

 

•

The expected operational or financial performance of strategic cooperation activities and joint ventures;

 

•

The time until acquired entities and businesses will be integrated and accretive to income; and

 

•

Technology and industry trends including the regulatory and standardization environment in which we operate, competition and our customer structure.

The words “believe,” “expect,” “foresee,” “anticipate,” “assume,” “intend,” “likely,” “projects,” “may,” “could,” “plan,” “estimate,” “forecast,” “will,” “should,” “would,” “predict,” “aim,” “ambition,” “seek,” “potential,” “target,” “might,” “continue,” or, in each case, their negative or variations, and similar words or expressions are used to identify forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.

 

1

We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Important factors that could affect whether and to what extent any of our forward-looking statements materialize include but are not limited to the factors described in the section Risk Factors.

These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this Form 20-F , to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

We present below certain selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 , included herein, prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS differs in certain significant respects from the accounting principles generally accepted in the United States, or “U.S. GAAP.”

The summary financial data should be read in conjunction with our consolidated financial statements and the notes thereto contained in this 2018 Form 20-F, as well as the information set forth under the heading “Item 5. Operating and Financial Review and Prospects” and the information set forth under the following headings of the 2018 Swedish Annual Report, which are incorporated herein by reference:

 

•

Other Information

 

•

Alternative Performance Measures

 

•

Financial Terminology

 

		2018				Change				2017				2016				2015				2014
Income statement and cash flow items, SEK million
Net sales 1)			210,838				3	%			205,378				220,316				246,920				227,983
Operating expenses 1)			–66,848				–5	%			–70,563				–60,501				–64,129				–63,408
Operating income (loss) 1)			1,242				—				–34,743				5,187				21,805				16,807
Net income (loss) 1)			–6,276				—				–32,433				1,012				13,673				11,143

 

2

Restructuring charges			8,015				–6	%			8,501				7,567				5,040				1,456
Cash flow from operating activities			9,342				–3	%			9,601				14,010				20,597				18,702
Year-end position, SEK million
Total assets 1)			268,761				3	%			259,882				284,150				284,363				293,558
Property, plant and equipment			12,849				0	%			12,857				16,734				15,901				13,341
Stockholders’ equity 1)			86,978				–10	%			96,935				134,582				146,525				144,306
Non-controlling interest			792				25	%			636				675				841				1,003
Per share indicators
Earnings (loss) per share, basic, SEK 1)			–1.98				—				–9.94				0.26				4.17				3.57
Earnings (loss) per share, diluted, SEK 1)			–1.98				—				–9.94				0.25				4.13				3.54
Dividends per share, SEK 2)			1				0	%			1				1				3.7				3.4
Dividends per share, USD 3)			0.11				-8.5	%			0.12				0.11				0.39				0.41
Number of shares outstanding (in millions)
end of period, basic			3,297				0	%			3,284				3,269				3,256				3,242
average, basic			3,291				0	%			3,277				3,263				3,249				3,237
average, diluted			3,318				0	%			3,317				3,303				3,282				3,270
Other information, SEK million
Additions to property, plant and equipment			3,975				3	%			3,877				6,129				8,338				5,322
Depreciations and write-downs/impairments of property, plant and equipment			3,843				–39	%			6,314				4,569				4,689				4,316
Acquisitions/capitalization of intangible assets			2,315				32	%			1,759				5,260				5,228				6,184
Amortization and write-downs/impairments of intangible assets			4,475				–79	%			21,578				4,550				5,538				5,629
Research and development expenses 1)			38,909				3	%			37,887				31,631				34,844				36,308
as percentage of net sales			18.50	%			—				18.40	%			14.40	%			14.10	%			15.90	%
Inventory turnover days			70				6	%			66				71				64				64
Alternative Performance Measures (APMs)
Gross margin 1)			32.30	%			—				23.30	%			29.60	%			34.80	%			36.20	%
Operating margin 1)			0.60	%			—				–16.9	%			2.40	%			8.80	%			7.40	%
EBITA margin			1.40	%			—				–8.8	%			3.60	%			10.50	%			9.30	%
Cash conversion 1)			601	%			—				–73	%			204	%			85	%			84	%
Free cash flow			2,968				–42	%			5,109				254				7,515				4,593
Free cash flow excluding M&A			4,253				–12	%			4,833				876				9,715				8,987
Capital employed, SEK million 1)			149,615				–4	%			155,625				185,666				195,150				189,839
Return on equity 1)			–7.1	%			—				–28.1	%			0.60	%			9.30	%			8.10	%
Return on capital employed 1)			0.60	%			—				–20.6	%			2.70	%			11.60	%			9.80	%
Equity ratio 1)			32.70	%			—				37.50	%			47.60	%			51.80	%			49.50	%
Capital turnover 1)			1.4				17	%			1.2				1.2				1.3				1.2
Working capital, SEK million 1)			52,508				–7	%			56,439				82,327				104,811				103,246
Gross cash, SEK million			68,996				2	%			67,702				57,877				66,270				72,159

 

3

Net cash, SEK million			35,871				4	%			34,657				31,191				41,150				48,014
Statistical data, year-end
Number of employees			95,359				–5	%			100,735				111,464				116,281				118,055
of which in Sweden			12,502				–10	%			13,864				15,303				17,041				17,580
Export sales from Sweden, SEK million 1)			109,969				26	%			87,463				105,552				117,486				113,734

 

1)	2017 and 2016 are restated due to implementation of IFRS 15 “Revenue from Contracts with Customers,” for more information see Note A3, “Changes in accounting policies.” Years 2014–2015 have not been restated. Year 2018 has been impacted by the implementation of IFRS 9 “Financial instruments”.

2)	For 2018, as approved by the Annual General Meeting.

3)	For 2018, as approved by the Annual General Meeting.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

The information set forth under the heading “Financials–Risk Factors” of the 2018 Swedish Annual Report is incorporated herein by reference.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The Business

 

•

Ericsson in Brief

 

•

Financials

 

•

Board of Directors’ Report

 

•

Business in 2018

 

•

Financial Highlights - Capital expenditures

For capital exenditures we usually use available cash from operations.

 

•

Notes to the Consolidated financial statements

 

4

•

Note E2 – Business combinations

 

•

Note H6 – Events after the reporting period

General facts on the company

Legal and commercial name of the Parent Company: Telefonaktiebolaget LM Ericsson (publ).

Organization number: 556016-0680

Legal form of the Parent Company: A Swedish limited liability company, organized under the Swedish Companies Act.

Country of incorporation: Sweden.

Date of incorporation: The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.

Domicile: Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 21, Kista, Sweden.

Telephone number: +46 10 719 0000

Website: www.ericsson.com. The information included on our website is not incorporated herein by reference.

Agent in the US: Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.

Shares: Ericsson’s Class A and Class B shares are traded on Nasdaq Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ New York.

Parent company operations: The business of the parent company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Our parent company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.

Subsidiaries and associated companies: For a list of our significant subsidiaries, please see “Item 4C. Investments”. In addition to our joint venture ST-Ericsson (up until August 2, 2013), we are engaged in a number of minor joint ventures and cooperative arrangements. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements, please see “Item 3D. Financials–Risk Factors—Market, Technology and Business Risks”.

Company history and development

Innovating to empower people, business and society

Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.

Today, Ericsson enables communications service providers to capture the full value of connectivity. The company’s portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and is designed to help our customers go digital, increase efficiency and find new revenue streams. Ericsson’s investments in innovation have delivered the benefits of telephony and mobile broadband to billions of people around the world.

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC: http://www.sec.gov.

 

5

B. Business Overview

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The business

 

•

Ericsson in brief

 

•

This is Ericsson

 

•

Business Model

 

•

Strategy and financial targets

 

•

Segments

 

•

Supply chain

 

•

Financials

 

•

Board of Directors’ report

 

•

Financial highlights – Research and development, patents and licensing

 

•

Financial highlights – Seasonality

 

•

Business results – Segments

 

•

Business results – Market Areas

 

•

Sourcing and supply

 

•

Sustainability and corporate responsibility

 

•

Notes to the consolidated financial statements

 

•

Note B1 – Segment information

 

•

Risk factors

 

•

Market, technology and business risks

 

•

Regulatory, compliance and corporate governance risks

 

•

Corporate Governance

 

•

Corporate Governance report 2018

 

•

Regulation and compliance

 

•

Sustainability

 

•

Sustainability Management

 

•

Significant topics and risk management

 

6

Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA)

Ericsson has conducted business in Iran/Persia since the late nineteenth century, opened an office in Iran in 1973 and later established a local subsidiary in the country. Ericsson strongly believes in enabling communication for all and believes that access to communications can enable the right to health, education and freedom of expression. Ericsson’s business activities in Iran principally involve the sale of communications infrastructure related products and services, including support, installation and maintenance services. Ericsson’s exports from the European Union (the “EU”) to Iran are performed under export licenses from the Swedish Agency for Non-Proliferation and Export Controls and in compliance with applicable economic sanctions and export controls.

Due to its operations in Iran, and having staff permanently in the country, Ericsson has contacts with its local customers and retains certain local suppliers, including banks, and service providers. In addition, Ericsson has other dealings incidental to its local activities, such as making payments for taxes, salaries, rents, utilities and office and similar supplies as well for local accommodation and transportation and customs related services. As a result, Ericsson has contact with companies and public functions that may be owned or controlled by the government of Iran. While Ericsson seeks to obtain information regarding the actual business names and ownership of customers and other counterparties in Iran through its policies and procedures designed to ensure that Ericsson “knows its customers”, it is challenging to determine ownership and control with certainty, particularly with respect to determining whether an entity engaged in commercial activities is owned or controlled by the government.

During 2018, Ericsson sold communications infrastructure related products and services in Iran to the following telecommunications companies operating in the country: Farabord Dadehavare Iranian (“Farabord”) (relating to purchase orders received before May 2018), Mobile Communication Company of Iran (“MCCI”), and MTN Irancell. During 2018, Ericsson’s gross revenue (reported as net sales) related to sales to Farabord, MCCI and MTNIrancell in Iran was approximately SEK 990 million.

Ericsson does not normally allocate net profit (reported as net income) on a country-by-country or activity-by-activity basis, other than as set forth in Ericsson’s consolidated financial statements prepared in accordance with IFRS as issued by the IASB. However, Ericsson has estimated that its operating income (income before taxes and financial net) from such sales was negative, after internal cost allocation approximately SEK -820 million during 2018. Ericsson always strives to honor its engagements with existing customers in compliance with applicable export controls, sanctions and other laws, rules and regulations, but it is clear that the U.S. withdrawal from the Joint Comprehensive Plan of Action (the “JCPOA”) has impacted the overall possibility of doing business in Iran. Ericsson has carefully evaluated the implications of the re-introduced sanctions (caused by the withdrawal by the US from the JCPOA) and continues to monitor developments in this area as it relates to the ability to continue delivering products and services to customers. Since the US withdrawal from the JCPOA, Ericsson is winding down its business and organization significantly but still continues to provide the two main mobile carriers, MCCI and MTN Irancell with support critical for the network to function and to fulfill engagements with these carriers entered into before May 8, 2018. As Ericsson fulfil contractual obligations with regard to contracts entered into before the US withdrawal from the JCPOA, Ericsson may, during a wind down period need to interact with other counterparties. Ericsson continues to explore, including with EU and US authorities, whether and how the disruptive impact on the ability to maintain and support the operations of existing networks of MCCI and MTN Irancell can be minimized and by doing so, endeavor to avoid undue impacts on the access of the people of Iran to humanitarian items/basic services such as telecommunications.

In some instances, Ericsson has had to arrange performance bonds or similar financial guarantees to secure Ericsson’s performance of obligations under the commercial agreements Ericsson has entered into relating to the business in Iran. In such instances, Ericsson usually engages its banks outside Iran, who in turn engage local banks in the country. These local banks include Tejarat Bank, Melli Bank, Parsian Bank and Saderat Bank. Although some bonds and guarantees are still in place, no new performance bonds or similar guarantees involving these four banks with respect to Ericsson’s business activities in Iran were issued during 2018. During the first quarter of 2018, payment was made by Ericsson, via one of Ericsson’s banks outside Iran, to Bank Mellat, under a previously issued performance bond.

 

7

During 2018, existing bank guarantees issued by Bank Mellat, Maskan Bank, Parsian Bank, Post Bank of Iran and Tejarat Bank (local banks in Iran) to cover Ericsson’s obligations under customer contracts or tender rules were extended in time. Further, some payments made to Ericsson’s local subsidiary and payments required to be made by the local subsidiary to suppliers involve banks that may be controlled by the government of Iran. Ericsson also received payments from customers in Iran to Ericsson’s accounts outside Iran.

C. Organizational Structure

The following list shows certain shareholdings owned directly and indirectly by our parent company as of December 31, 2018. A complete list of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Companies Registration Office (Bolagsverket), may be obtained upon request to: Telefonaktiebolaget LM Ericsson, External Reporting, SE-164 83 Stockholm, Sweden.

Shares owned directly by the Parent Company

 

Company		Reg. No.				Domicile				Percentage of ownership				Par value in local currency, million				Carrying value, SEK million
Subsidiary companies
Ericsson AB			556056-6258				Sweden				100				50				20,731
Ericsson Shared Services AB			556251-3266				Sweden				100				361				2,216
Netwise AB			556404-4286				Sweden				100				2				306
Datacenter i Rosersberg AB			556895-3748				Sweden				100				—				88
Datacenter i Mjärdevi Aktiebolag			556366-2302				Sweden				100				10				69
AB Aulis			556030-9899				Sweden				100				14				6
Ericsson Credit AB			556326-0552				Sweden				100				5				5
Other (Sweden)											—				—				1,494
Ericsson Austria GmbH							Austria				100				4				94
Ericsson Danmark A/S							Denmark				100				90				216
Oy LM Ericsson Ab							Finland				100				13				196
Ericsson Participations France SAS							France				100				26				524
Ericsson Germany GmbH							Germany				100				—				4,232
Ericsson Hungary Ltd.							Hungary				100				1,301				120
L M Ericsson Limited							Ireland				100				4				34
Ericsson Telecomunicazioni S.p.A.							Italy				100				44				3,857
Ericsson Holding International B.V.							The Netherlands				100				222				3,200
Ericsson A/S							Norway				100				75				114
Ericsson Television AS							Norway				100				161				270
Ericsson Corporatia AO							Russia				100				5				5
Ericsson España S.A.							Spain				100				43				14
Ericsson AG							Switzerland				100				—				—
Ericsson Holdings Ltd.							United Kingdom				100				328				1,994
Other (Europe, excluding Sweden)											—				—				681
Ericsson Holding II Inc.							United States				100				2,897				25,907
Companía Ericsson S.A.C.I.							Argentina				95	1)			41				15
Ericsson Canada Inc.							Canada				100				8				51
Belair Networks							Canada				100				108				170
Ericsson Telecom S.A. de C.V.							Mexico				100				939				1,050
Other (United States, Latin America)											—				—				88

 

8

Company		Reg. No.		Domicile		Percentage of ownership				Par value in local currency, million				Carrying value, SEK million
Teleric Pty Ltd.				Australia			100				20				100
Ericsson Ltd.				China			100				2				2
Ericsson (China) Company Ltd.				China			100				65				475
Ericsson India Private Ltd.				India			67	3)			364				82
Ericsson India Global Services PVT. Ltd				India			100				291				51
Ericsson Media Solutions Ltd				Israel			100				9				51
Ericsson-LG CO Ltd.				Korea			75				285				2,279
Ericsson (Malaysia) Sdn. Bhd.				Malaysia			70				2				4
Ericsson Telecommunications Pte. Ltd.				Singapore			100				2				1
Ericsson South Africa PTY. Ltd				South Africa			70				—				135
Ericsson Taiwan Ltd.				Taiwan			90				270				36
Ericsson (Thailand) Ltd.				Thailand			49	2)			90				17
Other countries (the rest of the world)							—				—				221
Total															71,201
Joint ventures and associated companies
Concealfab Co				USA			29				7				64
ST-Ericsson SA				Switzerland			50				137				—
Rockstar Consortium Group				Canada			21				1				—
Ericsson Nikola Tesla d.d.				Croatia			49				65				330
Total															394

 

1)	Through subsidiary holdings, total holdings amount to 100% of Compania Ericsson S.A.C.I.

2)	Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd.

3)	Through subsidiary holdings, total holdings amount to 100% of Ericsson India Private Ltd.

Shares owned by subsidiary companies

 

Company

Reg. No.

Domicile

Percentage of ownership

Subsidiary companies

Ericsson Cables Holding AB

556044-9489

Sweden

100

Ericsson France SAS

France

100

Ericsson Telekommunikation GmbH 1)

Germany

100

Ericsson Telecommunicatie B.V.

The Netherlands

100

Ericsson Telekomunikasyon A.S.

Turkey

100

Ericsson Ltd.

United Kingdom

100

Creative Broadcast Services Holdings Ltd.

United Kingdom

100

Ericsson Inc.

United States

100

Ericsson Wifi Inc.

United States

100

Redback Networks Inc.

United States

100

Telcordia Technologies Inc.

United States

83

Ericsson Telecomunicações S.A.

Brazil

100

Ericsson Australia Pty. Ltd.

Australia

100

Ericsson (China) Communications Co. Ltd.

China

100

Nanjing Ericsson Panda Communication Co. Ltd.

China

51

Ericsson Japan K.K.

Japan

100

Ericsson Communication Solutions Pte Ltd.

Singapore

100

 

9

1)

Disclosures Pursuant to Section 264b of the German Commercial Code (Handelsgesetzbuch – HGB) Applying Section 264b HGB, Ericsson Holding GmbH and Ericsson Telekommunikation GmbH, located in Frankfurt am Main/Germany, are exempted from the obligation to prepare, have audited and disclose financial statements and a management report in accordance with the legal requirements being applicable for German corporations.

D. Property, Plant and Equipment

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The business

 

•

CEO comment

 

•

Sustainability and corporate responsibility

 

•

Segments

 

•

Networks

 

•

Sustainability focus

 

•

Digital Services

 

•

Sustainability focus

 

•

Managed Services

 

•

Sustainability focus

 

•

Emerging Business and Other

 

•

Sustainability focus

 

•

Financials

 

•

Board of Directors’ report

 

•

Financial highlights – Capital expenditures

 

•

Sustainability and corporate responsibility

 

•

Notes to the consolidated financial statements

 

•

Note C2 – Property, plant and equipment

 

•

Note C3 – Leasing

 

•

Risk factors

 

•

Regulatory, Compliance and Corporate Governance risks

 

•

Sustainability

 

10

•

Sustainability Management

 

•

Significant topics and risk management

Primary manufacturing and assembly facilities

We continuously adjust our production capacity to meet expected customer demand. During 2018, our overall capacity utilization was around 75%.

The table below summarizes where we have major sites and the total floor space at year-end. All facilities are leased. The majority of the floor space within our production facilities is used for assembly.

 

		2018								2017								2016								2015
		Sites				Thousands of sq meters *				Sites				Thousands of sq meters *				Sites				Thousands of sq meters *				Sites				Thousands of sq meters *
Sweden			1				5				1				5				4				21.3				4				21.3
China			1				13.9				1				10				2				13				2				13
Estonia			1				8				1				6				1				6				1				6
Brazil			1				4.3				1				4.5				1				4.5				1				4.5
Mexico			0				0				0				0				1				0.8				1				0.8
India			0				0				0				0				1				10.8				1				10.8
Total			4				31.2				4				25.5				10				56.4				10				56.4

 

*	Floor space in square meters does not include any warehouses or transportation areas.

ITEM 4A. Unresolved Staff Comments

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The business

 

•

Ericsson in brief

 

•

This is Ericsson

 

•

Business Model

 

•

Strategy and financial targets

 

•

Segments

 

•

Other information

 

11

•

Five-year summary

 

•

Alternative Performance Measures

 

•

Financials

 

•

Board of Directors’ report

 

•

Business in 2018

 

•

Financial highlights

 

•

Business results – Segments

 

•

Business results – Market Areas

 

•

Risk management

 

•

Notes to the consolidated financial statements

 

•

Note A1 – Significant accounting policies

 

•

Note F1 – Financial risk management– Foreign exchange risk

 

•

Risk Factors

 

•

Market, technology and business risks

 

•

Regulatory, Compliance and Corporate Governance risks

Operating results for the years ended December 31, 2016 and 2017

Full-year highlights

Reported sales decreased by –7% to SEK 205.4 (220.3) billion with a decline in all segments. IPR licensing revenues amounted to SEK 8.3 (10.3) billion.

Operating income declined to SEK –34.7 (5.2) billion, mainly due to write-down of assets as well as provisions and customer project adjustments.

Cash flow from operating activities was SEK 9.6 (14.0) billion. Free cash flow amounted to SEK 5.1 (0.3) billion. Net cash at year-end was SEK 34.7 (31.2) billion.

The Board of Directors approved a dividend for 2017 of SEK 1.00 (1.00) per share at the AGM.

Business in 2017

In 2017, net sales decreased by –7% with a decline in all segments as described in more detail below. The sales decrease in Networks was mainly due to lower demand for radio access network equipment. The sales decrease in Digital services and Other was mainly due to lower sales of legacy products. The sales decline in Manages Services was mainly due to a renewed contract in North America in 2016 that was reduced in scope.

IPR licensing revenues were SEK 8.3 (10.3) billion.

In 2017 a focused business strategy was set and a new organizational structure was implemented. In addition, the company initiated a cost saving program with the target to reduce annual cost by SEK 10 billion by mid 2018. Together, this resulted in significant restructuring charges of SEK –8.5 (–7.6) billion.

Due to technology and portfolio shifts, the company has reduced the capitalization of development expenses for product platforms and software releases and the deferral of hardware costs. As a consequence, higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on operating income of SEK –2.9 (3.8) billion.

 

12

Operating income was SEK –34.7 - (5.2) billion.

Ericsson delivered a full-year cash flow from operating activities of SEK 9.6 (14.0) billion. Free cash flow amounted to SEK 5.1 (0.3) billion. Net cash at year end was SEK 34.7 (31.2) billion.

Financial highlights

Net sales

Reported sales decreased by SEK –14.9 billion or –7%, with a SEK –7.8 billion or –6% decrease in Networks, SEK –4.0 billion or –9% decrease in Digital Services, SEK –2.3 billion or –8% in Managed Services and SEK –0.8 billion or –9% in segment Emerging Business and Other. The sales decrease in Networks was mainly due to lower demand for radio access network (RAN) equipment, which was estimated by an external source to decline by –8% for full-year 2017. The sales decrease in segments Digital Services and Emerging Business and Other was mainly due to lower sales of legacy products. The sales decline in Managed Services was mainly due to a renewed contract in North America in 2016 that was reduced in scope.

IPR licensing revenues amounted to SEK 8.3 (10.3) billion. The revenues in 2016 were positively impacted by two signed contracts which included certain one-time items. The baseline for the current IPR licensing contract portfolio is approximately SEK 7 billion on an annual basis.

The sales mix by commodity was: software 21% (22%), hardware 35% (33%) and services 44% (45%).

Gross margin

Gross margin declined to 23.3% (29.6%) due to provisions and customer projects adjustments, write-down of assets and lower IPR licensing revenues at SEK 8.3 (10.3) billion. In addition, restructuring charges included in the gross margin increased to SEK –5.2 (–3.5) billion.

Due to technology and portfolio shifts, the company has reduced the capitalization of development expenses for software releases and the deferral of hardware costs. As a consequence, higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on gross income of SEK –2.6 (–0.5) billion.

Operating expenses

Operating expenses increased to SEK –70.6 (–60.5) billion, mainly as a result of provisions and customer project adjustments and write-down of assets. In addition, operating expenses increased due to higher amortized than capitalized development expenses with a negative effect on operating expenses of SEK –0.3 (4.3) billion. Operating expenses included restructuring charges of SEK –3.3 (–4.1) billion of which the sale of the global ICT center in Montreal generated a restructuring charge of SEK –1.3 billion.

Other operating income and expenses

Other operating income was SEK 1.2 (2.0) billion. In 2017, the power modules business was divested, which resulted in a gain of SEK 0.3 billion. Other operating expenses declined to SEK –13.3 (–1.6) billion negatively impacted by write-down of goodwill.As of 2017, the funding of foreign exchange forecast hedging is managed through foreign exchange loans (USD) instead of foreign exchange derivates. Therefore, revaluation and realization effects are included in financial expenses instead of other operating income and expenses. In 2016, the currency hedge contract effects impacted other operating income and expenses by SEK –0.9 billion.

Restructuring charges and cost savings

Restructuring charges amounted to SEK –8.5 (–7.6) billion. This was lower than the earlier estimate of SEK 9–10 billion. The restructuring charges mainly relate to cost savings. The target is to implement such savings with an annual run rate effect of at least SEK 10 billion by mid-2018. Approximately 30% of the cost savings are targeted at administrative expenses and 70% at cost of sales.

Total restructuring charges for 2018 are estimated to be SEK 5–7 billion.

Consequences of technology and portfolio shifts

Due to technology and portfolio shifts the company is reducing the capitalization of development expenses for product platforms and software releases and the deferral of hardware costs. As a consequence, higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on operating income.

 

13

Impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs

 

SEK billion		2017				2016
Cost of sales			–2.6				–0.5
R&D expenses			–0.3				4.3
Total impact on operating income			–2.9				3.8

Operating income (loss)

Operating income (loss) decreased to SEK –34.7 (5.2) billion, mainly due to write-down of assets of SEK, provisions and customer project adjustments and lower sales.

In addition, higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on operating income of SEK –2.9 (3.8) billion.

Operating margin was –16.9% (2.4%).

Financial net

The financial net improved to SEK –1.2 (–2.3) billion, mainly due to lower negative effects of foreign exchange revaluation. Lower interest rates partly offset the improvement. New borrowings have been signed on more favorable terms and risk reduction, in both currency exchange and interest rates, has been improved in 2017.

The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK 0.5 billion. The SEK has strengthened against the USD between December 31, 2016 (SEK/USD rate 9.06) and December 31, 2017 (SEK/USD rate 8.20).

Taxes

Taxes were SEK 3.5 (–1.9) billion following the negative net income. The effective tax rate was 10%, negatively impacted by non-deductible expenses (mainly goodwill impairment), by revaluation of deferred tax assets due to the change in U.S. corporate income tax rate, and by an allowance related to certain Swedish tax assets.

Net income (loss) and EPS

Net income (loss) decreased to SEK –32.4 (1.0) billion, for the same reasons as for the decrease in operating income. EPS diluted was SEK –9.94 (0.25) and EPS (non-IFRS) was SEK –3.24 (2.39).

Employees

The number of employees on December 31, 2017 was 100,735, a net reduction of more than 10,000 employees in 2017.

Business results – Segments

Networks

Networks represented 64% (64%) of net sales in 2017. The segment delivers products and services that are needed for mobile and fixed communication, several generations of radio networks and transmission networks.

Net sales

Sales as reported decreased by –6% YoY to SEK 132.3 (140.1) billion.. The decrease was mainly due to lower operator investments in mobile broadband, both products and services. In addition, the IPR licensing business declined to SEK 6.8 (8.4) billion.

Gross margin

Gross income decreased to SEK 43.4 (46.2) billion and gross margin decreased to 32.8% (33.2%). The gross margin decrease was mainly due to provisions and customer project adjustments made in the year. Higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs, together amounting to SEK –1.5 (0.2) billion, also had a negative impact on gross margin. This is a consequence of technology and portfolio shifts. Gross margin was positively impacted by higher hardware margins.

 

14

Operating income

Operating income decreased to SEK 10.5 (16.7) billion due to lower sales with lower IPR licensing revenues, provisions and customer project adjustments, write-down of assets made in the year as well as increased operating expenses. The higher operating expenses are partly due to the strategic decision to increase investments in Networks’ R&D. Higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs together amounted to SEK –1.5 (1.0) billion. Restructuring charges were SEK –4.8 (–3.4) billion. Operating margin decreased to 7.9% (11.9%).

Digital Services

Digital Services represented 19% (19%) of net sales in 2017. The segment is providing solutions for operators’ digital transformation journeys across the support systems BSS and OSS, Telecom Core, and IT Cloud domains through a combination of products, technology and expertise in networks, software, cloud, and business processes.

Net sales

Sales as reported decreased by –9% to SEK 38.8 (42.8) billion, due to lower sales of legacy products and related services, primarily in OSS, BSS and Packet Core. IPR and licensing revenues declined to SEK 1.5 (1.8) billion.

Gross margin

Gross income declined to SEK 4.7 (15.6) billion and gross margin decreased to 12.1% (35.0%). The gross margin decrease was mainly due to write-down of assets as well as provisions and customer project adjustments. In addition, there was a negative impact from higher costs in ongoing large transformation projects and from reduced sales of legacy products including related services.

Operating income (loss)

Operating income (loss) declined to –27.3 (–7.1) billion, mainly due to write-down of assets as well as provisions and customer project adjustments. In addition, operating income was negatively impacted by lower gross margin and lower sales.

The full-year negative impact of higher amortized than capitalized development expenses was SEK –1.3 (2.1) billion. This was partly offset by cost reductions, impacting both R&D and selling and administrative expenses. Restructuring charges were SEK –2.5 (–3.2) billion. Operating margin declined to –70.4% (–15.3%).

Managed Services

Managed Services represented 13% (13%) of net sales in 2017. The segment delivers managed services and network optimization to telecom operators. Through these offerings, customers entrust Ericsson to run the operations of their network/IT systems and optimize network performance.

Net sales

Sales as reported decreased by –8% to SEK 26.5 (28.8) billion, mainly a result of the earlier communicated rescoped Managed Services Networks contract in North America. In addition, sales were negatively impacted by completion of 23 contracts, out of the 42 identified to be exited, renegotiated or transformed. Sales in Managed Services IT showed good growth.

Gross margin

Gross income declined to SEK –1.6 (1.2) billion. Gross margin was –5.9% (4.0%), negatively affected by provisions and customer project adjustments as well as an asset write-down made in the year. In addition, gross margin was negatively impacted by lower sales and negative development in contracts identified to be exited, renegotiated or transformed.

Operating income (loss)

Operating income (loss) decreased to SEK –4.1 (–0.3) billion due to lower sales, reduced gross margin and increased operating expenses. Restructuring charges amounted to SEK –0.7 (–0.4 ) billion. Operating margin was –15.4% (–1.7%).

 

15

Emerging Business and Other

Segment Emerging Business and Other represented 4% (4%) of net sales in 2017. The segment consists of four businesses; Media solutions, Red Bee Media, Emerging business and iconectiv.

Net sales

Sales as reported decreased by –9% to SEK 7.9 (8.7) billion, due to lower sales in Media Solutions, where sales of legacy products and related services declined. Red Bee Media sales declined by –8% YoY, due to renegotiations and scope changes of contracts. The decline was partly offset by growth in Emerging-Business and iconectiv.

Gross margin

Gross income declined to SEK 1.4 (2.2) billion and gross margin decreased to 17.5% (25.5%). The gross margin decrease was mainly due to write-down of assets.

Operating income (loss)

Operating income (loss) declined to –13.8 (–4.0) billion, mainly due to write-down of intangible assets and goodwill. Operating income (loss) excluding asset write-downs declined, mainly due to increased investments in Emerging Business, higher amortized than capitalized development expenses of SEK –0.1 (0.7) billion and lower sales. The decline was partly offset by cost reductions in both Media Solutions and Red Bee Media. Restructuring charges amounted to SEK –0.5 (–0.6 ) billion. Operating margin was –175.7% (–46.2%).

Business results – Market areas

South East Asia, Oceania and India

Sales declined due to lower mobile broadband investments in Thailand, Indonesia and India. Growth in Digital Services was driven by growth in Australia, Singapore and Indonesia, mainly related to core network solutions.

North East Asia

Sales in Mainland China declined due to reduced LTE investments. Sales in Taiwan declined following a new network deployment for one operator in 2016. The markets in Korea and Japan stabilized and Ericsson increased its market share in Japan.

North America

North America sales increased with increased networks sales, driven by expasions to cater for increased data traffic. The increase was partly offset by lower managed services sales due to a renegotiated large managed services contract with reduced scope.

Europe and Latin America

Sales declined, mainly due to timing of major projects in Mexico and termination of a large contract in Italy. In addition, capex constraints in mobile broadband in Europe impacted sales negatively, as operators focus investments in fixed infrastructure. The decline was partially offset by network modernizations in Brazil.

Middle East and Africa

Sales declined in a challenging macroeconomic environment with cautious investments in broadband. Digital Services sales declined slightly. Managed Services sales declined due to effects of completed contract reviews.

Other¹⁾

Sales declined due to lower IPR licensing revenues and lower sales in Media Solutions, where sales of legacy products and related services declined. IPR licensing revenues amounted to SEK 8.3 (10.3) billion. IPR licensing revenues in 2016 were positively impacted by two signed contracts which included certain one-time items.

 

16

Sales per market area and segment 2017 and percent change from 2016

 

		Networks								Digital Services								Managed Services								Emerging Business and Other								Total
SEK million		2017				Change				2017				Change				2017				Change				2017				Change				2017				Change
South East Asia, Oceania and India			23.4				–2	%			4.8				9	%			3.2				–4	%			0.0				60	%			31.3				0	%
North East Asia			16.2				–13	%			5.5				–19	%			1.9				23	%			0.0				56	%			23.6				–13	%
North America			40.6				7	%			8.0				+1	%			3.2				–47	%			0.1				34	%			52.0				0	%
Europe and Latin America			30.2				–12	%			12.1				–17	%			14.1				4	%			0.3				155	%			56.8				–9	%
Middle East and Africa			14.1				–13	%			6.8				–3	%			4.0				–5	%			0.0				2200	%%			25.0				–9	%
Other 1)			7.7				–19	%			1.6				–26	%			—				—				7.4				–13	%			16.7				–17	%
Total			132.3				–6	%			38.8				–9	%			26.5				–9	%			7.9				–9	%			205.4				–7	%
Share of total			64	%							19	%							13	%							4	%							100	%

 

1)	Market Area “Other” includes licensing revenues, the majority of segment Emerging Business and Other.

B. Liquidity and Capital Resources

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Financials

 

•

Board of Directors’ report

 

•

Financial highlights – Cash flow

 

•

Financial highlights – Financial position

 

•

Financial highlights – Seasonality

 

•

Financial highlights – Capital expenditures

 

•

Notes to the consolidated financial statements

 

•

Note B9 – Other current liabilities

 

•

Note D2 – Contingent liabilities

 

•

Note F4 – Interest-bearing liabilities

 

•

Note F1 – Financial risk management

 

•

Note H3 – Statement of cash flows

See “Item 8.B. Financial Information – Significant Changes” herein.

Balance sheet and other performance indicators for the years ended December 31, 2016 and 2017

Cash flow

Cash flow from operating activities was SEK 9.6 (14.0) billion. The decline was due to lower income and increased cash outlays related to restructuring charges. The cash flow was supported by a reduction of operating assets. Cash outlays related to restructuring charges were SEK –5.3 (–2.4) billion.

 

17

Cash flow from investing activities was impacted by investments and sale of property, plant and equipment with a net effect of SEK –2.9 (–5.6) billion. In addition, product development decreased by SEK –1.4 (–4.5) billion due to reduced capitalization of product platform development following technology shifts. The cash flow was supported by the sale of Power Modules and the ICT center in Montreal.

Cash flow from financing activities was positive at SEK 5.5 (–11.7) billion due to increased net borrowings of SEK 8.6 billion. Dividends of SEK 3.4 (12.3) billion were paid out.

The increased focus on free cash flow and release of working capital, in combination with low investing activities, resulted in a free cash flow of SEK 5.1 (0.3) billion. The more even distribution of cash flow over the year and the amount of free cash flow mark a clear improvement over 2016. For the first time in five years, the full-year free cash flow exceeded dividend payout.

Financial position

Gross cash increased to SEK 67.7 (57.9) billion and net cash increased to SEK 34.7 (31.2) billion. Post-employments benefits increased by SEK 1.3 billion due to decreased discount rates and normal service cost, offset by returns on pension assets.

The average maturity of long-term borrowings as of December 31, 2017, was 4.4 years, compared with 3.8 years 12 months earlier. Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility will expire in 2022. In 2017, Ericsson concluded the following financing activities to strengthen the balance sheet and extend the average debt maturity profile:

 

•

Issue of one EUR 500 million 4-year bond

 

•

Issue of one EUR 500 million 7-year bond

 

•

Repayment of one EUR 500 million bond at maturity date.

 

•

The company received a USD 200 million payment relating to Francisco Partners’ investments for a 16.7% ownership in Ericsson’s independent subsidiary iconectiv. Due to the structure of the investment, IFRS accounting standards stipulate that the main part of the USD 200 million should be treated as borrowings, non-current.

 

•

Ericsson raised USD 220 million from the Nordic Investment Bank (NIB) and USD 150 million from the Swedish Export Credit Corporation (SEK). The credit agreements mature in 2023 and 2025 respectively. Of these new funds, USD 98 million replaced a credit with NIB that was set to mature in 2019.

In 2017, Standard & Poor’s downgraded Ericsson’s long-term rating from BBB with negative outlook to BB+ with stable outlook.

Moody’s downgraded Ericsson’s long-term rating from Baa3 with negative outlook to Ba2 with negative outlook.

Intangible assets

The amount of intellectual property rights and other intangible assets amounted to SEK 32.0 (51.1) billion, including goodwill of SEK 27.8 (43.4) billion. The goodwill impairment testing was based on the new segments that became effective as per October 1, 2017 and resulted in a write-down of goodwill of SEK –13.0 billion triggered by the implementation of the focused business strategy and new organizational structure.

Research and development, patents and licensing

In 2017, R&D expenses amounted to SEK 37.9 (31.6) billion. The increase is mainly due to higher amortized than capitalized development expenses with a negative effect of SEK –0.3 (4.3) billion and write-down of assets. The number of R&D resources were 23,600. The number of patents continued to increase and amounted to approximately 45,000 by end of 2017.

Research and development, patents and licensing

 

		2017				2016
Expenses (SEK billion)			37.9				31.6
As percent of Net sales			18.48	%			14.4	%
Employees within R&D as of December 31 1)			23,600				24,100
Patents 1)			45,000				42,000
IPR revenues, net (SEK billion)			8.3				10.3

 

1)	The number of employees and patents are approximate.

 

18

Seasonality

The Company’s sales, income cash flow from operations vary and between quarters, and are generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase-patterns of network operators

Off-balance sheet arrangements

There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated material effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.

Capital expenditures

For 2017, capital expenditure was SEK 3.9 (6.1) billion, representing 1.9% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs.

Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals.

As of December 31, 2017, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2016–2017

 

SEK billion		2017				2016
Capital expenditures			3.9				6.1
Of which in Sweden			1.5				2.0
Share of annual sales			1.9	%			2.8	%

C. Research and Development, Patents and Licenses

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The business

 

•

Business Model

 

•

Strategy and financial targets

 

•

Segments

D. Trend Information

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

The Business

 

•

This is Ericsson

 

•

CEO comment

 

•

Strategy and financial targets

See “Item 8.B. Financial Information – Significant Changes” herein.

 

19

E. Off-Balance Sheet Arrangements

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Financials

 

•

Board of Directors’ report

 

•

Financial highlights - Off-balance sheet arrangements

 

•

Notes to the consolidated financial statements

 

•

Note A1 - Significant accounting policies

 

•

Note F1 – Financial Risk Management

 

•

Note D2 – Contingent liabilities

F. Tabular Disclosure of Contractual Obligations

The information set forth under the section “Financials - Notes to the consolidated financial statements - Note D4 – Contractual obligations” of the 2018 Swedish Annual Report is incorporated herein by reference.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Corporate Governance

 

•

Corporate Governance report 2018

 

•

Members of the Board of Directors

 

•

Members of the Executive Team

See “Item 8.B. Financial Information – Significant Changes” herein.

B. Compensation

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Financials

 

•

Board of Directors’ report

 

•

Corporate governance – Remuneration

 

•

Notes to the consolidated financial statements

 

20

•

Note G1 – Post-employment benefits

 

•

Note G2 – Information regarding members of the Board of Directors and Group management

 

•

Note G3 – Share-based compensation

 

•

Corporate Governance

 

•

Corporate Governance report 2018

 

•

Remuneration to Board members

 

•

Remuneration report

See “Item 8.B. Financial Information – Significant Changes” herein.

C. Board Practices

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Financials

 

•

Notes to the consolidated financial statements

 

•

Note G2 – Information regarding members of the Board of Directors and Group management– Comments to the table

 

•

Corporate Governance

 

•

Corporate Governance report 2018

 

•

Board of Directors – Composition of the Board of Directors and diversity

 

•

Committees of the Board of Directors – Audit and Compliance Committee

 

•

Committees of the Board of Directors – Remuneration Committee

 

•

Remuneration report

 

•

The Remuneration Committee

See “Item 8.B. Financial Information – Significant Changes” herein.

D. Employees

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Financials

 

•

Board of Directors’ report

 

21

•

Financial Highlights – Employees

 

•

Notes to the Consolidated financial statements

 

•

Note G4 – Employee Information

 

•

Other information

 

•

Five-year summary – Statistical data, year-end

We consider that our relationship with the labor unions that represent our employees is good.

Number of employees by market area at year-end

 

		2018				2017
South East Asia, Oceania and India			23,959				24,495
North East Asia			12,788				12,456
North America			9,727				10,009
Europe and Latin America 1) 2)			44,621				49,231
Middle East and Africa			4,264				4,544
Total			95,359				100,735
1) Of which in Sweden			12,502				13,864
2) Of which in EU			35,268				39,508

E. Share Ownership

The information set forth under the following headings of the 2018 Swedish Annual Report is incorporated herein by reference:

 

•

Share information

 

•

The Ericsson share—Shareholders

 

•

Corporate Governance

 

•

Corporate Governance report 2018

 

•

Shareholders

 

•

Members of the Board of Directors

 

•

Members of the Executive Team

 

•

Remuneration report

 

•

Total remuneration in 2018

 

•

Financials - Notes to the consolidated financial statements

 

22