Table of Contents

 

 

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, 2019

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

 

Trading symbol(s)

 

Name of Each Exchange on which Registered

American Depositary Shares (each representing one B share)

B Shares *

  ERIC   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 of1934 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 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

TABLE OF CONTENTS

 

         Page  

PART I INTRODUCTION

     1  

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     1  

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     1  

ITEM 3.

 

KEY INFORMATION

     1  
 

A  Selected Financial Data

     1  
 

B   Capitalization and Indebtedness

     2  
 

C   Reasons for the Offer and Use of Proceeds

     2  
 

D  Risk Factors

     2  

ITEM 4.

 

INFORMATION ON THE COMPANY

     2  
 

A  History and Development of the Company

     2  
 

B   Business Overview

     3  
 

C   Organizational Structure

     4  
 

D  Property, Plant and Equipment

     6  

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     6  

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     7  
 

A  Operating Results

     7  
 

B   Liquidity and Capital Resources

     10  
 

C   Research and Development, Patents and Licenses

     11  
 

D  Trend Information

     11  
 

E   Off-Balance Sheet Arrangements

     11  
 

F   Tabular Disclosure of Contractual Obligations

     11  

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     11  
 

A  Directors and Senior Management

     11  
 

B   Compensation

     11  
 

C   Board Practices

     12  
 

D  Employees

     12  
 

E   Share Ownership

     12  

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     12  
 

A  Major Shareholders

     12  
 

B   Related Party Transactions

     13  
 

C   Interests of Experts and Counsel

     13  

ITEM 8.

 

FINANCIAL INFORMATION

     13  
 

A  Consolidated Statements and Other Financial Information

     13  
 

B   Significant Changes

     13  

ITEM 9.

 

THE OFFER AND LISTING

     13  
 

A  Offer and Listing Details

     13  
 

B   Plan of Distribution

     13  
 

C   Markets

     13  
 

D  Selling Shareholders

     13  
 

E   Dilution

     13  
 

F   Expenses of the Issue

     14  

ITEM 10.

 

ADDITIONAL INFORMATION

     14  
 

A  Share Capital

     14  
 

B   Memorandum and Articles of Association

     14  
 

C   Material Contracts

     14  
 

D  Exchange Controls

     14  
 

E   Taxation

     14  
 

F   Dividends and Paying Agents

     16  
 

G  Statement by Experts

     16  
 

H  Documents on Display

     16  
 

I   Subsidiary Information

     16  

 

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ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     16  

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     18  
    A  Debt Securities    18  
    B   Warrants and Rights    18  
    C   Other Securities    18  
    D  American Depositary Shares    18  

PART II

       19  

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     19  

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     19  

ITEM 15.

 

CONTROLS AND PROCEDURES

     19  
    A  Disclosure Controls and Procedures    19  
    B   Management’s Annual Report on Internal Control Over Financial Reporting    19  
    C   Attestation Report of the Registered Public Accounting Firm    19  
    D  Changes in Internal Control Over Financial Reporting    19  

ITEM 16.

 

[RESERVED]

     19  

ITEM 16A

 

AUDIT COMMITTEE FINANCIAL EXPERT

     19  

ITEM 16B

 

CODE OF ETHICS

     19  

ITEM 16C

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     20  

ITEM 16D

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     20  

ITEM 16E

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     20  

ITEM 16F

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     20  

ITEM 16G

 

CORPORATE GOVERNANCE

     20  

ITEM 16H

 

MINE SAFETY DISCLOSURE

     21  

PART III

       21  

ITEM 17.

 

FINANCIAL STATEMENTS

     21  

ITEM 18.

 

FINANCIAL STATEMENTS

     21  

ITEM 19.

 

EXHIBITS

     21  

 

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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, 2019 (the “2019 Form 20-F”). Reference is made to the English version of our Swedish Annual Report for 2019, with certain adjustments made to comply with U.S. requirements, which is attached hereto as Exhibit 15.1 (the “2019 Swedish Annual Report”). Only (i) the information included in this 2019 Form 20-F, (ii) the information in the 2019 Swedish Annual Report that is incorporated by reference in this 2019 Form 20-F, and (iii) the exhibits to the 2019 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 2019 Form 20-F. Any information in the 2019 Swedish Annual Report that is not referenced in the 2019 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 2019 Form 20-F are defined in the subsections entitled “Glossary” and “Financial Terminology” of the 2019 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 http://www.ericsson.com/ and other websites that appear in this 2019 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 http://www.ericsson.com/.

Forward-Looking Statements

This 2019 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

 

   

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.

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 Annual Report, 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, 2019, 2018, 2017, 2016, and 2015 , 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 2019 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 2019 Swedish Annual Report, which are incorporated herein by reference:

 

   

Other Information

 

   

Alternative Performance Measures

 

   

Financial Terminology

 

1


Table of Contents
     2019     Change     2018     2017     2016     2015  

Income statement and cash flow items, SEK million

            

Net sales 1)

     227,216       8     210,838       205,378       220,316       246,920  

Operating expenses 1)

     –64,215       –4     -66,848       -70,563       -60,501       -64,129  

Operating income (loss) 1)

     10,564       —         1,242       -34,743       5,187       21,805  

Net income (loss) 1)

     1,840       —         -6,276       -32,433       1,012       13,673  

Restructuring charges

     798       —         8,015       8,501       7,567       5,040  

Cash flow from operating activities

     16,873       81     9,342       9,601       14,010       20,597  

Year-end position, SEK million

            

Total assets 1)

     276,383       3     268,761       259,882       284,150       284,363  

Property, plant and equipment

     13,850       8     12,849       12,857       16,734       15,901  

Stockholders’ equity 1)

     82,559       -5     86,978       96,935       134,582       146,525  

Non-controlling interest

     –681       —         792       636       675       841  

Per share indicators

            

Earnings (loss) per share, basic, SEK 1)

     0.67       —         -1.98       -9.94       0.26       4.17  

Earnings (loss) per share, diluted, SEK 1)

     0.67       —         -1.98       -9.94       0.25       4.13  

Dividends per share, SEK 2)

     1.50 2)      50     1       1       1       3.7  

Dividends per share, USD 2)

     0.16 2)      44     0.11       0.12       0.11       0.39  

Number of shares outstanding (in millions)

            

end of period, basic

     3,314       1     3,297       3,284       3,269       3,256  

average, basic

     3,306       0     3,291       3,277       3,263       3,249  

average, diluted

     3,320       0     3,318       3,317       3,303       3,282  

Other information, SEK million

            

Additions to property, plant and equipment

     5,118       29     3,975       3,877       6,129       8,338  

Depreciations and write-downs/impairments of property, plant and equipment

     3,947       3     3,843       6,314       4,569       4,689  

Acquisitions/capitalization/divestments of intangible assets

     –13,692       —         2,315       1,759       5,260       5,228  

Amortization and write-downs/impairments of intangible assets

     2,593       –42     4,475       21,578       4,550       5,538  

Research and development expenses 1)

     38,815       0     38,909       37,887       31,631       34,844  

as percentage of net sales

     17.1     —         18.5     18.4     14.4     14.1

Inventory turnover days

     77       10     70       66       71       64  

Alternative Performance Measures (APMs) 3)

            

Gross margin 1)

     37.3     —         32.3     23.3     29.6     34.8

Operating margin 1)

     4.6     —         0.6     -16.9     2.4     8.8

EBITA margin

     5.1     —         1.4     -8.8     3.6     10.5

Cash conversion 1)

     120     —         601     -73     204     85

Free cash flow

     6,128         2,968       5,109       254       7,515  

Free cash flow before M&A

     7,633       79     4,253       4,833       876       9,715  

Capital employed, SEK million 1)

     165,273       10     149,615       155,625       185,666       195,150  

Return on equity 1)

     2.6     —         -7.1     -28.1     0.6     9.3

Return on capital employed 1)

     6.7     —         0.8     -20.4     2.8     11.3

Equity ratio 1)

     29.6     —         32.7     37.5     47.6     51.8

Capital turnover 1)

     1.4       —         1.4       1.2       1.2       1.3  

Working capital, SEK million 1)

     48,821       -7     52,508       56,439       82,327       104,811  

Gross cash, SEK million

     72,192       5     68,996       67,702       57,877       66,270  

Net cash, SEK million

     34,496       -4     35,871       34,657       31,191       41,150  

Statistical data, year-end

            

Number of employees

     99,417       4     95,359       100,735       111,464       116,281  

of which in Sweden

     12,730       2     12,502       13,864       15,303       17,041  

Export sales from Sweden, SEK million 1)

     120,822       10     109,969       87,463       105,552       117,486  

 

1) 

2017 and 2016 are restated due to implementation of IFRS 15 “Revenue from Contracts with Customers.” Year 2015 has not been restated.

2) 

For 2019, as proposed by the Board of Directors.

3) 

A reconciliation to the most directly reconcilable line items in the financial statements for 2019 and five comparison years is available in the 2019 Swedish Annual Report.

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 2019 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 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Ericsson in Brief

 

   

The Business

 

   

Financials

 

   

Board of Directors’ Report

 

   

Business in 2019

 

   

Financial Highlights - Capital expenditures

 

2


Table of Contents

For capital expenditures we usually use available cash from operations.

 

   

Notes to the Consolidated financial statements

 

   

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.

In addition, 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.

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. Shares owned directly by the Parent Company ”. 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 information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Ericsson in Brief

 

   

The Business

 

   

Financials

 

   

Board of Directors’ Report

 

   

Business in 2019

 

   

Financial Highlights – Capital expenditures

For capital expenditures we usually use available cash from operations.

 

   

Notes to the Consolidated financial statements

 

   

Note E2 – Business combinations

 

   

Note H6 – Events after the reporting period

B. Business Overview

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Ericsson in brief

 

   

The Business

 

   

Business Model

 

   

Strategy and financial targets

 

   

Innovation – Global R&D and supply chain

 

   

Segments

 

   

Financials

 

   

Board of Directors’ report

 

   

Financial highlights – Research and development, patents and licensing

 

   

Financial highlights – Seasonality

 

3


Table of Contents
   

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

 

   

Risks related to business activities and industry

 

   

Risks related to Ericsson’s financial situation

 

   

Legal and regulatory risk

 

   

Internal control risk

 

   

Environmental, social and governance risk

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Regulation and compliance

 

   

Sustainability

 

   

Sustainability Management

 

   

Significant topics, risks and opportunities

 

   

Responsible business – Responsible management of suppliers

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 Inspectorate of Strategic Products 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 2019, Ericsson sold communications infrastructure related products and services in Iran to the following telecommunications companies operating in the country: Mobile Communication Company of Iran (“MCCI”), and MTN Irancell. During 2019, Ericsson’s gross revenue (reported as net sales) related to sales to MCCI and MTN Irancell in Iran was approximately SEK 908 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, after internal cost allocation approximately SEK 95 million during 2019. 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 extensive U.S. sanctions impact the overall possibility of doing business in Iran. Ericsson carefully evaluates the implications of any sanctions and continues to monitor developments in this area as it relates to the ability to continue delivering products and services to customers. Ericsson has reduced its business and organization in Iran but still continues to fulfill engagements with the two main mobile carriers, MCCI and MTN Irancell and to provide them with what is critical for their networks to function. As Ericsson provides these services, it may 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 reduced 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 2019.

During 2019, existing bank guarantees issued by Maskan Bank, Parsian Bank, Post Bank of Iran and Tejarat Bank (local banks in Iran) to secure Iranian customer payment obligations to Ericsson were renewed. 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.

C. Organizational Structure

The following list shows certain shareholdings owned directly and indirectly by our parent company as of December 31, 2019. 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.

 

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Table of Contents

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  

Ericsson Software Technology Holding AB

     559094-8963        Sweden        100       —          6  

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)

           —         —          1,459  

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 Antenna Technology Germany GmbH

        Germany        100       —          21  

Ericsson Germany GmbH

        Germany        100       1        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)

           —         —          664  

Ericsson Holding II Inc.

        United States        100       2,897        25,907  

Ericsson Smart Factory Inc.

        United States        100       —          191  

Companía Ericsson S.A.C.I.

        Argentina        95 1)      41        99  

Ericsson Canada Inc.

        Canada        100       8        51  

Belair Networks

        Canada        100       2        170  

Ericsson Telecom S.A. de C.V.

        Mexico        100     939        1,050  

Other (United States, Latin America)

           —         —          214  

Teleric Pty Ltd.

        Australia        100       20        100  

Ericsson Ltd.

        China        100       2        2  

Ericsson (China) Company Ltd.

        China        100       65        475  

P.T. Ericsson Indonesia

        Indonesia        95       3,279        10  

Ericsson India Global Services PVT. Ltd

        India        100       291        51  

Ericsson Kenya Limited

        Kenya        100       —          88  

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)

           —         —          157  

Total

                71,172  

Joint ventures and associated companies

             

Concealfab Co

        USA        29       7        64  

Leone Media Inc.

        USA        49       —          790  

Rockstar Consortium Group

        Canada        21       1        —    

Ericsson Nikola Tesla d.d.

        Croatia        49       65        330  

Total

                1,184  

 

1)

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

2)

Through subsidiary holdings, total holdings amount to 74% of Ericsson (Thailand) Ltd.

 

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Table of Contents

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  

 

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

Primary manufacturing and assembly facilities

We continuously adjust our production capacity to meet expected customer demand. During 2019, our overall capacity utilization** was around 60%.

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.

 

     2019      2018      2017      2016  
     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        1        5        4        21.3  

China

     1        13.9        1        13.9        1        10        2        13  

Estonia

     1        9        1        8        1        6        1        6  

Brazil

     1        6.7        1        4.3        1        4.5        1        4.5  

Mexico

     0        0        0        0        0        0        1        0.8  

India

     0        0        0        0        0        0        1        10.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4        34.6        4        31.2        4        25.5        10        56.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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

**

Test capacity utilization.

In June 2019, the Company announced plans to build its first fully-automated smart factory in the US. The 300,000 square-foot smart factory will begin commercial operations in March 2020, in Lewisville, TX. The state-of-the-art factory will produce 5G and Advanced Antenna System radios to boost network capacity and coverage to meet the demand for rapid 5G deployments in North America. The company’s direct investment in the factory is approximately USD $100 million.

In September 2019, the Company announced that its 269,000 square-foot factory in Tallinn, Estonia, was nearing completion of its two-year digitalization transformation, in the amount of SEK 500 million, to become a 5G manufacturing facility utilizing Ericsson’s own 5G technology. The factory will be fully operational during the first quarter of 2020.

In September 2019, the company announced it concluded the 18-month upgrade, in the amount of SEK 500 million, to modernize the production process (of 5G and 4G radio technology products) in its smart factory in Nanjing, China, in preparation for the introduction and rapid deployments of 5G in China.

The investments are financed by cash flow from operations or by the financing activities described in our Swedish Annual Report 2019.

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials

 

   

Board of Directors’ report

 

   

Financial highlights – Capital expenditures

 

   

Notes to the consolidated financial statements

 

   

Note C2 – Property, plant and equipment

 

   

Note C3 – Leases

 

   

Risk factors

 

   

Legal and regulatory risk

 

   

Environmental, social and governance risk

ITEM 4A. Unresolved Staff Comments

None.

 

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Table of Contents

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Ericsson in brief

 

   

The business

 

   

Business Model

 

   

Strategy and financial targets

 

   

Segments

 

   

Other information

 

   

Five-year summary

 

   

Alternative Performance Measures

 

   

Financials

 

   

Board of Directors’ report

 

   

Business in 2019

 

   

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

Operating results for the years ended December 31, 2017 and 2018

Financial highlights

Net sales

Sales increased by SEK 5.5 billion or 3% to SEK 210.8 (205.4) billion. Networks sales increased by SEK 6.3 billion (5%), Digital Services sales decreased by SEK –0.7 billion (–2%), Managed Services sales decreased by SEK –0.7 billion (–3%) and Emerging Business and Other sales increased by SEK 0.5 billion (7%).

The sales increase in Networks was mainly driven by higher demand for radio access network equipment. Networks sales growth adjusted for comparable units and currency was 3%.

The sales decrease in segment Digital Services was due to lower sales in legacy products. The sales decline in Managed Services was mainly a result of exit of low-performing and non-strategic contracts. The sales increase in segment Emerging Business and Other was driven by growth in iconectiv business due to the multi-year number portability contract in the United States.

In the geographical dimension, sales grew in North America and in Europe and Latin America.

Sales adjusted for comparable units and currency increased by 1%. The sales mix by commodity was: software 21% (21%), hardware 37% (35%) and services 42% (44%).

Gross margin

Gross margin increased to 32.3% (23.3%) with improved margins in hardware and services mainly driven by cost reductions, ramp-up of Ericsson Radio System product platform and good progress in the review of low-performing managed services contracts. A reduced share of services sales had a positive impact on gross margin. Restructuring charges included in the gross margin increased to SEK –5.9 (–5.2) billion. Costs of SEK –5.9 billion, of which SEK –3.1 billion were restructuring charges, impacted gross margin in Digital Services.

Due to technology and portfolio shifts, the company has since 2017 reduced the capitalization of development expenses and the deferral of hardware costs, which had a net impact on gross income of SEK –0.9 (–2.6) billion. Write-down of assets, as well as provisions and adjustments related to certain customer projects had a significant negative impact on gross margin in 2017.

Operating expenses

Operating expenses decreased to SEK –66.8 (–70.6) billion with SG&A expenses of SEK –27.5 (–29.0) billion, R&D expenses of SEK –38.9 (–37.9) billion and impairment losses on trade receivables of SEK –0.4 (–3.6) billion. Restructuring charges included in operating expenses were SEK –2.1 (–3.3) billion.

R&D expenses increased due to increased investments in R&D for Networks. The increase was partly offset by R&D reductions in Digital Services. Higher amortized than capitalized development expenses had a negative effect on R&D expenses of SEK –1.7 (–0.3) billion.

SG&A expenses were reduced as a result of cost reduction activities. The reduction was more than offset by higher provisions for variable compensation, increased costs related to revaluation of customer financing and increased costs for 5G trials.

Other operating income and expenses

Other operating income and expenses was SEK –0.2 (–12.1) billion. In 2017, write-down of intangible assets had a significant negative impact on other operating expenses.

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 of SEK –2.6 (–2.9) billion. The amounts related to capitalized software releases were fully amortized in 2017.

Restructuring charges

Restructuring charges amounted to SEK –8.0 (–8.5) billion, which was higher than the earlier estimate of SEK –5 to –7 billion. The restructuring charges in 2018 mainly relate to the cost-reduction program announced in 2017 and costs related to revised BSS strategy. Total restructuring charges for 2019 are estimated to be SEK –3 to –5 billion.

 

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Table of Contents

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

 

SEK billion

   2018      2017  

Cost of sales

     –0.9        –2.6  

R&D expenses

     –1.7        –0.3  

Total impact on operating income

     –2.6        –2.9  

Operating income and margin

Operating income improved to SEK 1.2 (–34.7) billion. Higher gross margin and sales and lower operating expenses had a positive impact. Write-down of assets, as well as provisions and adjustments related to certain customer projects had a significant negative impact on operating income in 2017. Operating margin was 0.6% (–16.9%). Operating margin excluding restructuring charges of SEK –8.0 (–8.5) billion was 4.4% (–12.8%).

Financial net

The financial net decreased to SEK –2.7 (–1.2) billion, mainly due to increased negative effects of foreign exchange revaluation, negative currency hedge effects and reduced interest rates. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK –0.5 (0.5) billion. The SEK weakened against the USD between December 31, 2017 (SEK/USD rate 8.20) and December 31, 2018 (SEK/USD rate 8.94).

Taxes

Taxes were SEK –4.8 (3.5) billion, negatively impacted by impairment of withholding tax assets in Sweden mainly as a result of pro-visions related to revised BSS strategy. In addition, non-deductible expenses, with-holding tax expenses outside of Sweden and revaluation of tax assets due to a change in Swedish corporate tax rate impacted tax costs negatively.

Net income and EPS

Net income improved to SEK –6.3 (–32.4) billion driven by higher operating income partly offset by a negative financial net and increased tax costs. EPS diluted was SEK –1.98 (–9.94) and EPS (non-IFRS) was SEK 0.27 (–3.24).

Employees

The number of employees on December 31, 2018 was 95,359, a reduction of 5,376 employees compared with Dec 31, 2017.

The employee reduction was mainly in services as a consequence of the cost-reduction program. The number of R&D employees has increased by more than 1,100 in 2018.

Business results – Segments

Networks

Networks represented 66% (64%) of net sales in 2018. 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 increased by 5% to SEK 138.6 (132.3) billion. Sales adjusted for comparable units and currency increased by 3%. The sales increase was due to sales growth in North America and in Europe and Latin America, driven by telecom operator investments in 5G readiness and LTE networks. The Networks share of IPR licensing revenues was SEK 6.5 (6.8) billion.

Gross margin

Gross income increased to SEK 55.2 (43.4) billion and gross margin increased to 39.8% (32.8%). Gross margin increased across all areas, mainly due to improved margins in hardware and a higher share of hardware sales at the expense of services sales. The impact on gross margin of higher recognition than deferral of hardware costs was SEK –0.7 (–1.5) billion. In 2017 the gross margin was negatively impacted by provisions and customer project adjustments.

Operating income

Operating income increased to SEK 19.4 (10.5) billion due to lower restructuring charges as well as higher sales and gross margin. The increase was partly offset by increased operating expenses. Operating expenses increased mainly due to higher investments in R&D to strengthened tech-nology leadership. Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK –0.3 (–1.5) billion. Restructuring charges were SEK –1.8 (–4.8) billion. Operating margin increased to 14.0% (7.9%).

Digital Services

Digital Services represented 18% (19%) of net sales in 2018. The segment provides solutions consisting primarily of software and services in the areas of Digital Business Support Systems (BSS), Operational Support Systems (OSS), Cloud Communication, Cloud Core, and Cloud Infrastructure.

Net sales

Sales decreased by –2%. Sales in BSS declined by –11% while sales in OSS and Cloud Core grew, driven by demand for the 5G-ready portfolio. Sales adjusted for comparable units and currency decreased by –4%.

Gross margin

Gross margin increased to 21.8% (12.1%) as a result of cont-inuous work on service delivery efficiency. Gross margin was negatively impacted by costs related to revised BSS strategy, while cost reductions had a significant positive impact. Gross margin was negatively impacted by significant write-down of assets as well as provisions and customer project adjustments in 2017.

Operating income (loss)

Operating income improved to SEK –13.9 (–27.3) billion. Full-year operating income was SEK –5.5 billion, excluding restructuring charges of SEK –5.4 billion and excluding SEK –3.0 billion for other costs related to revised BSS strategy. This is a significant improvement compared with 2017, with profit improvements across all key portfolio areas. Most of the losses in 2018 are in BSS, and additional strategic actions to materially reduce the losses already in 2019 were announced in January 2019.

Write-down of assets as well as provisions and customer project adjustments had a significant negative impact on income in 2017. Cost reductions had a significant impact on gross margin and operating expenses compared with 2017.

 

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Table of Contents

Managed Services

Managed Services represented 12% (13%) of net sales in 2018. 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 decreased by –3%. Sales adjusted for comparable units and currency decreased by –5%, as a result of contract exits, partly offset by sales growth in Managed Services IT.

Gross margin

Gross margin increased to 11.2% (–5.9%) mainly as a result of customer contract reviews and efficiency measures.

Write-down of assets as well as provisions and customer project adjustments had a significant negative impact on gross margin in 2017.

Operating income

Operating income improved to SEK 1.1 (–4.1) billion due to higher gross margin.

Restructuring charges amounted to SEK –0.3 (–0.7) billion.

Emerging Business and Other

Segment Emerging Business and Other represented 4% (4%) of net sales in 2018. The segment consists of four businesses; Media Solutions, Red Bee Media, Emerging Business and iconectiv.

Net sales

Sales increased by 7%. Sales adjusted for comparable units and currency increased by 3%, driven by growth in the iconectiv business through a multi-year number portability contract in the United States. Sales in Emerging Business grew by more than 25%. Media Solutions sales declined by –14% due to lower sales in the legacy portfolio. Red Bee Media sales declined by –4% due to renegotiations and changes in scope of contracts.

Gross margin

Gross margin increased to 21.9% (17.5%). Write-down of assets had a significant negative impact on gross margin in 2017.

Operating income (loss)

Operating income (loss) improved to SEK –5.4 (–13.8) billion with significant improvements in Media Solutions and Red Bee Media business. Restructuring charges amounted to SEK –0.6 (–0.5) billion.

Cost reductions had a positive impact on Media Solutions operating income, partly offset by reduced sales and costs of SEK –0.3 billion related to the transaction with One Equity Partners. Write-down of assets had a significant negative impact on Media Solutions income in 2017.

Operational efficiencies and cost reductions had a positive impact on Red Bee Media income, while reduced sales impacted negatively. Write-down of assets had a significant negative impact on Red Bee Media income in 2017.

Losses in Emerging Business were negatively impacted by costs of SEK –0.4 billion, of which SEK –0.1 billion in restructuring charges, for resetting the Edge Gravity business and increased investments in new areas such as IoT and Emodo. The growth in iconectiv business had a positive impact on operating income.

Business results – Market areas

South East Asia, Oceania and India

Sales declined, mainly due to timing of major projects in Vietnam and India. Managed services sales grew slightly mainly due to a new contract, while sales in Digital Services remained flat.

North East Asia

Sales declined due to reduced operator investments in LTE whilst the operators plan for 5G.

North America

Networks sales increased, primarily driven by investments in 5G readiness across all major customers. Digital Services sales increased as operators digitalize operations and improve customer experience to prepare for 5G. Managed Services sales grew, driven by higher variable sales in large customer contracts.

Europe and Latin America

The strong growth in Networks sales in Latin America and parts of Europe was partly offset by lower sales in Managed Services due to exit of non-strategic contracts.

Middle East and Africa

Sales declined slightly. Networks sales declined due to monetary restrictions in certain markets, Digital Services declined due to timing of project milestones while Managed Services sales were flat.

Other1)

Sales declined slightly. IPR licensing revenues amounted to SEK 8.0 (8.3) billion.

Sales per market area and segment 2018 and percent change from 2017

 

     Networks     Digital Services     Managed
Services
    Emerging
Business
and Other
    Total  

SEK million

   2018     Change     2018     Change     2018     Change     2018     Change     2018     Change  

South East Asia, Oceania and India

     21,337       –9     4,824       1     3,388       5     40       400     29,589       –6

North East Asia

     15,915       –2     4,849       –11     1,465       –22     80       471     22,309       –5

North America

     46,452       14     8,358       4     3,680       15     96       –16     58,586       13

Europe and Latin America

     33,887       15     12,172       1     13,191       –6     313       12     59,563       7

Middle East and Africa 2)

     13,826       –7     6,451       –7     4,046       –1     15       –67     24,338       –6

Other 1)

     7,153       –7     1,435.0       –8     —         —         7,865       6     16,453       –1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     138,570       5     38,089       –2     25,770       –3     8,409       7     210,838       3

Share of total

     66       18       12       4       100  

 

1)

Market Area “Other” includes primarily licensing revenues and the major part of segment Emerging Business and Other.

2)

2018 and 2017 are restated due to a change in 2019, where sales reported in Morocco are now reported in Market Area Middle East and Africa (previously Europe and Latin America).

 

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B. Liquidity and Capital Resources

The information set forth under the following headings of the 2019 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 F1 – Financial risk management

 

   

Note F4 – Interest-bearing liabilities

 

   

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, 2017 and 2018

Cash flow

Cash flow from operating activities reached SEK 9.3 (9.6) billion. Working capital efficiency has improved as a result of a strong focus on cash flow. The business growth in 2018 and high delivery and invoicing volumes towards the end of the year led to some build-up of trade receivables, to be collected in the coming periods. Inventory and trade payables also increased to meet customer demand in a growing market. The combined working capital KPI (sales outstanding days plus inventory days less payable days) improved to 89 (102) days. The ambition is to maintain working capital efficiency and thereby effectively convert income to cash. Cash outlays related to provisions were SEK –6.9 (–8.2) billion, of which cash outlays related to restructuring charges were SEK –4.1 (–5.3) billion.

Cash flow from investing activities was SEK –4.1 (–16.1) billion, impacted by investments and sale of property, plant and equipment with a net effect of SEK –3.6 (–2.9) billion and investments in M&A of SEK –1.3 (0.3) billion. In addition, product development decreased by SEK –0.9 (–1.4) billion due to reduced capitalization of product platform development following technology shifts.

Cash flow from financing activities was SEK –4.1 (5.5) billion. Dividends of SEK 3.4 (3.4) billion were paid out.

The focus on free cash flow and release of working capital, in combination with limited investing activities, resulted in free cash flow of SEK 3.0 (5.1) billion and in free cash flow excluding M&A of SEK 4.3 (4.8) billion.

Financial position

Gross cash increased to SEK 69.0 (67.7) billion and net cash increased to SEK 35.9 (34.7) billion.

Liability for post-employments benefits increased by SEK 3.7 billion mainly due to decreased discount rates and normal service costs. The Swedish defined benefit obligation (DBO) has been calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 9.5 billion lower as of Dec 31, 2018.

The average maturity of long-term borrowings as of Dec 31, 2018, was 3.4 years, a decrease from 4.4 years 12 months earlier.

Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility will expire in 2022.

In 2018, Ericsson signed a credit facility agreement of EUR 250 million with the European Investment Bank (EIB). The credit facility is undrawn and will mature five years after disbursement.

Moody’s changed their outlook on Ericsson’s long-term rating from negative to stable. The rating of Ba2 was unchanged.

The capital efficiency improved during the year and the capital turnover reached 1.4 (1.2) times.

Research and development, -patents and licensing

In 2018, R&D expenses amounted to SEK 38.9 (37.9) billion. The increase is mainly due to investments in Networks R&D to increase the competitiveness and profitability of the radio product portfolio. The number of R&D resources were 24,800. The number of patents continued to increase and amounted to approximately 49,000 by end of 2018.

Research and development, patents and licensing

 

     2018     2017  

Expenses (SEK billion)

     38.9       37.9  

As percent of Net sales

     18.5     18.4

Employees within R&D as of December 31 1)

     24,800       23,600  

Patents 1)

     49,000       45,000  

IPR revenues, net (SEK billion)

     8.0       8.3  

 

1)

The number of employees and patents are approximate.

Seasonality

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

Most recent two-year average seasonality

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Sequential change, sales

     -26     10     3     18

Share of annual sales

     22     24     25     29

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 2018, capital expenditure was SEK 4.0 (3.9) 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.

 

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Ericsson believes that the Company’s property, plant and equipment and the fac-ilities 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, 2018, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2016–2018

 

SEK billion

   2018     2017     2016  

Capital expenditures

     4.0       3.9       6.1  

Of which in Sweden

     1.3       1.5       2.0  

Share of annual sales 1)

     1.9     1.9     2.8

 

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.”

C. Research and Development, Patents and Licenses

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Highlights 2019 – Strategy execution

 

   

The business

 

   

CEO Comment – Technology Leadership

 

   

Strategy and financial targets

 

   

Innovation – Global R&D and supply chain

 

   

Segments

D. Trend Information

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Highlights 2019

 

   

The business

 

   

This is Ericsson

 

   

CEO Comment

 

   

Strategy and financial targets

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

E. Off-Balance Sheet Arrangements

The information set forth under the following headings of the 2019 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

 

   

Financials

 

   

Notes to the consolidated financial statements

 

   

Note D4 – Contractual obligations

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

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 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials

 

   

Board of Directors’ report

 

   

Corporate governance – Remuneration

 

   

Notes to the consolidated financial statements

 

   

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

 

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Corporate Governance report

 

   

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 2019 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

 

   

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 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials

 

   

Board of Directors’ report

 

   

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

 

     2019      2018      2017  

South East Asia, Oceania and India

     24,559        23,959        24,495  

North East Asia

     13,783        12,788        12,456  

North America

     9,643        9,727        10,009  

Europe and Latin America 1) 2)

     47,135        44,621        49,231  

Middle East and Africa

     4,297        4,264        4,544  
  

 

 

    

 

 

    

 

 

 

Total

     99,417        95,359        100,735  
  

 

 

    

 

 

    

 

 

 

1) Of which in Sweden

     12,730        12,502        13,864  

2) Of which in EU

     37,989        35,268        39,508  

E. Share Ownership

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Share information

 

   

The Ericsson share—Shareholders

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Shareholders

 

   

Members of the Board of Directors

 

   

Members of the Executive Team

 

   

Remuneration report

 

   

Total remuneration in 2019

 

   

Financials - Notes to the consolidated financial statements

 

   

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

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Shareholders

 

   

Share information

 

   

The Ericsson share

 

   

Shareholders

 

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B. Related Party Transactions

The information set forth under the–following heading of the 2019 Swedish Annual Report is incorporated herein by reference.

 

   

Financials - Board of Directors’ report

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note H4 – Related party transactions

C. Interests of Experts and Counsel.

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information.

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials

 

   

Board of Directors’ report

 

   

Legal proceedings

 

   

Parent Company – Proposed disposition of earnings

 

   

Consolidated financial statements

 

   

Notes to the consolidated financial statements

 

   

Report of independent registered public accounting firm

 

   

Other information

 

   

Five-year summary – Statistical data, year-end

See “Item 8.B. Financial Information – Significant Changes”, “Item 10.B. Memorandum and Articles of Association – Dividends” and “Item 17. Financial Statements”, herein.

Refer also to item 8.B herein

B. Significant Changes

US Securities class action

On January 11, 2020, the United States District Court for the Southern District of New York granted Ericsson’s motion to dismiss the putative class action filed in 2018 against Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives. At the same time the court granted plaintiffs leave to file a third amended complaint within thirty days. The plaintiffs did not file an amended complaint by the court-ordered deadline.

Sol IP Settlement

Ericsson has after the year-end 2019 resolved the previously communicated litigation with Sol IP, concerning alleged infringement of 20 patents declared to the LTE standard. The patents originated from Electronics and Telecommunications Research Institute (ETRI), a Korean government-funded research institution. The settlement resolves the litigation with Sol IP and involves a patent license agreement between Ericsson, Sol IP and ETRI. The settlement will have a negative impact for 2020 of approximately USD 13 million on operating income within Segment Networks of which USD 10 million will be recorded in Q1 2020 and the balance spread equally over the remaining quarters. This quarterly license fee amortization will continue in subsequent periods. The exact terms of the agreement are confidential.

Ericsson to acquire Genaker to strengthen Mission Critical Push-to-talk offering

On March 12, 2020, Ericsson announced that it had signed an agreement to acquire 100 percent of the shares in Genaker, a provider of Mission Critical Push-to-talk (MC-PTT) solutions. The acquisition strengthens Ericsson’s MC-PTT offering as the mission critical communications and private network market is going through a significant technology shift. Genaker, located in Barcelona, Spain, was founded in 2004 and employs around 30 people, all of whom will transfer to Ericsson as part of the acquisition.

Pandemics, such as for example the one caused by the Coronavirus, COVID-19, could severely impact our local and global operations

Pandemics, such as for example the one caused by the Coronavirus, could severely impact our local and global operations related to e.g. Service Delivery, Research & Development, Sales and Supply, as well as our customers and suppliers, with significant financial and other consequences. As an example, the Coronavirus has caused disturbance to our operations in China where Ericsson has offices and manufacturing sites. It is starting to cause similar disruptions to Ericsson’s operations and those of its customers and suppliers in other countries and to negatively impact the global economy. The effects of those disruptions may have material adverse effects on our business and financial position.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

The information set forth in Exhibit 2.[3], “Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.” is incorporated herein by reference.

B. Plan of Distribution

Not applicable.

C. Markets

The information set forth in Exhibit 2.[3], “Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.” is incorporated herein by reference.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

 

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F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The information set forth in Exhibit 2.[3], “Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.” is incorporated herein by reference.

C. Material Contracts

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials - Board of Directors’ report

 

   

Material contracts

D. Exchange Controls

There is no Swedish legislation affecting the import or export of capital or the remittance of dividends, interest or other payments to non-resident holders of our securities, except that, subject to the provisions in any tax treaty, dividends are subject to withholding tax.

E. Taxation

General

The taxation discussion set forth below does not purport to be a complete analysis or listing of all potential tax effects relevant to the acquisition, ownership or disposition of Class B shares or ADSs. The statements of United States and Swedish tax laws set forth below are based on the laws in force as of the date of this report and may be subject to any changes in United States or Swedish law, and in any double taxation convention or treaty between the United States and Sweden, occurring after that date, which changes may then have retroactive effect.

Specific tax provisions may apply for certain categories of taxpayers. Your tax treatment if you are a holder of Class B shares or ADSs depends in part on your particular situation. If you are a holder of Class B shares or ADSs, you should therefore consult a tax advisor as to the tax consequences relating to your particular circumstances resulting from the ownership of Class B shares or ADSs.

The tax consequences to holders of ADSs, as discussed below, apply equally to holders of Class B shares.

Certain Swedish Tax Considerations

This section describes the material Swedish income and net wealth tax consequences for a holder of ADSs or Class B shares who is not considered to be a Swedish resident for Swedish tax purposes. This section applies to you only if you are a holder of portfolio investments representing less than 10% of capital and votes and is not applicable if the ADSs or Class B shares pertain to a permanent establishment or fixed place of business in Sweden.

Taxation on Capital Gains

Generally, non-residents of Sweden are not liable for Swedish capital gains taxation with respect to the sale of ADSs or Class B shares. However, under Swedish tax law, capital gains from the sale of shares in Swedish companies and certain other securities by an individual may be taxed in Sweden at a rate of 30% if the seller has been a resident of Sweden or has lived permanently in Sweden at any time during the year of the sale or the 10 calendar years preceding the year of the sale (absent treaty provisions to the contrary). The provision is applicable to ADSs or Class B shares. From January 1, 2008, the rule has been extended so that it also applies to shares in foreign companies, provided that the shares were acquired during the time that the person was liable to tax in Sweden.

This provision may, however, be limited by tax treaties that Sweden has concluded with other countries. Under the tax treaty between Sweden and the United States (the “U.S. Tax Treaty”), this provision applies for ten years from the date the individual became a non-resident of Sweden.

Taxation on Dividends

A Swedish dividend withholding tax at a rate of 30% is imposed on dividends paid by a Swedish corporation, such as us, to non-residents of Sweden. The same withholding tax applies to certain other payments made by a Swedish corporation, including payments as a result of redemption of shares and repurchase of stock through an offer directed to its shareholders. Exemption from the withholding tax or a lower tax rate may apply by virtue of a tax treaty. Under the U.S. Tax Treaty, the withholding tax on dividends paid on portfolio investments to eligible U.S. holders is reduced to 15%.

Under all Swedish tax treaties, except the tax treaty with Switzerland, withholding tax at the applicable treaty rate should be withheld by the payer of the dividends. With regard to dividends paid from shares in corporations registered with the Euroclear Sweden (such as our shares), a reduced rate of dividend withholding tax under a tax treaty is generally applied at the source by the Euroclear Sweden or, if the shares are registered with a nominee, the nominee, as long as the person entitled to the dividend is registered as a non-resident and sufficient information regarding the tax residency of the beneficial owner is available to the Euroclear Sweden or the nominee.

In those cases where Swedish withholding tax is withheld at the rate of 30% and the person who received the dividends is entitled to a reduced rate of withholding tax under a tax treaty, a refund may be claimed from the Swedish tax authorities before the end of the fifth calendar year following the year that the distribution was made.

Taxation on Interest

No Swedish withholding tax is payable on interest paid to non-residents of Sweden.

Net Wealth Taxation

The Swedish net wealth tax has been abolished from January 1, 2007.

Certain United States Federal Income Tax Consequences

The following discussion is a summary of the material United States federal income tax consequences relevant to the ownership and disposition of ADSs or Class B shares. This discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion is not a full discussion of all tax considerations that may be relevant to the ownership and

 

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disposition of ADSs or Class B shares and does not address the Medicare tax on net investment income or the effects of any state, local or foreign tax laws. The discussion applies only if you will hold the ADSs and/or the Class B shares as capital assets and you use the USD as your functional currency. It does not deal with the tax treatment of investors subject to special rules, such as grantor trusts, real estate investment trusts, regulated investment companies, banks, brokers or dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of recording for their securities holdings, financial institutions, insurance companies, persons required to accelerate the recognition of any item of gross income with respect to our ADSs or Class B shares as a result of such income being recognized on an applicable financial statement, tax-exempt entities, investors liable for alternative minimum tax, holders (either actually or constructively) of 10% or more of the voting power or the value of our shares, persons holding ADSs and/or Class B shares as part of a hedging, straddle, conversion or constructive sale transaction and persons who are resident or ordinarily resident in Sweden. In addition, investors holding ADSs and/or Class B shares indirectly through partnerships are subject to special rules not discussed below. You should consult your own tax advisors about the United States federal, state, local and foreign tax consequences to you of the ownership and disposition of the ADSs or Class B shares.

The discussion below applies to you only if you are a beneficial owner of ADSs and/or Class B shares not resident in Sweden for purposes of the U.S. Tax Treaty and you are, for United States federal income tax purposes, (1) a citizen or resident of the United States, (2) a corporation or any other entity treated as a corporation that is organized in or under the laws of the United States or its political subdivisions, including the District of Columbia, (3) a trust if all of the trust’s substantial decisions are subject to the control of one or more United States persons and the primary supervision of the trust is subject to a United States court, or if a valid election is in effect with respect to the trust to be taxed as a United States person, or (4) an estate the income of which is subject to United States federal income taxation regardless of its source.

The discussion below assumes that the representations contained in the deposit agreement governing the ADSs are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with the terms. If you hold ADSs, you will be treated as the holder of the underlying Class B shares represented by those ADSs for United States federal income tax purposes.

Dividends

Subject to the passive foreign investment company rules discussed below, the gross amount of dividends paid (before reduction for any Swedish withholding taxes) with respect to the ADSs or Class B shares generally will be included in your gross income as ordinary income from foreign sources to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the ADSs or Class B shares and thereafter as capital gain. The dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from other U.S. corporations. The amount of any dividend paid in SEK will be the USD value of the dividend payment based on the exchange rate in effect on the date of receipt (or constructive receipt) by you, in the case of Class B shares, or by the depositary, in the case of ADSs, whether or not the payment is converted into USD at that time. Your tax basis in the SEK received will equal such USD amount. Gain or loss, if any, recognized on a subsequent sale or conversion of the SEK will be U.S. source ordinary income or loss.

If you are a non-corporate holder of ADSs or Class B shares, dividends you receive on the ADSs or Class B shares may be taxed at the lower applicable long-term capital gains rate provided that (1) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, (2) certain holding period requirements are met, (3) you are not under any obligation to make related payments with respect to substantially similar or related property and (4) either (a) in the case of ADSs our ADSs continue to be listed on the Nasdaq Stock Market (or a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934, as amended) or (b) we are eligible for the benefits of the U.S. Tax Treaty. You should consult your own tax advisors regarding the availability of the lower rate for dividends paid with respect to ADSs or Class B shares.

Subject to certain limitations, you will generally be entitled to receive credit against your United States federal income tax liability (or a deduction against your United States federal taxable income) with respect to any Swedish tax withheld in accordance with the U.S. Tax Treaty and paid over to Sweden. If a refund of the tax withheld is available to you under the laws of Sweden or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for such credit against your United States federal income tax liability (and will not be eligible for the deduction in computing your United States federal taxable income). For foreign tax credit limitation purposes, dividends will be income from sources without the United States, and will generally be treated as “passive category income” (or, in the case of certain holders, “general category income”).

Sale or Exchange of ADSs or Class B shares

Subject to the passive foreign investment company rules discussed below, you will generally recognize capital gain or loss on the sale or other disposition of the ADSs or Class B shares equal to the difference between the USD value of the amount realized and your adjusted tax basis (determined in USD) in the ADSs or Class B shares. Such gain or loss will generally be long-term capital gain or loss if you have held the ADSs or Class B shares for more than one year, and will generally be treated as arising from U.S. sources for foreign tax credit limitation purposes. If you are a non-corporate holder of ADSs or Class B Shares, long-term capital gains are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

The amount realized on a disposition of ADSs or Class B shares for cash will generally be the amount of cash you receive for the ADSs or Class B shares (which, in the case of payment in a non-U.S. currency, will equal the USD value of the payment received determined on (a) the date of receipt of payment if you are a cash basis taxpayer and (b) the date of disposition if you are an accrual basis taxpayer). If the ADSs or Class B shares are treated as traded on an “established securities market” and you are a cash basis taxpayer (or, if you are an accrual basis taxpayer, if you so elect), you will determine the USD value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.

You will have a tax basis in any foreign currency received equal to the USD value thereof on the date of receipt. Any gain or loss you realize on a subsequent sale or conversion of foreign currency will be U.S. source ordinary income or loss.

Passive Foreign Investment Company Status

A non-U.S. corporation is a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (a) at least 75% of its gross income is passive income or (b) at least 50% of the quarterly average value of its assets is attributable to assets that produce or are held to produce passive income. Based on the market value of our shares, the composition of our assets and income and our operations, we believe we were not a PFIC during the year 2019. However, whether or not we will be considered a PFIC will depend on the nature and source of our income and the composition and value of our assets, as determined from time to time. If we are treated as a PFIC, we will not provide information necessary for the “qualified electing fund” election as the term is defined in the relevant provisions of the Code. You should consult your own tax advisors about the consequences of our potential classification as a PFIC.

If we were classified as a PFIC with respect to your ADSs or Class B shares for any taxable year, we would generally continue to be a PFIC (unless certain conditions are met), and you would be subject to special rules with respect to:

 

   

any gain realized on the sale or other disposition of ADSs or Class B shares; or

 

   

any other “excess distribution” made to you (generally, any distributions to you in respect of ADSs or Class B shares during a single taxable year that are, in the aggregate, greater than 125% of the average annual distributions received by you in respect of ADSs or Class B shares during the three preceding taxable years or, if shorter, your holding period for ADSs or Class B shares).

Under these rules:

 

   

the gain or any other excess distribution would be allocated ratably over your holding period for ADSs or Class B shares;

 

   

the amount allocated to the taxable year in which the gain or excess distribution was realized and any year before we became a PFIC would be taxable as ordinary income;

 

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the amount allocated to each prior year, other than the current year and any taxable year prior to the first taxable year in which we were a PFIC, would be subject to tax at the highest applicable marginal tax rate in effect for each such year; and

 

   

an interest charge would be imposed.

If we are a PFIC for any taxable year, you will also be deemed to own shares in any of our subsidiaries that are also PFICs in such a year. As an alternative to the special rules described above, holders of “marketable stock” in a PFIC may elect mark-to-market treatment with respect to their ADSs or Class B shares. ADSs or Class B shares will not be considered marketable stock unless they are regularly traded on a qualified exchange or other market. If the mark-to-market election is available and you elect mark-to-market treatment you will, in general, include as ordinary income each year an amount equal to the increase in value of your ADSs or Class B shares for that year (measured at the close of your taxable year) and will generally be allowed a deduction for any decrease in the value of your ADSs or Class B shares for the year but only to the extent of previously included mark-to-market income. In addition, any gain you recognize upon the sale or other disposition of the ADSs or Class B shares will be treated as ordinary income and any loss will be treated as ordinary loss but only to the extent of previously included mark-to-market income. Any loss in excess of previously included mark-to-market income will be treated as a capital loss. However, a mark-to-market election would likely be unavailable with respect to your proportionate share in any of our subsidiaries that are PFICs.

If you own ADSs or Class B shares during any year in which we are a PFIC, you will generally be required to make an annual return on IRS Form 8621.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends paid in respect of ADSs or Class B shares and the proceeds received on the sale or exchange of the ADSs or Class B shares within the United States or by a broker with certain United States connections. Backup withholding may apply to payments to you of dividends paid in respect of ADSs or Class B shares or the proceeds of a sale or other disposition of ADSs or Class B shares if you fail to provide an accurate taxpayer identification number (certified on IRS Form W–9) or, upon request, to certify that you are not subject to backup withholding or otherwise to comply with the applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability, and a refund of any excess amount withheld under the backup withholding rules may be obtained by filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information.

Additional Reporting Requirements

Certain holders who are individuals may be required to report information relating to an interest in ADSs or Class B shares, subject to certain exceptions (including an exception for ADSs or Class B shares held in accounts maintained by certain financial institutions). Holders should consult their tax advisors regarding the effects, if any, of these requirements on their ownership and disposition of ADSs or Class B shares.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

Annual reports and other information are filed with, or furnished to, the SEC in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov, where they are stored in the EDGAR database.

I. Subsidiary Information

See “Item 4.C. Information on the Company - Organizational Structure.”

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A. Quantitative information about market risk

The information set forth under the following heading of the 2019 Swedish Annual Report is incorporated herein by reference.

 

   

Financials - Board of Directors’ report

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note F1 – Financial risk management

B. Qualitative information about market risk

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Financials - Board of Directors’ report

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note F1 – Financial risk management

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Management – Risk management

C. Interim periods

Not applicable.

D. Safe harbor

Not applicable.

 

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E. Small business issuers

Not applicable.

 

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

Depositary fees, charges and payments

During 2019, an annual service fee of $0.02 was charged per ADS, for the operation and maintenance costs in administering the ADS program. The Depositary, Deutsche Bank Trust Company Americas (“Deutsche Bank”), established October 21, 2019 as the record date for payment of annual servicing fees. During 2019, an annual dividend fee of $0.01 was charged per ADS. The Depositary, Deutsche Bank, established April 22, 2019 as the record date for payment of the dividend fee.

Fees and charges payable by ADS holders

 

    

Service

  

Rate

  

By whom paid

1)    Deposit of shares and issuance of receipts    Up to USD 5 per 100 American Depositary Shares or fraction thereof    Party to whom receipts are issued
2)    Delivery of deposited shares against surrender of receipts    Up to USD 5 per 100 American Depositary Shares or fraction thereof    Party surrendering receipts
3)    Distribution of Cash Dividends and Cash Proceeds processing    Up to USD 3 per 100 American Depositary Shares    All holders of American Depositary Shares
4)    Administration of the ADSs    Up to USD 3 per 100 American Depositary Shares per annum    All holders of American Depositary Shares

In addition to the fees of the Depositary enumerated above, ADS holders are required under the terms of the Deposit Agreement to bear the following: (i) taxes and other governmental charges, (ii) share transfer registration fees on deposits, (iii) certain cable and facsimile transmission and delivery charges, and (iv) such expenses as are incurred by Deutsche Bank in the conversion of foreign currency into dollars.

Fees payable by the Depositary to the Issuer

Effective January 2019, Deutsche Bank agreed to pay Ericsson an amount equal to a fixed percentage of the net revenues, if any, collected by it as a result of charging ADS holders issuance and cancellation fees, and dividend processing and annual servicing fees. In 2019, such amount totaled approximately USD 9.5 million.

Effective January 2019, Deutsche Bank waived the cost of providing the ADS program administrative and reporting services to the extent provided by Deutsche Bank, and has agreed to bear the cost of certain third-party out-of-pocket costs related to the ADS program up to USD 50,000 per year. These costs include costs for the local custodian’s administration of matters relating to meetings of shareholders and costs of certain transfer agent administration services, such as the registration and transfer of depositary receipts. In 2019, such amount totaled approximately USD 61,400.

 

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

A. Disclosure Controls and Procedures

The information set forth under the following heading of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Internal control over financial reporting 2019 – Disclosure controls and procedures

B. Management’s Annual Report on Internal Control Over Financial Reporting

The information set forth under the section “Financials - Management’s report on internal control over financial reporting” of the 2019 Swedish Annual Report is incorporated herein by reference.

C. Attestation Report of the Registered Public Accounting Firm

The information set forth under the section “Financials - Report of independent registered public accounting firm” of the 2019 Swedish Annual Report is incorporated herein by reference.

D. Changes in Internal Control Over Financial Reporting

The information set forth under the following heading of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance

 

   

Corporate Governance report

 

   

Internal control over financial reporting 2019 – Internal control over financial reporting

 

   

Board of Directors’ Report

 

   

Report of independent registered public accounting firm

 

   

Consolidated Financial statements

 

   

Management’s report on internal control over financial reporting

 

   

Risk factors

 

   

Forward-looking statements

ITEM  16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The information set forth under the following heading of the 2019 Swedish Annual Report is incorporated herein by reference.

 

   

Corporate Governance

 

   

Corporate governance report

 

   

Committees of the Board of Directors – Audit Committee – Members of the Audit Committee

ITEM 16B. CODE OF ETHICS

Our Code of Business Ethics is available on our website at https://www.ericsson.com/en/about-us/corporate-governance/code-of-ethics. The Company will promptly disclose to our shareholders, if required by applicable laws or stock exchange requirements, any amendments to or waivers from the Code of Business Ethics applicable to our directors or officers by posting such information on our website at https://www.ericsson.com/en/about-us/corporate-governance/code-of-ethics.

In 2019, Ericsson released an updated Code of Business Ethics, available on the Company’s website at https://www.ericsson.com/en/about-us/corporate-governance/code-of-ethics. As part of the 2019 update, the substantive content was unchanged, merely simplified and reorganized.

The information set forth under the following headings of the 2019 Swedish Annual Report is incorporated herein by reference:

 

   

The business

 

   

Sustainability and corporate responsibility

 

   

Ethics & Compliance program

 

   

Financials - Board of Directors’ report

 

   

Corporate Governance – Business integrity

 

   

Corporate Governance

 

   

Corporate governance report

 

   

Regulation and Compliance – Code of business ethics

 

   

Sustainability

 

   

Sustainability management

 

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the Section “Financials - Notes to the consolidated financial statements - Note H5 – Fees to auditors” of the 2019 Swedish Annual Report is incorporated herein by reference.

Audit and Compliance Committee Pre-Approval Policies and Procedures

The Audit and Compliance Committee reviews and approves the scope of audits to be performed by external and internal auditors and analyzes their results and costs. The Audit and Compliance Committee keeps the Board of Directors informed about the external and internal auditors’ performance. It also makes recommendations to the Nomination Committee regarding the external auditor’s election and fees. In order to ensure the external auditor’s independence, the Audit Committee has established pre-approval policies and procedures for audit and non-audit services to be performed by the external auditor. Pre-approval authority may not be delegated to management. The policies and procedures include a list of prohibited services, and audit and non-audit services that require pre-approval by the Committee. Such services fall into two broad categories:

 

   

General pre-approval – certain services regarding taxes, transactions, risk management, business improvement, attestation and accounting services and the so called general services (other than prohibited services) have received general pre-approval by the Audit and Compliance Committee, provided that the estimated fee for each project does not exceed SEK 1 million. The external auditor must advise the Audit and Compliance Committee with a quarterly summary of ongoing projects related to audit and non-audit services and an annual report of fees and expenses for all audit and non-audit services.

 

   

Specific pre-approval – all other non-audit services and services subject to general pre-approval exceeding SEK 1 million must receive specific pre-approval. The external auditor submits an application in writing to the Parent Company for final approval by the Audit and Compliance Committee, including a statement as to whether, in the view of the external auditor, the contemplated services are consistent with applicable rules on their independence. The Audit and Compliance Committee Chairman has the delegated authority for specific pre-approval in between Committee meetings, provided that the estimated fee in each case does not exceed SEK 2.5 million. The Chairman reports any pre-approval to the Audit and Compliance Committee at its next meeting.

All services provided in 2019 by the independent auditors were pre-approved in accordance with the pre-approval policies and procedures described above.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

All members of the Audit Committee of a NASDAQ New York-listed company must be independent in accordance with NASDAQ New York and SEC rules. SEC Rule 10A-3(b)(1)(iv)(C) under the Exchange Act includes a specific exemption from these independence requirements for Audit Committee members of foreign private issuers who are non-executive employee representatives appointed to the Audit Committee pursuant to local law. The Company relies on this exemption and does not consider that such reliance materially adversely affects the ability of the Audit and Compliance Committee to act independently or to satisfy other SEC requirements applicable to Audit Committees.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

The Nomination Committee, which is comprised of the Chair of the Board of Directors and representatives of Ericsson’s largest shareholders by voting power, is responsible for proposing the external auditor for election by the shareholders, upon recommendation from the Audit and Compliance Committee of the Board of Directors. Under applicable auditor rotation rules, Ericsson must change auditors from its current auditor PricewaterhouseCoopers AB (“PwC”) no later than in 2021. In light of the foregoing and to secure timely auditor relation, in 2018, Ericsson initiated a tendering process, overseen by the Audit and Compliance Committee, for appointment of the Group’s auditor for the financial year 2020 to be elected by the shareholders at the 2020 Annual General Meeting of shareholders (“AGM”). Based on the results of this tendering process, the Audit and Compliance Committee recommend the Nomination Committee to propose that Deloitte AB be elected new auditor at the 2020 Annual General Meeting. The Nomination Committee’s proposal to elect Deloitte AB as new auditor, was made public by the Company on February 21, 2020. If Deloitte AB is elected new auditor at the AGM 2020, PwC will resign as auditors at the end of the AGM 2020.

In respect of fiscal years 2018 and 2019 and the subsequent interim period through March 19, 2020:

 

   

PwC has not issued any report on Ericsson’s consolidated financial statements or on the effectiveness of Ericsson’s internal control over financial reporting that contained an adverse opinion or a disclaimer of opinion. The relevant PwC auditor’s reports were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

   

there has not been any disagreement with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to PwC’s satisfaction, would have caused PwC to make reference to the subject matter of the disagreement in connection with its auditor’s reports, or any reportable event as described in Item 16F(a)(1)(v) of Form 20-F.

Ericsson has provided PwC with a copy of the foregoing disclosure and has requested that they furnish it with a letter addressed to the US Securities and Exchange Commission stating whether it agrees with such disclosure and, if not, stating the respects in which it does not agree. A copy of PwC’s letter dated March  19, 2020, in which they stated that they agree with such disclosure, is filed as Exhibit 16.1.

ITEM 16G. CORPORATE GOVERNANCE

Ericsson, as a company whose shares are listed on NASDAQ New York, is subject to the listing requirements and certain of the corporate governance requirements of NASDAQ New York and to certain rules of the SEC.

Under NASDAQ New York rules, all members of the audit committee of a NASDAQ New York- listed company must be independent in accordance with SEC rules. SEC rules include a specific exemption from these independence requirements for an employee of a foreign private issuer who is not an executive officer if the employee is elected or named to the board of directors or audit committee pursuant to the issuer’s governing law or documents, or other home country legal or listing requirements. The Company relies on this exemption and does not consider that such reliance materially adversely affects the ability of the Audit and Compliance Committee to act independently or to satisfy other SEC requirements applicable to audit committees.

Under NASDAQ New York rules, Ericsson is permitted to follow home country practices in lieu of certain NASDAQ corporate governance requirements that would apply to US companies listed on NASDAQ New York. The rules require disclosures regarding the ways in which Ericsson’s corporate governance practices differ from those required of US companies under the rules of NASDAQ New York.

These differences include the following:

 

   

Employee representatives are appointed to Ericsson’s Board of Directors and serve on Committees (including the Audit and Compliance Committee and the Remuneration Committee) in accordance with Swedish law.

 

   

Employee representatives on the Ericsson Board and committees may attend all meetings of the Board and committees on which they serve (including those of the Audit and Compliance Committee and the Remuneration Committee) in accordance with Swedish law.

 

   

In accordance with Swedish market practices, the Nomination Committee is not fully comprised of Board members. In addition to the Chair of the Board, representatives of the four largest shareholders are members of the current Nomination Committee of Ericsson.

 

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The determination regarding independence of Board members is made by the Nomination Committee (instead of the Board) prior to the Annual General Meeting of Shareholders (“AGM”). Before the AGM 2019, the Nomination Committee determined that the following Board members were independent under all applicable independence requirements, including the NASDAQ New York rules: Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Eric A. Elzvik, Kurt Jofs and Kristin S. Rinne. When appointing members to the committees of the Board, the Board makes determinations regarding committee member independence.

 

   

The Board holds non-executive directors’ sessions but does not have regularly scheduled meetings with only independent directors present.

 

   

Under applicable Swedish rules, Ericsson is not required to publicly disclose the material terms of all agreements and arrangements between our directors or nominees for director and any person or entity (other than us) relating to compensation or other payment in connection with such person’s candidacy or service as a director of our company.

 

   

The external auditor is elected by the shareholders and is proposed by the Nomination Committee upon recommendation from the Audit and Compliance Committee.

 

   

NASDAQ New York rules applicable to US companies require the consideration of six factors relating to the independence of compensation consultants, legal counsel or other advisers retained by compensation or remuneration committees. Consistent with Swedish practices, the Remuneration Committee’s procedures addressing independence of advisers do not expressly require the consideration of those six factors.

 

   

Ericsson does not solicit proxies for shareholder meetings, which is in accordance with Swedish practices and rules.

 

   

There are no minimum quorum requirements for shareholder meetings under Swedish law, except under certain limited circumstances. Certain resolutions requiring special quorums and majorities are described under Memorandum and Articles of Association.

 

   

Some of the requirements addressed by NASDAQ New York rules are included in the Swedish Corporate Governance Code or the work procedure for the Board instead of committee charters. The work procedure establishes the attribution of various responsibilities among the Board, its committees and the President and CEO. The work procedure for the Board is reviewed, evaluated and amended as required or appropriate, and adopted by the Board at least once a year.

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

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

See our consolidated financial statements and accompanying notes of the 2019 Swedish Annual Report.

 

   

Consolidated income statement and Consolidated statement of comprehensive income

 

   

Consolidated balance sheet

 

   

Consolidated statement of cash flows

 

   

Consolidated statement of changes in equity

 

   

Notes to the consolidated financial statements

 

   

Report of independent registered public accounting firm

ITEM 18. FINANCIAL STATEMENTS

Not applicable.

ITEM 19. EXHIBITS

The exhibit index attached hereto is incorporate herein by reference.

 

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EXHIBIT INDEX

The agreements and other documents filed as exhibits to this 2019 Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the registrant in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

Securities Exhibit

 

Exhibit Number

  

Description

1    Articles of Association of Telefonaktiebolaget LM Ericsson (amended April 2016) (incorporated herein by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2016 filed by the registrant on April 26, 2017 (File No 000-12033)
2.1    Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January 7, 2014 (incorporated herein by reference to Exhibit 2 to the Annual Report on Form 20-F for the year ended December 31, 2014 filed by the registrant on March 31, 2015 (File No. 000-12033)
2.2    Amendment No. 1, dated as of October  24, 2016, to the Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January  7, 2014 (incorporated herein by reference to Exhibit 2.2 to the Annual Report on Form 20-F for the year ended December 31, 2016 filed by the registrant on April 26, 2017 (File No. 000-12033)
2.3    Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
6    See “Financials – Notes to the consolidated financial statements – Note A1—Significant accounting policies” of the 2019 Swedish Annual Report
7    For definitions of certain ratios used in this report, see the section of the 2019 Swedish Annual Report entitled “Financial Terminology”
8    See Item 4.C. Organizational Structure
11    Code of Ethics (amended October 2019, available on our website at https://www.ericsson.com/en/about-us/corporate-governance/code-of-ethics)
12.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1*    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2*    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1**    Swedish Annual Report for 2019 in English (adjusted version)
15.2    Consent of PricewaterhouseCoopers AB
16.1    Letter from PricewaterhouseCoopers AB regarding change in registrants’ certifying accountant
101**    XBRL Instance Document and related items

 

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Exhibit Number

 

Description

101.INS***   XBRL Instance Document.
101.SCH***   XBRL Taxonomy Extension Schema Document.
101.CAL***   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF***   XBRL Taxonomy Definition Linkbase Document.
101.LAB***   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE***   XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. §78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

**

Certain of the information included in Exhibit 15.1 is incorporated by reference into this 2019 Form 20-F, as specified elsewhere in this report, in accordance with Rule 12b-23(a)(3) of the Securities Exchange Act of 1934, as amended. With the exception of the items so specified, the 2018 Swedish Annual Report is not deemed to be filed as part of this 2019 Form 20-F.

***

In accordance with Rule 406T(b)(2) of Regulation S-T, such XBRL information will be furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, will be deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise will not be subject to liability under those sections.

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

 

TELEFONAKTIEBOLAGET LM ERICSSON
By:  

/s/ JONAS STRINGBERG

Name:   Jonas Stringberg
Title:  

Vice President, Head of Financial Control and

Business Services
By:  

/s/ XAVIER DEDULLEN

Name:   Xavier Dedullen
Title:   Senior Vice President, Chief Legal Officer
 

Date March 19, 2020

 

24

EX-2.3

Exhibit 2.3

Description of Securities

Registered Pursuant to Section 12 of the

Securities Exchange Act of 1934

All references below to “Ericsson,” the “Company,” “we,” “our” or “us” refer to Telefonaktiebolaget LM Ericsson, and not to its subsidiaries.

As of December 31, 2019, Ericsson had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: American Depositary Shares, each representing one Class B share. Ericsson’s Class A and Class B Shares are listed on Nasdaq Stockholm. In the United States, the American Depositary Shares representing Class B Shares are listed on NASDAQ New York under the symbol “ERIC”.

The following description of our share capital and American Depositary Shares is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Articles of Association, as amended (our “Articles”), the Second Amended and Restated Deposit Agreement, dated as of January 7, 2014, among Ericsson and Deutsche Bank Trust Company Americas, as amended (“deposit agreement”), and the form of American Depositary Receipt, which are incorporated by reference as exhibits to the Annual Report on Form 20-F of which this Exhibit is a part. We encourage you to read our Articles, and the applicable provisions of the Swedish Companies Act for additional information.

DESCRIPTION OF SHARE CAPITAL

REGISTER AND COMPANY PURPOSE

Telefonaktiebolaget LM Ericsson is registered under no. 556016–0680 in the Company Register kept by the Swedish Companies Registration Office.

Our Company’s objective and purposes are described in article 2 of the Articles, as follows: The objects of the Company are to, directly or indirectly, develop, construct, produce, sell and deliver and in other forms carry on trade and other commercial business related to goods, products and other equipment as well as maintenance and other services based on telecommunication and radio technology and other technologies for transference, transmission and other communications of speech, data, images, text, other kinds of information and means of payment and to carry on other activities consistent therewith.

SUMMARY OF PROVISIONS RELATING TO CERTAIN

POWERS AND INTERESTS OF DIRECTORS

Our Articles do not stipulate anything regarding:

 

   

a director’s power to vote on a proposal, arrangement, or contract in which the director is materially interested;

 

   

our directors’ power to vote for compensation to themselves;

 

   

our directors’ borrowing powers;

 

   

retirement rules for our directors; or

 

   

the number of shares required for a director’s qualification.


Applicable provisions are found in the Swedish Companies Act (2005:551) (the “Swedish Companies Act”).

Other than being of legal age, there are no age limit restrictions for directors and they are not required to own any shares in the Company.

SHARE CAPITAL

As of December 31, 2019, our Articles provide that our share capital may not be less than SEK 6,000,000,000 nor more than SEK 24,000,000,000, and that the number of shares in Ericsson shall amount to no less than 3,000,000,000 and no more than 12,000,000,000. All of our outstanding shares are validly issued, fully paid and non-assessable, and are not redeemable and do not have any preemptive rights other than under the Swedish Companies Act and our Articles, as described below. In accordance with our Articles, Ericsson’s shares are divided into three classes of shares, denoted as Class A shares, Class B Shares and Class C shares; however, as of December 31, 2019, no Class C shares were outstanding.

ADDITIONAL SHARE ISSUANCES; PREEMPTIVE RIGHTS

Under the Swedish Companies Act, shareholders must approve each issue of additional shares either by deciding on the share issue at a shareholders’ meeting, or by a shareholders’ approval of a decision on a share issue by our Board of Directors (the “Board”), or by giving an authorization to the Board to decide about a share issue. If we decide to issue new Class A, Class B or Class C shares by means of a cash issue, or an issue against payment through set-off of claims, Class A, Class B and Class C shareholders (except for Ericsson and its subsidiaries, in the event they hold shares in Ericsson) have a primary preferential right to subscribe for new shares of the same type in relation to the number of shares previously held by them. Shares not subscribed for through a preferential right shall be offered to all shareholders for subscription on a pro rata basis. If we decide to issue new shares of only one series by means of a cash issue or an issue against payment through set-off of claims, all shareholders, regardless of whether their shares are Class A, Class B or Class C, are entitled to a preferential right to subscribe for new shares in proportion to the number of shares previously held by them. Shareholders may vote to waive shareholders’ preferential rights at a general meeting of shareholders.

If we decide to issue warrants or convertibles through a cash issue or an issue against payment through set-off of claims, the shareholders have preferential rights to subscribe to warrants as if the issue were of the shares that may be subscribed to pursuant to the warrant and, respectively, preferential rights to subscribe to convertibles as if the issue were of the shares that the convertibles may be converted to.

The above does not constitute any restriction to waive the shareholders’ preferential rights when deciding on either an issue of shares, warrants or convertibles by means of a cash issue or an issue against payment through set-off of claims.

DIVIDENDS AND OTHER DISTRIBUTIONS

Our Class A and Class B shareholders have the same right to dividends. Class C shareholders do not have any right to dividends, as described in article 6 of our Articles. No Class C shares are currently outstanding.

Under Swedish law, only a general meeting of shareholders may decide on payment of dividends, which may not exceed the amount proposed by the Board (except in certain limited circumstances), and may only be paid from funds legally available for that purpose. Under Swedish law, no interim dividends may be paid in respect of any fiscal period for which audited financial statements of the company have not yet been adopted by the annual general meeting of shareholders. The market practice in Sweden is most often for dividends to be paid annually. Under the Swedish Companies Act, dividends to shareholders and other transfers of value from a company—such as purchases of its own shares (see below)—may only be made in case the company’s restricted equity remains fully covered after the transfer of value has been made. The calculation shall be based upon the most recently adopted balance


sheet, and any changes in the restricted equity that has occurred after the balance sheet date shall be taken into account. In addition, dividends to shareholders and other transfers of value from the company may only be made if this is justifiable taking into account the type of business activities of the company, the scope and risks related thereto and the company’s need for financial resources, its liquidity and financial position. In respect of parent companies, also the business activities of the group, their scope and risks related thereto and the group’s need for financial resources, its liquidity and financial position shall be taken into account.

The Company’s shares are registered in the computerized book-entry share registration system administered by Euroclear Sweden AB (“Euroclear”). The rights attached to shares eligible for dividends accrue to those persons whose names are recorded in the register of shareholders on the record day. The dividends are then sent to a specified account as directed by the person registered with Euroclear. The relevant record day must, in most circumstances, be specified in the resolution declaring a dividend or resolving upon a capital increase or any similar matter in which shareholders have preferential rights, or the Board must be authorized to determine the relevant record day.

Where the registered holder is a nominee, the nominee receives, for the account of the beneficial owner, dividends and, on issues of shares with preferential rights for the shareholders, shares, as well as rights. Dividends are remitted in a single payment to the nominee who is responsible for the distribution of such dividends to the beneficial owner. A similar procedure is adopted for share issues. Specific authority to act as a nominee must be obtained from Euroclear. At the request of Euroclear, the nominee must provide information about all beneficial holders of shares to Euroclear. Euroclear is required to keep a register with regard to any holding on behalf of a single beneficial owner in excess of 500 shares in any one company. This list is prepared every third month and must reveal the names of the beneficial owner and be open to public inspection.

RIGHTS IN A LIQUIDATION

On a return of capital on winding up or liquidation , any assets available for distribution amongst our shareholders at the commencement of the winding up (i.e. any surplus after paying off all the creditors of the company), will be equally distributed amongst our shareholders in proportion to the par value of the shares held by them.

ANNUAL GENERAL MEETINGS: VOTING RIGHTS

In a general meeting of shareholders of Ericsson, each Class A share shall carry one vote, each Class B share one tenth of one vote and each Class C share one-thousandth of one vote.

We are required to publish notices to attend annual general meetings no earlier than six weeks and no later than four weeks prior to the annual general meeting and the same notice period requirements apply regarding extraordinary general meetings concerning changes in our Articles. Notices to attend other types of extraordinary general meetings at Ericsson must be published no earlier than six weeks and no later than three weeks prior to the general meeting.

Directors are elected during the annual general meeting for a period of one year at a time and do not stand for reelection at staggered intervals.

A shareholder may attend and vote at the meeting in person or by proxy. For companies whose shares are registered in a central securities depositary register, proxies are valid for up to five years from the date of issuance. Any shareholder wishing to attend a general meeting must notify us no later than on the day specified in the notice. We are required to accept all notifications of attendance received at least five business days (Saturdays normally included) prior to the meeting. A person designated in the register as a nominee (including the depositary of the ADSs) is not entitled to vote at a general meeting, nor is a beneficial owner whose share is registered in the name of a nominee (including the depositary of the ADSs) unless the beneficial owner first arranges to have such owner’s own name entered in the register of shareholders maintained by Euroclear no later than the designated record day.

Under the Swedish Companies Act, elections are determined by a plurality vote. Resolutions, other than elections, are passed by a simple majority of votes cast at the meeting with the chairman of the meeting having a decisive vote,


unless otherwise required by law or a company’s Articles. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:

 

  a)

a resolution to amend our Articles requires a majority of two-thirds of the votes cast as well as two-thirds of the shares represented at the meeting, except in those circumstances described in b)—d) below;

 

  b)

a resolution to amend our Articles which reduces any shareholder’s rights to profits or assets, restricts the transferability of shares or alters the legal relationship between shares, normally requires the unanimous approval of the shareholders present at the meeting and who hold nine-tenths of all outstanding shares;

 

  c)

a resolution to amend our Articles for the purpose of limiting the number of shares with which a shareholder may vote at a general meeting or allocating part of the net profit for the fiscal year to a restricted fund or limiting the use of the company’s profits or assets in a liquidation or dissolution, normally requires the approval of shareholders representing two-thirds of the votes cast and nine-tenths of the shares represented at the meeting;

 

  d)

a resolution of the kind referred to under b) or c) above may, however, be taken with a lower supermajority requirement if the amendments referred to therein will only adversely affect specific shares or classes of shares. In such cases, the requirement under a above will apply together with the following separate supermajority: (a) where only a class of shares is adversely affected, approval of the owners of one-half of all shares of such class and nine-tenths of the shares of such class represented at the meeting, or (b) where the shares adversely affected do not constitute a class of shares, the unanimous approval of all such affected outstanding shares present at the meeting and who hold nine-tenths of all outstanding shares adversely affected;

 

  e)

a resolution to issue, approve or authorize the issuance for cash of new shares, warrants or convertibles with a deviation from the preferential right for existing shareholders requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting;

 

  f)

a resolution to reduce the outstanding share capital requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting. In case there are several classes of shares in a company, the above described majority requirement shall apply also within each share class represented at the meeting and for which the rights of the shares are adversely affected; and

 

  g)

a resolution to approve a merger requires a two-thirds majority of the votes cast at the meeting and two-thirds of the shares represented at the meeting (however, under certain circumstances a higher majority is required).

At a general meeting of shareholders, a shareholder or proxy for one or more shareholders may cast full number of votes represented by the holder’s shares.

AMENDMENTS TO THE ARTICLES

Under the Swedish Companies Act, an amendment of our Articles requires a resolution passed at a shareholders meeting. The number of votes required for a valid resolution depends on the type of amendment, however, any amendment must be approved by not less than two-thirds of the votes cast and represented at the meeting. The board is not allowed to make amendments to the Articles absent shareholder approval.

PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY

Neither our Articles nor the Swedish Companies Act contains any restrictions on change of control. However, mandatory bid requirements under the Swedish Stock Market (Takeover Bids) Act (2006:451) may apply under certain circumstances.


REDEMPTION, REPURCHASE AND SURRENDER OF SHARES

A Swedish public limited liability company whose shares are traded on a regulated market place within the European Economic Area (“EEA”) or a market place comparable to a regulated market place outside the EEA is entitled to purchase its own shares under certain conditions. A purchase by us of our own shares may take place only if (a) the purchase has been decided upon by a general meeting of shareholders or the Board has been authorized by a general meeting of shareholders, in both cases by a two thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting, (b) the purchase is effected on a regulated market place within the EEA or a market place comparable to a regulated market place outside the EEA (in the latter case with the approval of the Swedish Financial Supervisory Authority the “SFSA”) or pursuant to an offer to all shareholders or holders of a specific class of shares, (c) the Company’s restricted equity will still be fully covered and the purchase is justifiable taken into account the type of business activities of the Company and the group, their scope and risks related thereto and the Company’s and the group’s need for financial resources, their liquidity and financial position, and (d) we and our subsidiaries do not hold or, as a result of purchase, will not hold in excess of 10% of all our outstanding shares.

LIMITATION ON OWNING SECURITIES

There are no limitations imposed by Swedish law or by our Articles in respect of the rights of non-residents or foreign persons to purchase, own or sell securities issued by us.

There are, however, certain flagging and ownership examination rules that apply, irrespective of nationality.

Pursuant to the Swedish Financial Instruments Trading Act any change in a holding of shares, depository receipts with voting rights or financial instruments that entitle the holder to acquire shares in issue in a Swedish limited liability company whose shares are admitted for trading on a regulated market place within the EEA shall be reported by the holder to the company and the SFSA, where the change entails that the holder’s portion of all shares or votes in the company reaches, exceeds or falls below any of the limits of 5, 10, 15, 20, 25, 30, 50, 66 2/3 or 90 per cent. Such a change should, as a main rule, be reported not later than three trading days following the day on which the party with a duty to report has entered into an agreement for the acquisition or transfer of shares or any other change to the shareholding has occurred.

In addition, the EU Market Abuse Regulation requires, among other things, that the Company holds a register of all persons discharging managerial responsibilities and of persons closely associated with them. The Company and the SFSA must be notified of certain transactions conducted by the aforementioned persons. Such notifications shall be made no later than three business days after the date of the transaction.


DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Deutsche Bank Trust Company Americas, as depositary, has registered and delivered the ADSs. Each ADS represent ownership of one B share (or a right to receive one Class B share), deposited with Svenska Handelsbanken AB, having its principal office at Kungsträdgårdsgatan 2, SE-106 70 Stockholm, Sweden and Nordea Bank AB (publ), having its principal office at Mäster Samuelsgatan 17-21, SE-111 44 Stockholm, as custodians for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s principal office at which the ADSs are administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA.

The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, or DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto.

We do not treat ADS holders as our shareholders and accordingly, you, as an ADS holder, will not have shareholder rights. Swedish law governs shareholder rights. The depositary is the holder of the Class B Shares underlying your ADSs. As a holder of ADSs, you have ADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs.

HOLDING THE ADSs

How may you hold your ADSs?

You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (b) by holding ADSs in uncertificated form in DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. ADSs will be issued through DRS, unless you specifically request certificated ADRs. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this summary. You should consult with your broker or financial institution to find out what those procedures are.

DIVIDENDS AND OTHER DISTRIBUTIONS

How may you receive dividends and other distributions on the shares?

The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our shares) set by the depositary with respect to the ADSs.

 

   

Cash. The depositary will convert or cause to be converted any cash dividend or other cash distribution we pay on the shares or any net proceeds from the sale of any shares, rights, securities or other entitlements under the terms of the deposit agreement into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the United States and will distribute promptly the amount thus received. If the depositary determines in its judgment that such conversions or transfers are not practical or lawful or if any


 

government approval or license is needed and cannot be obtained at a reasonable cost within a reasonable period or otherwise sought, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold or cause the custodian to hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid and such funds will be held for the respective accounts of the ADS holders. It will not invest the foreign currency and it will not be liable for any interest for the respective accounts of the ADS holders.

Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must be paid, will be deducted. The depositary will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.

 

   

Shares. For any shares we distribute as a dividend or free distribution, either (1) the depositary will, with our approval or at our request, distribute additional ADSs representing such shares or (2) existing ADSs as of the applicable record date will represent rights and interests in the additional shares distributed, in either case, net of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. The depositary will only distribute whole ADSs. It will sell shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash.

 

   

Elective Distributions in Cash or Shares. If we offer our shareholders the option to receive dividends in either cash or shares, we will notify the depositary at least 30 days prior to the proposed distribution stating whether or not we want such distribution to be made available to ADR holders. Following such notice, the depositary will consult with us to determine, with our assistance, whether it is lawful and reasonably practicable to make such elective distribution available to ADR holders. The depositary will make such elective distribution available to ADR holders only if (i) we have timely requested that the elective distribution is available to ADR holders, (ii) the depositary has determined that such distribution is reasonably practicable and (iii) the depositary has received satisfactory legal opinions of counsel as provided in the deposit agreement. If these conditions are not satisfied, the depositary will, on the basis of the same determination as is made in respect of the shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional ADSs representing shares in the same way as it does in a share distribution. The depositary is not obligated to make available to you a method to receive the elective distribution in shares rather than in ADSs. There can be no assurance that you will be given the opportunity to receive elective distributions on the same terms and conditions as our shareholders.

 

   

Rights to Purchase Additional Shares. If we offer our shareholders any rights to subscribe for additional shares or any rights of any other nature, the depositary will establish procedures to either (i) distribute such rights and enable you to exercise the rights or (ii) dispose of such rights on your behalf and making the net proceeds available in dollars, each upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. At our request, however:

 

   

if the depositary determines that it is lawful and feasible to make such rights available to you by means of warrants or otherwise, it will distribute warrants or other instruments to you, or employ such other method as it may deem feasible in order to facilitate the exercise, sale or transfer of rights by you; or

 

   

if the depositary determines that it is not lawful or not feasible to make such rights available to you by means of warrants or otherwise, or if the rights represented by such warrants or such other instruments are not exercised and appear to be about to lapse, the depositary may sell the rights, at such place and upon such terms (including public or private sale) as it may deem proper and distribute the net proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.


If the depositary makes rights available to you, U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this summary except for changes needed to put the necessary restrictions in place.

There can be no assurance that you will be given the opportunity to exercise rights on the same terms and conditions as our shareholders or be able to exercise such rights.

 

   

Other Distributions. The depositary will distribute to you anything else we distribute on deposited securities by any means it may deem equitable and practicable, upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. If the depositary determines that such distribution cannot be made proportionately, or if for any other reason the depositary deems such distribution not to be feasible, the depositary may adopt such method as it may deem equitable and practicable for the purpose of effecting such distribution, including the sale of the property we distributed, and the net proceeds of any such sale will be distributed.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the US Securities Act of 1933, as amended (the “Securities Act”). We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or any other property to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if we and/or the depositary determines that it is illegal or not practicable for us or the depositary to make them available to you.

DEPOSIT, WITHDRAWAL AND CANCELLATION

How are ADSs issued?

The depositary will deliver ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian. Upon payment of its applicable fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto.

How do ADS holders cancel an ADS?

You may turn in your ADSs at the depositary’s principal office or by providing appropriate instructions to your broker. Upon payment of its applicable fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other deposited securities underlying the ADSs to you or a person you designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its principal office, to the extent permitted by law and the deposit agreement. See “Requirements for Depositary Actions” below.


How do ADS holders interchange between Certificated ADSs and Uncertificated ADSs?

You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs.

How do ADS holders vote?

You may instruct the depositary to vote the shares or other deposited securities underlying your ADSs at any meeting at which you are entitled to vote pursuant to Swedish law, the provisions of our Articles, and the deposit agreement. Otherwise, you could exercise your right to vote directly if you withdraw the shares. However, you may not know about the meeting sufficiently enough in advance to withdraw the shares.

The depositary will notify you of any meeting at which you are entitled to vote, and arrange to deliver our voting materials to you. The materials will contain (a) such information as is contained in our notice of meeting, solicitation of consent or proxy, (b) a statement that the ADS holders at the close of business in New York on the specified record date will be entitled, subject to Swedish law, our Articles and the deposit agreement, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the shares or other deposited securities represented by such holder’s ADSs; and (c) a brief statement as to the manner in which blocking or voting instructions may be given to the depositary. Blocking or voting instructions may be given only in respect of a number of ADSs representing an integral number of shares or other deposited securities. For instructions to be valid, the depositary must receive them in writing on or before the date specified. The depositary will try, in so far as practicable and as permitted under Swedish law, our Articles, and the deposit agreement,, to vote or to have its agents block or vote the shares or other deposited securities (in person or by proxy) as you instruct. If the depositary timely receives blocking and voting instructions from you that fails to specify the manner in which the depositary is to vote the ADSs on one or more matters presented at the relevant meeting, the depositary will abstain on those items for which you failed to specify the manner in which the depositary is to vote.

We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the shares underlying your ADSs. In addition, there can be no assurance that ADS holders and beneficial owners generally, or any holder or beneficial owner in particular, will be given the opportunity to vote or cause the depositary or the custodian, as applicable, to vote on the same terms and conditions as our shareholders.


COMPLIANCE WITH REGULATIONS

Disclosure of Interests

Each ADR holder is required to comply with our Articles, as they may be amended from time to time, and the laws of Sweden with respect to disclosure requirements, if any, regarding ownership of ADSs and shares in and other securities and debt obligations of the Company, all as if such ADRs were to the extent practicable the Class B Shares represented thereby. This may include providing information as to whether any ADSs represented by any of the ADRs held by or registered in the name of such holder are being held, directly or indirectly, for some person other than such holder and, if so, the name, address and citizenship of such other person or persons.

How may the deposit agreement be amended?

We may agree with the depositary to amend the deposit agreement and the form of ADR without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or prejudice any substantial existing right of ADS holders, it will not become effective for outstanding ADSs until one month after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended. If any new laws are adopted which would require the deposit agreement to be amended in order to comply therewith, we and the depositary may amend the deposit agreement in accordance with such laws and such amendment may become effective before notice thereof is given to ADS holders.

How may the deposit agreement be terminated?

The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 30 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign, and we have not appointed a new depositary within 90 days.

After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: continue to collect dividends and other distributions pertaining to ADSs, sell rights as provided in the deposit agreement, and continue to deliver ADSs, together with any dividends or other distributions received and the net proceeds of the sale of any rights or other property, in exchange for ADRs surrendered to the depositary. Six months or more after the date of termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. After such sale, the depositary’s only obligations will be to account for the money and other cash. After termination, we shall be discharged from all obligations under the deposit agreement except for our obligations to the depositary thereunder.


BOOKS OF DEPOSITARY

The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours, provided that such inspection is not for the purpose of communicating with ADR holders in the interest of a business or object other than the business of the Company or a matter related to the deposit agreement or the ADRs.

The depositary will maintain facilities in the Borough of Manhattan, The City of New York for the execution and delivery, registration, registration of transfers and surrender of ADRs.

These facilities may be closed at any time or from time to time when such action is deemed necessary or advisable by the depositary in connection with the performance of its duties under the deposit agreement or at our reasonable request.

LIMITATIONS ON OBLIGATIONS AND LIABILITY OF DEPOSITARY

The deposit agreement expressly limits our obligations and the obligations of the depositary and the custodian. It also limits our liability and the liability of the depositary. The depositary:

 

   

is only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct;

 

   

is not obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any ADSs or ADRs, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability is furnished as often as may be required;

 

   

is not liable for (i) any action or non-action by it in reliance on the advice of or information from legal counsel, accountants, any person presenting Class B Shares for deposit, any ADR holder, or any other person believed by it in good faith to be competent to give such advice or information, (ii) the inability by an ADS holder to benefit from any distribution, offering, right or other benefit which is made available to shareholders but is not, under the terms of the deposit agreement, made available to ADS holders or (ii) any special, consequential, indirect or punitive damages for any breach of the terms of the deposit agreement or otherwise; and

 

   

is not responsible for any failure to carry out any instructions to vote any of the ADSs, or for the manner in which any such vote is cast or effect of any such vote, provided that any such action or non-action is in good faith.

The custodian is not under any obligation whatsoever with respect to any action, suit or other proceeding in respect of any ADSs or ADRs, the responsibility of the custodian being solely to the depositary.

In the deposit agreement, we agree to indemnify the depositary under certain circumstances.


Requirements for Depositary Actions

Before the depositary will issue, deliver or register a transfer of an ADS, split-up, subdivide or combine ADSs, make a distribution on an ADS, or permit withdrawal of shares, the depositary may require:

 

   

reimbursement for any applicable tax or other governmental charge and any applicable stock transfer or registration fee (including any such tax or charge and fee with respect to deposits or withdrawn) and payment of any applicable fees, expenses and charges of the depositary;

 

   

satisfactory proof of the identity and genuineness of any signature or any other matters contemplated in the deposit agreement; and

 

   

compliance with any regulations, if any, that the depositary may establish consistent with the provisions of the deposit agreement.

The depositary may refuse to issue and deliver ADSs or register transfers of ADSs during any period when the transfer books of the depositary are closed, or if we or the depositary deem such refusal to be necessary or advisable because of compliance with any requirement of applicable law or regulation. The depositary is not permitted to knowingly accept for deposit under the deposit agreement any shares or other deposited securities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such shares.

EX-12.1

Exhibit 12.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Börje Ekholm, certify that:

 

1.

I have reviewed this annual report on Form 20-F of Telefonaktiebolaget LM Ericsson (publ) (the “Company”);

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

  (a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

  (a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

  (b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated March 19, 2020

 

/s/ Börje Ekholm

Börje Ekholm
President and Chief Executive Officer
EX-12.2

Exhibit 12.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Carl Mellander, certify that:

 

1.

I have reviewed this annual report on Form 20-F of Telefonaktiebolaget LM Ericsson (publ) (the “Company”);

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

  (a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

  (a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

  (b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated March 19, 2020

 

/s/ Carl Mellander

Carl Mellander
Senior Vice President and
Chief Financial Officer
EX-13.1

Exhibit 13.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Telefonaktiebolaget LM Ericsson (publ) (the “Company”) hereby certifies, to such officer’s knowledge, that:

 

  (i)

the Annual Report on Form 20-F of the Company for the period ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  (ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated March 19, 2020

 

/s/ Börje Ekholm

Börje Ekholm
President and Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-13.2

Exhibit 13.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Telefonaktiebolaget LM Ericsson (publ) (the “Company”) hereby certifies, to such officer’s knowledge, that:

 

  (i)

the Annual Report on Form 20-F of the Company for the period ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  (ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated March 19, 2020

 

/s/ Carl Mellander

Carl Mellander
Senior Vice President and
Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-15.1

Exhibit 15.1

Swedish annual report for 2019

in English (adjusted version)


Contents
The business

4

   CEO comment

6

   Business model

8

   An industry driving change

9

   Strategy and financial targets

14

   Differentiating the 5G user experience

15

   Innovation

16

   Segments

20

   Market areas

26

   Our people

Financials

27

   Letter from the Chair of the Board

28

   Board of Directors’ report

43

   Report of independent registered public accounting firm

45

   Consolidated financial statements

52

   Notes to the consolidated financial statements

97

   Management’s report on internal control over financial reporting

98

   Risk factors

109

   Forward-looking statements

 

Corporate governance

110

   Corporate governance report

135

   Remuneration report

Sustainability

143

   Sustainability management

144

   Significant topics, risks and opportunies

145

   Responsible business

Share information

149

   The Ericsson share

Other information

153

   Five-year summary – Financial information

154

   Five-year summary – Non-financial information

155

   Alternative performance measures

160

   Financial terminology and exchange rates

161

   Glossary

162

   Shareholder information

164

   Signatures
 

The annual accounts and consolidated accounts of the Company are included on pages 43–94 in this document.

 

 

Ericsson in brief

 

We have connected people through the evolution of communications technology. It started with telegraphy on to fixed telephony and mobile. As a 5G technology leader we are now not only connecting every “one”, but also every “thing”. It all started in a mechanical workshop in Stockholm in 1876 where Lars Magnus Ericsson designed telephones and his wife Hilda manufactured them by winding copper wire coils.

We have been a technology leader in every generation of mobile communications.

When mobile broadband was in its infancy, Ericsson was already working on the next generation technology, 3G. Ericsson was working on 4G long before the smartphone became ubiquitous and our technology leadership has been a key industry driver towards 5G.

Now, with 5G as a commercial reality, we continue to invest to strengthen 5G leadership and we support our customers to capture the full value of connectivity for them and their customers.

Our portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and Other. The portfolio is designed to help our customers go digital and increase efficiency in an intelligent and sustainable way, while finding new revenue streams.

The Ericsson shares trade on Nasdaq Stockholm and the Ericsson ADSs trade on NASDAQ New York. www.ericsson.com.

 

 

Contact: investor.relations@ericsson.com


3 The business – This is Ericsson

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Highlights 2019

 

Earnings

Q1 report: Ericsson reported underlying operating margin improvement in all segments YoY. Segment Managed Services’ gross margin excluding restructuring charges improved to 17.7% (9.1%) YoY, supported by efficiency gains and customer contract reviews.

Q2 report: Ericsson grew by 7% YoY adjusted for comparable units and currency. Segment Networks’ operating margin excluding restructuring charges improved to 15.0% (13.3%) as a result of higher sales and gross margin.

Q3 report: Ericsson delivered 11.4% (7.0%) operating margin excluding restructuring charges and items affecting comparability.1) Segment Digital Services’ operating margin significantly improved YoY with stronger gross margin and growth in the new portfolio of 19% rolling 12 months.

Q4 report: Ericsson reported growth for the sixth consecutive quarter adjusted for comparable units and currency. Gross margin excluding restructuring charges improved to 37.1% (32.0%) YoY, mainly driven by improvements in Digital Services. The board will propose a dividend for 2019 of SEK 1.50 (1.00) per share to the AGM.

Strategy execution

Networks: By year-end 2019, Ericsson announced 78 commercial 5G agreements with individual operators and 24 live 5G networks across the globe. Ericsson also increased investments within R&D, and reported organic growth and gross margin improvement.

Digital Services: The business momentum in the new portfolio of 5G and cloud-native products is good. Sales of the new portfolio grew by 7%, driven by customer investments in 4G and 5G. By year-end 2019, 75% of the critical and non-strategic contracts identified in 2017 had been addressed.

Managed Services: R&D investments in Managed Services increased in 2019 and in the first quarter a new AI-based offering for operators, Ericsson Operations Engine, was launched.

Emerging Business and Other: In 2019, Ericsson increased its investments within IoT, a fast-growing business that addresses new opportunities created with 5G.

Key announcements

 

    Ericsson and Swisscom launched the first large-scale commercial 5G network in Europe, supporting commercially available 5G smartphones.

 

    Ericsson to build a new state-of-the-art 5G smart factory in Lewisville, Texas, to meet the demand for rapid 5G deployments in North America.

 

    Ericsson acquired Kathrein’s antenna and filter business which will enabled us to broaden our portfolio of antenna and filter products. The acquisition will also add essential competence regarding advanced radio network products.

 

    Ericsson reaches resolutions on US FCPA investigations. Ericsson announced the resolution of the previously disclosed investigations by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA).
 

 

Net sales

SEK billion

     227. 2             

Operating income

(loss)

     10.6             

Free cash flow before M&A

SEK billion

     7.6  
     (2018: 210.8)         SEK billion      (2018: 1.2)              (2018: 4.3)  
     (2017: 205.4)              (2017: –34.7)              (2017: 4.8)  
                         

Gross margin

excl. restructuring

     37. 5%        

Operating margin

excl. restructuring

     5.0%        

Number of

employees

     99,417  
charges 2)      (2018: 35.2%)         charges 3)      (2018: 4.4%)              (2018: 95,359)  
     (2017: 25.9%)              (2017: –12.8%)              (2017: 100,735)  

 

1) 

Operating income excluding restructuring charges in all periods. Excluding cost provisions related to resolution of the SEC and DOJ investigations of SEK –11.5 billion and refund of social security costs of SEK 0.9 billion in Q3 2019.

2) 

Excluding restructuring charges of SEK –0.3 billion (2019), SEK –5.9 billion (2018) and SEK –5.2 billion (2017).

3) 

Excluding restructuring charges of SEK –0.8 billion (2019), SEK –8.0 billion (2018) and SEK –8.5 billion (2017).


4 The business – CEO comment

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

We are capturing the 5G opportunity

 

In 2019 we have seen 5G grow faster than expected, there is an unprecedented demand for consumer applications and 5G will be the platform for connectivity in the enterprise space. Our focused business strategy, built on increased R&D for technology leadership, allowed us to double down on our 5G investments and this has created a solid foundation for growth. We closed out the year in a clear leading position with 78 contracts and 24 live 5G networks across 4 continents.

    

 

 

Over the last three years, we have executed on our focused strategy. With the turnaround phase behind us, we now see our topline growing and margins improving. This, in combination with improved working capital efficiency, has generated a solid cash flow. In short, we have a healthy business and can now take the next steps to identify profitable growth opportunities.

With increased R&D we now have a competitive portfolio which is driving improved gross margin and in addition, we have recorded several important commercial agreements that strengthen our future business.

During 2019, we adjusted our sales ambition for 2020 up by SEK 20 billion to SEK 230–240 billion. Our operating margin target for 2020 remains at more than 10% and we have crystallized the 2022 operating margin target as a range of 12–14%.

M&A activity will continue to be an important part of our growth strategy, where we see potential value creating portfolio-near acquisitions as enablers for future growth. In 2019, we acquired Kathrein’s antenna and filter business to expand our portfolio and bring vital competence into the Company.

Over the past several years, we have worked to resolve many difficult issues, including turning around our challenged contracts and resolving our settlement with the US authorities. With the resolution with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC), we have brought closure to the long- standing investigations into our past conduct. It is

important to stress that we have a zero tolerance for corruption and the resolution highlights a number of shortcomings. We work hard every day to build a culture of compliance, anchored securely within the organization, to ensure that such an event will never happen again. Rebuilding our trust is a top priority. In the near term, the addition of significant resources to further strengthen our Ethics & Compliance program will negatively affect our earnings, but the long-term payoff is indisputable.

Excluding the costs related to the resolution of the investigations by the US authorities, our 2019 operating margin was 9.7%, almost achieving the target for 2020 one year ahead of plan. Proof of our strength and confidence in our future was reflected by the Board’s proposal to raise the dividend to SEK 1.50 per share.

The 5G opportunity

With a solid business foundation and our increased investments in 5G we are well positioned to benefit from an accelerated deployment of this technology. In 2019 leading telecom operators from all over the world have switched on their 5G networks and that market is growing even faster than most analysts expected. In total, we expect the global number of 5G subscriptions to reach 2.6 billion within the next six years, driven by sustained momentum and a rapidly developing 5G ecosystem. This will make it the fastest mobile technology to have ever been rolled out.

Our research shows that consumers have a high interest in the new 5G-enabled services and a willingness to pay for them.

We also expect data usage to increase rapidly. In South Korea, where commercial 5G services were launched in early 2019, 5G subscribers on unlimited data plans consume on average 30 percent more data than that of 4G subscribers on similar plans.

But 5G is much more than enhanced mobility for consumers. This is an innovation platform so powerful that it will be the driving force behind the next big shift in society – the fourth industrial revolution. By 2025, we expect the number of cellular IoT connections to reach 5 billion. This shift will impact all sectors, potentially increasing the addressable opportunity for telecom operators by up to 30% by 2030.

We are increasing our investments in IoT and advanced connectivity solutions that will allow us to capture this growing market. We already see very strong demand for these solutions.

Technology leadership

Over more than three decades, we have invested tens of billions of dollars in all generations of mobile technology, and with 5G we are laying the foundation for a new era of connectivity. Our 5G platform is commercially live with 24 customers on four continents and our focus continues to be on performance.

Thanks to our early and significant investment in R&D, Ericsson has the world’s leading patent portfolio in cellular technology, with

 


5 The business – CEO comment

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

more than 54,000 granted patents and over 100 signed licensing agreements. When an independent law firm reviewed the 5G patents which are declared as potentially standard-essential, they found Ericsson to have a leading share of relevant patents. Another way to look at 5G leadership is that we have the most devices certified to work on our equipment. To put it simply, from technology leadership to performance in the field, there is no one ahead of us in 5G.

Doing business the right way

It is my strong belief that a culture of integrity, responsibility, transparency and accountability is what ultimately counts in determining a company’s long-term success. Unfortunately, the commitment to our values and to upholding our Code of Business Ethics has in the past been inconsistent.

We must acknowledge that we have not always met the high standards that we set for ourselves for doing business the right way. The settlement with the DOJ and SEC is evidence of that.

The resolution allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA). We can do nothing about yesterday, very little about today, but we can fundamentally change tomorrow. We are working hard to be a better company, today and in the future, to ensure that this doesn’t happen again.

Over the past several years we have significantly increased resources devoted to compliance and investigations. We have introduced vetting of Executive Team members and staff in over 150 key positions.

Importantly, the key individuals identified by the DOJ and SEC are no longer with the company. In total, 49 people with some form of culpable involvement in the matters reported to the DOJ and SEC have left Ericsson.

We have also strengthened the vetting of third parties and have improved screening for high-risk transaction. We take action when we find third parties who fail to live up to the standards we set to ensure ethical business practices.

We are focused on re-establishing the trust and confidence of all our stakeholders –including employees, customers, regulators, investors and the general public.

This work has made Ericsson a stronger company, but we know that there is more to be done. In fact, this work never stops. This is not just about policies and internal controls – it is about people and culture. To be a trusted partner we must ensure that everyone in the Company adheres to the highest ethical standards and principles. Ultimately, conducting business responsibly and with integrity is the only way we can drive real and positive change.

Sustainability and corporate responsibility

We have integrated sustainability and corporate responsibility into our business strategy, and our sustainability performance is reflected in the Sustainability and Corporate Responsibility report published together with this Annual Report. We continue to support the ten principles of the UN Global Compact and the UN Guiding Principles on Business and Human Rights as important elements of our commitment to responsible business.

Ericsson has been a driving force in showing how digital technology can reduce carbon

emissions by 15% in sectors like manufacturing and transport by 2030. We are one of a handful of companies that has set Science Based Targets committed to support limiting global temperature rise to 1.5°C, to further demonstrate our leading position we have made an additional commitment to become carbon neutral by 2030.

In summary

We are empowering an intelligent, sustainable and connected world by relentlessly innovating technologies that are easy to adopt, use and scale. We have already connected billions of people, and our solutions are helping to solve some of the planet’s biggest challenges. Through our people, solutions and technology leadership we will continue to drive real, positive change in society.

We are stronger today. We have returned to profitability, have a solid core business and are growing. Our focused strategy remains in place, with the prime focus on telecom operators, and we are continuing our work to bolster ethics and compliance across the Company and build a culture defined by integrity, responsibility, transparency and accountability. We know that conducting our business the right way is the only way to be successful for another 100 or more years.

A company’s performance is all about people. Therefore, I want to especially thank all my colleagues at Ericsson for turning around the company. You have done a tremendous job in 2019. You rock!

Börje Ekholm

President and CEO

 


6 The business – Business model

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Business model

Our business model is built to manage changing market requirements and to capture new business opportunities. Customer focus and motivated employees are key to drive our business, create stakeholder value and to build a stronger company long-term.

 

LOGO

 

We develop innovative and cost

competitive solutions for our customers.

  Motivated and talented employees drive our business.

 

LOGO


7 The business – Business model

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

With an agile and efficient business model, we create value for our stakeholders by providing industry-leading, high performing, sustainable and cost-efficient solutions to our customers.

 

LOGO

We create value for our stakeholders by building a stronger company long term.

 

LOGO


8 The business – An industry driving change

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

An industry driving change

During 2019 initial deployments of 5G networks continued at a rapid pace and an increasing number of 5G devices became available.

Spectrum for future networks

 

For every new generation of mobile technology, new radio frequency bands have been allocated to enable the commercial launch of the new technology, while maintaining previous generations in operation. With the rapid uptake of 5G expected to continue, operators will need more spectrum, not least to achieve the full benefits of 5G, such as ultra-high peak data-rates and low latency in the millimeter wavelengths. By 2025, Ericsson forecasts 2.6 billion 5G subscriptions globally, accounting for 29 percent of all mobile subscriptions at that time.

Different spectrum for different needs

Each spectrum band has different physical properties, meaning that there are tradeoffs between capacity, coverage and latency as well as reliability and spectral efficiency. When planning 5G deployments, operators need to take these trade-offs into consideration to match their own service focus, whether this is enhanced mobile broadband, massive IoT, critical IoT or Fixed Wireless Access.

Low-band

The low-band frequencies have historically been used for 2G, 3G and 4G networks for voice and mobile broadband services as well as for TV broadcasting. For a typical 5G mobile broadband use case, capacity and latency are similar to 4G on the same band.

Mid-band

Mid-band frequencies are currently used for 2G, 3G and 4G services. In the new higher mid-band spectrum, we are likely to see larger bandwidths (50–100 MHz). This could enable high-capacity, lower-latency networks to be used for new 5G use cases, with better wide-area and indoor coverage than what higher-band spectrum can offer.

High-band

High-band frequencies provide the quantum leap in performance promised by 5G. These new bands are typically in the 24–40 GHz range, with bandwidths in 100 MHz (or higher) blocks. Such large bandwidth enables ultra-high capacity networks with latency as low as 1 millisecond. However, these higher frequencies come with a coverage limitation compared with lower bands.

Spectrum strategy

Over time, existing spectrum used for 4G will be smoothly migrated to 5G. Functions that enable smooth spectrum migration and combinations of both bands and technologies will be crucial for the planned evolution of the network.

There are likely to be several combinations of bands and technologies for 5G over the coming years, as traffic increases and markets mature. This will enable devices to be connected to both 4G and 5G simultaneously. Utilizing spectrum in combination with new bands will enable operators to serve a wider variety of use cases more efficiently and, in many cases, more quickly.

Challenges in Europe

Compared with the introduction of 4G, larger quantities of new radio spectrum have been allocated for 5G. In the US the Federal Communications Commission has freed up vast amounts of bandwidth for 5G in underused high-band spectrum. Although EU lawmakers have agreed to open up the 3.6 and 26 GHz bands by 2020, about half of all European countries have not yet licensed spectrum for 5G. European countries will thus lag behind countries like the US, Japan, Korea, Australia, and China. Several European countries and their society, industries and consumers will not be able to use 5G to its full extent until several years after the early 5G countries.

 

 

Spectrum trade-off

 

LOGO


9  The business – Strategy and financial targets

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

A focused business strategy

In 2019 we continued to fully execute the focused strategy introduced in 2017 and we are tracking towards the financial targets set for 2020 and 2022. We continue to pursue selective, disciplined and profitable growth in order to build an even stronger company long term.

 

Building a stronger Ericsson long term

The execution of our focused strategy is visible in our financial performance, which shows organic growth, increased operating margin and a positive free cash flow. While we are committed to our targets for 2020 and 2022 and are tracking towards them, our focused strategy aims at building a stronger Ericsson long term, beyond 2022, with continued sales growth and improved returns.

Our strategy to increase R&D investments for technology and cost leadership has been successful, giving us a competitive advantage as telecom operators accelerate their 5G investments. We believe that our position and the current market dynamics present a unique opportunity for us to grow our market share. We aim to address long-term opportunities that present clear advantages of scale and new, profitable revenue streams.

Our ambition is to grow faster than the market, but our approach to sales growth is

focused, and based on the following criteria:

 

    Selective: Product-led growth aligned with our streamlined portfolio and existing customer base.

 

    Disciplined: Commercial and financial discipline, and excellence in contract execution.

 

    Profitable: Growth is managed for positive returns and to support Group financial targets. While contracts are expected to be profitable over time, some expansions may be associated with challenging near-term returns, as the cost for telecom operators to change vendor can be high.

Strategy built on our customers’ needs

Our mission is to enable the full value of connectivity for our customers, the telecom operators. There are three key areas in which we can support their success:

 

    Customers need to capture new revenue streams and new opportunities made possible by 5G and IoT.
    Customers need to go truly digital to enable faster service provisioning and faster network configuration and to increase service usability. This will be increasingly important for them when attracting new customers, but it will also help them to lower their costs further.

 

    Customers need to continuously drive efficiency, relentlessly lowering the cost of delivering traffic in the networks. 5G will increase spectrum efficiency and is also significantly more power efficient, reducing cost and supporting climate targets.

The strategy stands on a foundation of four pillars

Technology leadership

Investments in R&D and technology leadership allow us to bring innovative solutions to the market ahead of competitors, giving our customers an advantage.

 

 

A focused business strategy

 

Purpose    Mission

Empowering an intelligent, sustainable and connected world, by relentlessly innovating technologies that are easy to adopt, use and scale

  

Enabling our customers to capture the full value of connectivity

Our customers’ needs

 

New revenue streams    End-customer experience    Relentless efficiency

Our segment structure and solutions

 

Networks    Digital Services    Managed Services    Emerging business and Other
Highly scalable, cost-competitive, modular platforms offering low total cost of ownership (TCO), good user experience and smooth network trans- formation to 5G    TCO-efficient solutions for programmable 4G and 5G core networks, automated operations and digital engagements    Providing customer experience and cost performance led by automation and AI driven operations and optimization   

Pursuing new business opportunities, fostering an innovation culture and investing in promising incubation opportunities, while supporting the core business

Our foundation

 

Technology leadership    Cost efficiency    Product-led solutions    Global scale & skill
   Sustainability and corporate responsibility   


10 The business – Strategy and financial targets

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

 

Cost efficiency

A cost-efficient base is essential for our business. Investments in R&D enable not only technology leadership but also cost leadership. Using the latest technology enables us to bring down cost in our solutions. This benefits both us and our customers.

Product-led solutions

Software and hardware are at the core of our customer solutions. These are complemented by offerings of services such as installation, roll-out, system integration, support and consulting.

Global scale & skill

Our global presence and our close interaction with our customers bring opportunities for us to grow with discipline, leading to increased market footprint and advantages of scale.

At Ericsson, the expertise that our people have is a key asset that enables us to work close to our customers across the world.

Addressing new revenue opportunities

With 5G our industry will move beyond connecting people; it will also connect machines and things. 5G is a powerful network platform for innovation, opening up new revenue opportunities for telecom operators in both the consumer segment and the enterprise segment. We are already seeing that 5G is supporting telecom operators to deliver new, differentiating services to consumers with upside revenue potential, and there is also significant upside revenue potential for telecom operators who invest in delivering new 5G enterprise services. Our studies show that telecom operators could see an additional revenue opportunity of USD 700 billion by 2030 driven by industry sectors such as healthcare, manufacturing and automotive.

We aim to address these enterprise opportunities and continue to sell through our existing telecom operator relationships and go-to-market models. Our ambition is to service our customers by developing competitive industrial solutions that are easy to scale, such as our global IoT platform and private networks solutions. We increased our M&A capabilities in 2019, and we see portfolio-near acquisitions as an enabler for future growth.

Our aim is to grow and create value by investing in solutions that support our customers’ new revenue streams, drive traffic to mobile networks and drive increased demand for network quality.

Driving our business through four segments and five market areas

Our business is divided into four segments. All of these segments address the same customer group, the telecom operators. The segments are Networks, Digital Services, Managed Services, and Emerging Business and Other.

In Networks we provide hardware, software and services for our customers to build and evolve their mobile networks.

Digital Services is a software-led business supporting our customers as they move to a cloud-native environment, providing solutions for our customers to operate, control and monetize their mobile networks.

With our Managed Services offering we operate our customers’ networks. Our AI and data driven Managed Services offering, Ericsson Operations Engine, proactively manages telecom operator networks to enhance customer experience, drive agile service creation, and optimize costs.

In Emerging Business and Other we explore how our customers can leverage connectivityin order to create new revenue streams.

 

Our market is divided into five geographical market areas. The market areas are responsible for selling and delivering products and solutions developed by our business areas. Staying close to our customers is key. In line with the strategy, we have shifted more responsibility to the market areas, to ensure that we stay close to our customers while maintaining central guidelines and governance structures to ensure price discipline.

Sustainability and Corporate Responsibility

Sustainability is central to Ericsson’s purpose – empowering an intelligent, sustainable and connected world. We are committed to creating positive impacts in society and reducing risks to the Company, our customers and society through our technology, our solutions and the expertise of our people.

We work continuously to improve and strengthen our responsible business practices, with focus on building and maintaining trust, transparency and integrity wherever in the world we operate. We have set targets that are in line with the reduction required to keep the temperature-rise trajectory to 1.5°C. In 2019, we made a further commitment to climate action by approving a target to be carbon neutral in our own operations by 2030.

Sustainability and corporate responsibility are integrated into the business with the aim of understanding and proactively managing environmental, social and economic risks, opportunities and impacts within each segment and market area. Integrating sustainability practices and programs throughout the Company can help us to run operations more efficiently and deliver value to our customers.

 

 

Ericsson’s Ethics & Compliance program

 

The Ethics & Compliance program at Ericsson focuses on business ethics risks
e.g. in the areas of corruption and money laundering, fair competition, data
protection, and sanctions and export control. In recent years, Ericsson has added
significant resources to further strengthen its Ethics & Compliance program,
particularly with respect to anti-bribery and corruption. The anti-bribery and
corruption program consists of ten core elements designed to collectively enable
the Company to raise awareness, to prevent and detect mistakes and breaches of
our Code of Business Ethics, and to respond and remediate quickly when
needed.

 

These ten elements are based on the expressed expectations of national
regulators such as the US Securities and Exchange Commission (SEC), the US
Department of Justice (DOJ), the UK Serious Fraud Office (SFO) and others,
as well as good practices endorsed by public international organizations such as
the OECD, Transparency International and the World Bank.

 

Ericsson will continue to invest in its Ethics & Compliance program in
order to achieve a state-of-the-art program. Please refer to the section on anti-
corruption on page 143 of the Sustainability Report for a more detailed update
on this subject.

  LOGO


11 The business – Strategy and financial targets

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

                                                                                     Tracking towards our financial targets

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1) 

The 2019 operating margin was 9.7% when excluding restructuring charges and costs related to the SEC and DOJ settle- ment of SEK –10.7 billion.

While we are tracking well towards our targets for 2020 and 2022 and remain highly committed to them, our focused strategy aims at building a stronger Ericsson long-term.

The key financial target for 2022 is to reach an operating margin of 12–14% excluding restructuring charges, to be compared to the previous 2022 target of >12%. The near-term focus is to continue the financial turnaround, in order to reach an operating margin of at least 10% in 2020, excluding restructuring charges.

2019 progress

During 2019 we continued to execute on our strategy, which is visible in our financial metrics:

 

    The operating margin excluding restructuring is tracking towards the 2020 target and has improved from 4.4% in 2018 to 5.0% in 2019. The 2019 operating margin was 9.7% when excluding restructuring charges and costs related to the SEC and DOJ settlement of SEK –10.7 billion.

 

    The organic and FX adjusted sales growth in 2019 was 4%, compared to 1% in 2018.

 

    Free cash flow before M&A was SEK 7.6 billion including payments made of SEK 10.1 billion related to the settlement with SEC and DOJ.

Strategy execution activities performed during 2019 included:

 

    Continued investments in R&D for technology and cost leadership, R&D accounted for more than 25% of workforce in 2019.

 

    The turnaround of Digital Services continued, and we addressed 12 additional critical contracts in Digital Services and at year-end 35 of the 45 identified critical contracts have been addressed.

 

    Ericsson announced 78 commercial 5G agreements and contracts with individual telecom operators.

 

    The Company supplied equipment to 24 live 5G networks.

 

    The transition to the Ericsson Radio System was completed with all radio unit deliveries in 2019.

2020 increased net sales ambition driven by Networks

In 2019 the Company increased the net sales ambition for 2020 to SEK 230–240 billion (based on a USD to SEK rate of 9.5), to be compared to the previous 2020 sales ambition of SEK 210–220 billion. The increase is mainly expected in Networks, driven by a growing radio access network (RAN) market, favorable FX movements, the acquisition of Kathrein’s antenna and filter business and selective market share gains. Actual sales in 2019 was SEK 227.2 billion.

Continued focus on gross margin

Gross margin in 2019 has improved, driven by structural improvements. Cost reductions, efficiency improvements and investments in R&D in selected areas are important to keep us competitive and generate further expansion of gross margin. When pursuing expansion of market footprint, initial margins may be challenging, while expected to be profitable over time and support our financial targets.

R&D to drive profitability

We expect our R&D investments to drive profitability, and to secure technology and cost leadership. Continued technology investments are fundamental for long-term competitiveness and a key part of our focused strategy. In Networks we have increased investments to generate more cost-efficient networks for our customers, enable new services and improve serviceability. As 5G is being deployed in high-, mid- and low-band spectrums, this requires us to develop different variants to meet different customer demands. In Digital Services we are investing to develop a full 5G and cloud-native portfolio. In Managed Services we are investing in automation, analytics and AI driven offerings, to support 5G, IoT and cloud as well as to increase service delivery efficiency. In Emerging Business we are increasing our investments in IoT to leverage our position and capture new revenue streams.

Technology leadership will also be a contributor to market share generation and to increase advantages of scale. There will be a continued high focus on implementing structural and continuous improvements in SG&A expenses to safeguard target fulfilment and long-term profitability.

 


12  The business – Strategy and financial targets

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Working capital efficiency and free cash flow in focus

The strong focus on cash flow is paying off. Our ambition is to maintain a strong balance sheet and we aim to secure financial resilience, improve performance visibility, increase accountability and drive focus on profit and cash. In 2019 the Company increased the target for 2020 free cash flow before M&A, from “positive” to “strong”. As illustrated in the graph below, based on an operating income of >12%, Ericsson has the ambition that free cash flow before M&A should be >8% of net sales. In 2019, the free cash flow was 3.4% of net sales by the new definition from the Q4 2019 report, where free cash flow before M&A has been adjusted to include amortization of lease liabilities according with IFRS 16.

The target is to improve collection and credit management as well as sourcing and supply chain management, with an ambition to remain below 100 working capital days. Sharp discipline in both CAPEX and M&A

 

activities are other major elements to drive positive free cash flow. Our planning assumption for CAPEX including capitalized development expenses is 2% of net sales, but this can vary depending on the investments we make, and for instance in 2020, we are building a new 5G-factory in Lewisville, Texas. M&A will vary depending on strategic decisions but are assumed to be around 1–2% of net sales, in line with the last few years. During 2015–2019 restructuring charges in percent of sales was on average 2.8%. In 2020 the ratio is estimated to be approximately 1% and our ambition is to maintain restructuring charges at that level going forward.

To support free cash flow generation, we apply financial discipline with priority on profitability and return on capital over growth.

Target breakdown

In the process to improve financial performance, all segments are critical for success and all have clear targets and focus areas

supporting the Group targets for 2020 and 2022. The sum of the segments’ operating margin targets for 2020 is 10–13%, compared with >10% for the Group. For 2022 the sum of the segments’ operating margin targets is 12–14%, the same as for the Group.

We see opportunities for growth above the estimated market growth. Please see pages 14–17 for specific growth CAGR for each segment. Opportunities can be achieved through winning market share with a competitive product portfolio and cost structure, through growth in new businesses, and through M&A.

While we are committed to, and are tracking towards, our targets for 2020 and 2022, our focused strategy aims at building a stronger Ericsson long term, beyond 2022, with continued sales growth and improved returns.

 

 

Free cash flow generation

 

Bridge from operating income to free cash flow (illustrative)

 

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Operating margin excluding restructuring charges. All numbers are in relation to net sales.

 

1)

Restructuring charges as reported in the income statement for each year.


13  The business – Strategy and financial targets

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Group financial targets and ambitions

Targets for 2022

 

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1) 

Excluding restructuring charges.

Targets and ambitions for 2020

 

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1) 

Excluding restructuring charges.


14  The business – Differentiating the 5G user experience

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Differentiating the 5G user experience

A cluster-based deployment strategy with focus on the customer experience.

 

Providing premium network experience in selected cluster sites

SK Telecom completed the first phase of its 5G deployment in 2019. The operator focused on an initial build-out of coverage primarily in major metropolitan areas, along major traffic and commuter routes and in other densely populated areas. The second phase is now continuing with a build-out of 5G coverage on mid-band. It will be complemented by deployments in the millimeter wave band to meet expected capacity needs and increase network speeds in selected densely populated areas.

A cluster-based 5G deployment strategy

To drive further uptake of 5G services, SK Telecom has identified areas with large numbers of potential consumers who could be provided with a variety of high-quality services supported by a dense 5G network. Identifying and selecting such areas is a key element in SK Telecom’s cluster-based 5G deployment strategy, which aims to provide various new services and benefits to customers in specific clusters, and thereby to create new business growth opportunities. The strategy is therefore centered around providing a premium 5G network experience and innovative services to customers in selected limited geographical locations. The goal is to drive uptake of 5G subscriptions in the clusters, as well as to stimulate the development of new 5G services for consumers, enterprises and industries.

Enhancing customer value

In the clusters, 5G network capacity will be built out to provide for high-volume data traffic and include localized services and benefits tailored to each area’s specific characteristics. The objective of the 5G clusters is to enhance customer value, showing the features and benefits of 5G-enabled services,

and making it obvious that these services bring new user experiences compared to 4G. Because the 5G ecosystem is still under development, consumers will be the initial target group, while industry and enterprise opportunities will be addressed on an ‘on-demand’ basis to drive industrial innovation.

Selection criteria for cluster areas

The target areas for the 5G cluster-based deployment are selected by using floating population data, which identifies the locations of areas where many potential consumers are expected to need 5G services. The initial main targets are areas of high population or office areas with people in the 20–40 age group, as well as areas with high seasonal populations. One example of a cluster area is eSport stadiums, which provide various augmented and virtual reality services linked to watching eSports while supporting the gaming culture. Other examples include popular urban areas where local shops, cafes and restaurants are promoting digital offerings such as customer-centric discount coupons, discount promotions or events. Another selection criteria is areas with expected potential future demand for business-to-business (B2B) services using 5G. Mobile game development clusters, where 5G networks with low-latency capabilities can be used by the gaming industry, is one example.

During 2019, more than 70 cluster areas were selected to stimulate innovation and the uptake of new 5G services mainly addressed to consumers. Further cluster expansion will follow, along with the development of further 5G-based, B2B-specific solutions.

SK Telecom’s go-to-market services strategy for 5G

SK Telecom is initially targeting the enhanced mobile broadband opportunity of immersive

consumer experiences based on virtual and augmented reality (VR/AR) and high-quality streaming content in ultra-high definition (UHD) formats (2K, 4K and 8K). VR and AR are both parts of rapidly evolving device ecosystems which include smartphones, headsets, glasses and displays.

The multimedia content produced includes multi-view and pinch-zoom features to enhance and differentiate the 5G media experience compared to watching regular TV or video content. For example, SK Telecom’s Social VR service enables multiple users to experience sports events and movies together in a virtual environment as if they were in the same physical location.

New business opportunities in the game streaming market will emerge with the introduction of ultra-low-latency capabilities in the 5G networks.

5G drives an increase in average mobile data consumption

In September 2019, a 5G subscriber’s average monthly data consumption in South Korea was almost three times higher than that of 4G subscribers. Under one possible scenario, if SK Telecom were to reach 2.2 million 5G subscribers with an average monthly data consumption of around 28 GB by the end of 2019, about 25 percent of its total mobile traffic would have been carried over the 5G network.1) SK Telecom continues to build out 5G coverage during 2020.

 

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Source: Ericsson Mobility Report.

SK Telecom’s choice of 5G cluster areas

 

Service cluster    Commercial area cluster    Summer cluster    B2B cluster
5G League of Legends Park (eSports stadium), Olympic Park etc.    10 key commercial areas nationwide    Key beaches and water parks    Manufacturing, smart city, smart office and smart hospital


15 The business – Innovation

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Innovation

We invest in R&D and in innovation to create both technology and cost leadership.

Global R&D and supply chain

Our strategy is built on our customers’ needs, and our ambition is to be close to our customers through the whole supply chain. Through our R&D efforts we build long-term value.

 

Research and Development

Our investments in R&D generate technology and cost leadership for us and our customers. Ericsson has 25,100 employees within Research & Development, which represent about a quarter of Ericsson’s employees.

In Research the focus is long-term. We have dedicated research teams located across the world who stay on top of what the technology future will look like and why it matters. In Development the focus is on making timely product investment decisions and executing them with the right capabilities and at the right cost.

Our insight into the emerging technology trends and potential disruptors is high, supported by collaboration initiatives with leading industry forums and universities

globally. Emerging technologies such as edge compute, zero touch, artificial intelligence and virtual and augmented reality are researched, and 6G is already being explored.

Supply chain

Our supply chain aims to secure high-performing, sustainable and cost-effective deliveries of hardware products, software and services to our customers. This requires the global supply chain management and resource management to be in constant close cooperation with sales and product management.

Our global hardware production strategy is to be close to our customers through all steps of the product life-cycle and to meet customer requirements with short lead-times and flexibility, targeting transportation by

road, train or ship. This also includes proactive and reactive supply chain risk management as well as ensuring adherence to our implemented global standards. Our manufacturing sites and logistics operations are there to deliver business value and to ensure that 5G meets industry requirements.

Through our Code of Conduct for business partners we conduct audits to verify Code of Conduct compliance. New suppliers that meet certain criteria are required to complete a self-assessment, while existing suppliers must update their self-assessment on a regular basis. Read more on responsible management of suppliers in our Sustainability Report on page 145.

 

 

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16  The business – Segments

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Segments

Our segment structure is based on our customers’ needs, enabling us to efficiently provide products and services.

Networks

 

Offering – main components

Networks’ solutions support all radio-access technologies and offer hardware, software and related services for both radio access and transport end-to-end.

The product-related services are design, tuning, network rollout and customer support.

Business model

Networks business is primarily based on a transactional model, where Ericsson develops, sells, licenses and delivers hardware, software and services. Networks business also includes recurring revenue streams such as customer support and certain software revenues.

Market

In 2019, the market that Networks addresses, the RAN market, grew by 5.5%, driven by investments in North America and Asia.

2019 was the year when 5G took off. Ericsson was first with commercial live networks in four continents – Americas, Europe, Asia and Oceania. This included multiple operators in the United States, South Korea, Europe as well as in Australia and the Middle East.

Strategic priorities

Networks’ three strategic priorities are to invest in technology and cost leadership, to expand market share selectively and to accelerate 5G with leading customers.

Investments in R&D are focused on generating more cost-efficient networks for our customers, enabling new services and improving serviceability. The constantly increasing mobile data usage is estimated to grow four times by the end of 2025, highlighting the operators’ need to lower the cost per gigabyte to remain profitable. Revenue and profitability can also be increased by new advanced services.

In 2019, the Company acquired Kathrein’s antenna and filter business with a strong R&D organization and extensive experience in antenna design and research. This enabled us

to broaden our portfolio of antenna and filter products and brought essential competence regarding the evolution of advanced radio network products.

Investments to improve network agility will enable our customers to address new revenue streams. The revenue opportunity will open up through IoT and 4G as well as 5G technologies and our ambition is to be the first on the market to offer new features and functionalities in these areas.

In order to secure technology and market leadership in 5G networks, we work with leading customers. The strategy is to continue to gain market share and to seize new business opportunities where it makes business sense, through a competitive product portfolio and a competitive cost structure. The ambition is also to expand and adopt the portfolio to better serve adjacencies such as fixed wireless access, public safety applications, industry digitalisation and other verticals.

By the end of 2019, Ericsson had announced 78 commercial 5G agreements with individual operators, of which 24 were live networks, by the end of the year.

Sustainability focus

The energy-efficiency of products, sustainable materials management as well as circular economy such as reuse and recycling, are key areas of importance for Networks. One of the major cost items for operators is energy for network operations. Networks is investing to improve the energy performance of its offerings, to lower customers’ total cost of ownership and to reduce the carbon footprint from its products. Circular Economy is a topic with an increased focus, where Networks is focusing on reuse, refurbishment and recycling of products. During 2019, the segment launched a refurbished spare parts offering.

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Financial targets and sales ambitions

 
     2020      2022  

Sales ambition
(SEK billion)

     160–164     

Operating margin target3) (%)

     15–17        15–17  

 

1) 

Reported operating income excluding SEK –0.1 billion related to restructuring charges.

2) 

Source: Dell’Oro.

3) 

Excl. restructuring charges.

 


17  The business – Segments

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Digital Services

 

Offering – main components

Digital Services provides solutions consisting of software, services and hardware in the areas of business support systems (BSS), operational support systems (OSS), cloud communication, cloud core, and cloud infrastructure. The portfolio is focused on 5G, cloud native, automated and industrialized solutions to facilitate a smooth journey towards 5G for our customers’ consumer and enterprise business. Customers’ consumer business is the main business driver of solutions that Digital Services provides, but their enterprise business is increasingly important. One example is their private networks and IoT offerings, in which the core network plays a vital role.

Business model

Ericsson develops, sells, licenses and delivers solutions, based on software and services, for specific functions or capabilities in our customers’ operations. The contracts are typically systems integration projects, combining Ericsson software and high-value services. Customer support and software upgrades typically continue to generate sales for Ericsson after delivery of the initial solution. Ericsson has a selective approach to large and complex customer transformation projects. We strive for a gradually higher proportion of recurring revenues through subscription-based software licensing that includes software upgrades and solution support. Over time, we expect the sales-mix to shift towards a higher portion of software content driven by the adoption of cloud native and automation technologies.

Market

Ongoing digitalization, together with virtualization, cloud native and 5G, is driving new opportunities for operators. Digitalization gives possibilities to capitalize on the investments by programming and slicing 4G and 5G networks for specific consumer and enterprise needs. There are also possibilities to automate operations and thus become more agile and radically more efficient with digitalization.

Market growth varies between and within areas. The average growth 2018–2023 CAGR is low single digit, with pockets of up to mid-teens growth, e.g. in orchestration (source Analysys Mason). The growth is primarily driven by the ongoing technology shift to 5G.

Strategic priorities

Top priority is to continue to increase sales of the new 5G and cloud-native portfolio while turning Digital Services into a profitable business.

During 2019 we proceeded with actions to improve efficiency and reduce cost. To date we have also addressed 35 of the 45 critical and non-strategic contracts identified in 2017. The execution of the BSS strategy outlined in the beginning of 2019 is progressing according to plan. In 2019 losses were significantly reduced and the segment is tracking towards its financial targets.

For the long term, Ericsson works to ensure that investments in the new portfolio of 5G and cloud native products continue to strengthen the market position and equip Digital Services for profitable growth.

The new portfolio sales increased by 7% in 2019 and corresponds to approximately two thirds of total product sales.

The continued turnaround is executed in four strategic areas: customers, portfolio, commercial and operational. Key activities include:

 

    Growing sales in line with market development.

 

    Maintaining a disciplined portfolio management and evolving the portfolio together with leading customers.

 

    Providing strong commercial governance and discipline to maximize software value and avoid high-risk projects.

 

    Continuing to improve operational efficiency across R&D, SG&A and service delivery.

Another key activity for the turnaround is to address (finalize, renegotiate, or both) the remaining critical projects.

Sustainability focus

Digital Services focus is on utilizing the full value of connectivity and enabling operators to engage with modern digital ecosystems. Critical aspects when engaging in these ecosystems are network security, the protection of sensitive data and right to privacy. Ericsson is committed to developing software solutions while meeting security and privacy requirements. By using the latest cloud and automation technologies, hardware resources can be utilized more efficiently.

 

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Financial targets and sales ambitions

 
     2020      2022  

Sales ambition
(SEK billion)

     41–43     

Operating margin target3) (%)

    
Low
single digit
 
 
     10–12  

 

1) 

Reported operating income excluding SEK –0.6 billion related to restructuring charges.

2) 

External Sources Dell’Oro (Core), Analysys Mason (OSS), TBR Survey (Orchestration). Measured in revenues (Core, OSS) and operator survey (Orchestration)

3) 

Excl. restructuring charges.

 


18  The business – Segments

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Managed Services

 

Offering – main components

Managed Services provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to operators.

The AI and data driven Managed Services offering, Ericsson Operations Engine, proactively manages operator networks to enhance customer experience, drive agile service creation, and optimize costs.

Business model

Managed Services operate customer networks and IT systems both in the field and remotely from our network operations centers. The contracts are typically multi-year, including transition, transformation and optimization phases. The transition phase is associated with lower profitability because it involves up-front costs when employees and expertise are transferred from the customer to Ericsson. During the transformation phase, global processes, AI and automation tools and delivery models are introduced. The optimization phase focuses on increasing efficiency using industrialized solutions for AI, automation and analytics.

Managed Services has a high contract renewal rate and a higher capital turnover ratio than Group average.

Market

The introduction of 5G and IoT is driving new opportunities for Managed Services, as the growth in data traffic and number of devices increases network complexity, generates a high demand for better end-user experience, and a continued need for cost efficiency.

All this can be addressed with industrialized solutions in automation and analytics. Managed Service’s market is expected to grow by between 3% and 5% CAGR between 2018 and 2022.

Strategic priorities

In order to achieve the 2020 and 2022 financial targets, important priorities include:

 

    A higher share of business from the Ericsson Operations Engine, while maintaining strict financial governance on new contracts.

 

    Industrialization and mass-deployed AI and automation to drive continued efficiency in the service delivery organization.

 

    Investments to continue in R&D for AI, automation and data driven offerings to support 5G, IoT and cloud.

Sustainability focus

The use of automation, machine learning and artificial intelligence improves both network optimization and management while reducing negative environmental impact and contributing to increased occupational health and safety. The ambition to strengthen energy management solutions and reduce carbon footprint is planned to be driven through a new Managed Services sustainability program.

We take an inclusive, risk-based approach to occupational health and safety that includes employees and anyone working or managing networks on our behalf. Consideration for safety and wellbeing is of crucial importance to Ericsson in all areas of our business.

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Financial targets and sales ambitions

 
     2020      2022  

Sales ambition
(SEK billion)

     23–25     

Operating margin target3) (%)

     5–8        8–10  

 

1) 

Reported operating income excluding SEK –45 million related to restructuring charges.

2) 

TBR – Telecom Infrastructure Services (TIS) Benchmark Data, Jan 2020.

3)

Excl. restructuring charges.

 


19  The business – Segments

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Emerging Business and Other

 

Offering – main components

The Emerging Business and Other segment consists of:

 

    Emerging Business, including IoT, iconectiv and New businesses.

 

    Media businesses, including Red Bee Media (formerly Broadcast Services) and a 49% ownership in MediaKind (formerly Media Solutions).

Emerging Business is the area for investments building on Ericsson’s core business and R&D. The objective is to identify new revenue sources for operators and new types of businesses. Major initial investments areas are IoT offerings, Industry 4.0 and automotive.

iconectiv offers software-based interconnection solutions providing number portability between operators.

Red Bee Media consists of technology enabled services, where Ericsson manages the play-out platform for broadcasters and content owners.

MediaKind includes platforms for compression, video processing and storage, content publishing and delivery. Since February 1, 2019 Ericsson has 49% ownership in MediaKind after having divested 51%.

Strategic priorities

To fully leverage Ericsson’s market position, capture new recurring revenue streams and create long-term value, the segment needs to do additional investment in IoT which means that the segment is not expected to reach a breakeven result in 2020.

The expected result for Emerging Business and Other in 2020 is an operating income loss of SEK –1.5 to –2.0 billion, excluding restructuring charges, with a net sales ambition of SEK 6–8 billion given the current portfolio and scaling of opportunities.

Emerging Business applies a disciplined and lean startup approach by conducting regular business performance reviews compared to target milestones and leading indicators for funding approvals.

Sustainability focus

New digital technologies such as 5G and IoT, can have a positive impact on climate action and we believe that Ericsson is in a unique position to drive sustainable development and influence emissions reductions in several industry sectors. As an example, the transportation industry accounts for 21% of the world’s carbon emissions. Solutions such as vehicle navigation and assisted driving systems, can reduce fuel consumption and emissions by 12%.

In Ericsson’s factory in Estonia we have implemented 5G, augmented reality, industrial IoT and machine learning, thus increasing our operational efficiency and workplace health and safety. Average fault detection time has been reduced by 15%, and factory heating costs are potentially reduced by up to 20%.

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Financial targets and sales ambitions

 
     2020      2022  

Sales ambition
(SEK billion)

     6–8     

Operating income3)
(SEK billion)

    
–1.5 to
–2.0
 
 
     N/A  

 

1) 

Operating income includes cost of SEK –10.7 b. related to the resolution of the SEC and DOJ investigations in 2019.

2) 

Reported operating income excluding SEK –0.1 billion related to restructuring charges.

3) 

Excl. restructuring charges.

 


20  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Market areas

Our global skill and presence enable us to develop close relationships with our customers across the world.

Our geographical structure

Our geographical structure is comprised of five market areas, to provide clear customer interfaces and fast time-to-market. Our geographical market areas are responsible for selling and delivering the competitive solutions that our business segments develop.

 

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Sustainability focus across our business

 

As an important input to Ericsson’s continuous efforts to assess the environmental, economic and social topics that are significant to the Company, materiality assessments were carried out with each market area. The

results show a common view around the most important areas outlined to the right and are listed on respective Market Area pages (pages 18–23). More information on Sustainability topics can be found on pages 142–146.

2019 top commonly prioritized Sustainability areas by all market areas1)

 

    Access and affordability

 

    Anti-corruption

 

    Information security and privacy

 

    Management of legal and regulatory environment

 

    Occupational health and safety

 

    Product energy performance

 

1) 

Areas listed in alphabetical order.

 


21  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

North America

 

Market trends

LTE penetration is currently 91% in North America. The transition to 5G is moving rapidly across the US. Ericsson led the way in 2019, deploying 54 live 5G networks in 44 unique markets across all major operators in the US with an unparalleled series of industry firsts. AT&T and Verizon each deployed 5G mmWave services in over 30 markets. Sprint deployed 5G in the mid-band across nine markets, while T-Mobile deployed 5G mmWave services in six markets and launched nationwide in the low band. In Canada, Rogers is planning a commercial 5G launch in 2020. All operators are advertising aggressive network expansion plans, with many new devices planned for 2020. By the end of 2025, we anticipate close to 320 million 5G subscriptions in the region, accounting for 74% of mobile subscriptions.

The US government continues to make 5G leadership a strategic priority, targeting accelerated spectrum deployment, network build regulation, and innovation in the broader ecosystem.

In 2019 the US DOJ1) and FCC2) approved a proposed merger between T-Mobile and Sprint under conditions supporting DISH Networks becoming a new nationwide wireless operator. In February, 2020, a federal judge in New York found in favor of the merger. The deal remains subject to certain closing conditions, possible additional court proceedings, and resolution of outstanding business issues among the parties.

Binding commitments made by T-Mobile and DISH Networks to the FCC and DOJ for national/rural 5G and mobile broadband coverage may intensify the US 5G buildout.

The RAN market in North America grew by 9% in 2019 and is expected by Dell’Oro to grow by 1% in 2020.

Key announcements 2019

 

    Ericsson announces USD 100 million investment to build 5G smart factory in Texas

 

    AT&T and Ericsson are making 5G a reality, delivering ground-breaking innovations

 

    Ericsson leads Sprint’s initial commercial mobile 5G launch across four US cities

 

    T-Mobile partners with Ericsson and others to accomplish key technology achievements towards delivering nationwide 5G

 

    Ericsson leads Verizon’s first 5G ultra- wideband commercial services launch

Sales development 2019

Sales increased in 2019. Networks sales increased driven by investments in 4G and 5G across all major customers. Digital Services sales increased as operators digitalize in preparation for 5G. Managed Services sales grew, driven by strong add-on sales in large customer contracts. Uncertainties regarding the pending operator merger between T-Mobile and Sprint impacted capital spend during Q4 2019.

Sustainability focus

In North America in 2019, the identified significant sustainability topics in priority order were: information security and privacy, anti-corruption, access and affordability, product energy performance and responsible management of suppliers.

 

1) 

The US Department of Justice.

2) 

The US Federal Communications Commission.

 

 

 

 

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22  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Europe and Latin America

 

Market trends

The market area Europe and Latin America had 1.8 billion mobile subscriptions in 2019, representing more than 22% of the global total. Ericsson forecasts 5G to account for around 55% of all mobile subscriptions in Western Europe and around 25% in Central and Eastern Europe by the end of 2025. In Latin America, LTE is the dominant technology in 2019, accounting for 51% of all subscriptions, which Ericsson expects to rise to 69% in 2025. By then, Ericsson expects that 5G will account for 11% of all subscriptions.

On April 17, 2019, Swisscom switched on the first European commercial 5G network, which was 100% powered by Ericsson. Since then Ericsson equipment has been part of ten live 5G networks across eight European countries. However, the overall pace of 5G deployments in Europe is expected by Dell’Oro to lag that of North East Asia and the US.

Market conditions such as uncoordinated timing of spectrum release, prices and license terms act as head winds to deployments in the market area.

In Western Europe, Ericsson expects the majority of 5G spectrum to be released by the end of 2020 with an EU deadline for spectrum release set for end 2022. The current approach to 5G spectrum assignment in Europe is mixed. There is a high variance in spectrum prices with a close correlation to the amount of spectrum made available.

In Latin America, Ericsson expects 5G spectrum to be auctioned in a number of countries next year.

In Europe and Latin America, the RAN equipment market is expected by Dell’Oro to remain relatively flat over the next 4–5 years.

Key announcements 2019

 

    Orange opts for Ericsson Operations Engine in managed services extension

 

    Telia Norway selects Ericsson as sole 5G RAN provider

 

    Vodafone goes live with Ericsson 5G technology in London

 

    Ericsson and Swisscom in European commercial 5G first

 

    TDC selects Ericsson for 5G and Ericsson Operations Engine managed services

 

    Ericsson to transform Tele2 Russia network towards 5G

 

    Telefónica Movistar México selects Ericsson Expert Analytics to enhance customer experience

Sales development 2019

Sales decreased slightly in 2019. Growth in Europe was driven by previously announced contract wins, partly offset by renegotiation and exits of low-performing and non-strategic businesses. Sales in Latin America declined due to timing of large deployment projects.

Sustainability focus

In Europe and Latin America in 2019, the identified significant sustainability topics in priority order were: management of legal and regulatory environment, information security and privacy, anti-corruption, occupational health and safety and product energy performance.

        

 

 

 

 

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23  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Middle East and Africa

 

Market trends

The market area Middle East and Africa is comprised by over 70 countries and is a highly diverse region. While a majority of subscriptions are still 2G and 3G, Ericsson believes 4G to be the dominant technology by 2025 with 720 million subscriptions, comprising around 40% of the total. The race for 5G leadership in the market area continues, with several front-runner operators in the Middle East launching commercial networks in 2019, putting the market area among the early adopters of 5G. Ericsson expects 5G network deployments to take off on a larger scale in 2020 and 2021, with total 5G subscriptions forecast to surpass 120 million in the market area by 2025.

The countries in the market area vary from advanced markets having over 100% penetration in mobile broadband subscriptions to emerging markets with less than 10% penetration. At the end of 2019, more than 25% of all mobile subscriptions in the Middle East and North Africa were for LTE, while in Sub-Saharan Africa LTE connections stood at 11% of the total. Mobile subscriptions in the region are forecast by Ericsson to continue to grow, with close to 75% of total subscriptions expected to be on mobile broadband (3G, 4G and 5G) networks by 2025. Driving factors behind this shift include increased operator investments, a young and growing population with increasing digital skills, and the availability of more affordable smartphones and mobile services in general.

Operators’ revenues are forecast by

Ericsson to grow slightly at 2% annually between 2019 and 2025. However, regulatory challenges (e.g. spectrum policy, SIM registration and local content requirements) still exist in several countries, hence slowing market growth.

Key announcements 2019

 

    STC and Ericsson launch 5G network in Saudi Arabia

 

    Etisalat UAE selects Ericsson for 5G

 

    Mobily and Ericsson provided seamless experiences for Hajj pilgrims

 

    Ooredoo Qatar selects Ericsson for 5G

 

    Batelco and Ericsson – 5G launch in Bahrain

 

    Zain selects Ericsson for 5G in Bahrain

 

    MTN South Africa selects Ericsson for commercial 5G Core and Radio

Sales development 2019

Sales increased in 2019 in Networks and Digital Services, driven by 4G and 5G investments in the Middle East. Managed Services sales declined due to exit of non-strategic contracts.

Sustainability focus

In Middle East and Africa in 2019, the identified significant sustainability topics in priority order were: anti-corruption, access and affordability, information security and privacy, critical incident risk management and product energy performance.

    

 

 

 

 

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24  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

South East Asia, Oceania and India

 

Market trends

The market area South East Asia, Oceania and India includes developed markets with some of the most advanced networks in the world, as well as emerging markets where there is more opportunity for mobile broadband capacity and coverage. In South East Asia and Oceania (excluding India), 3G is still the dominant technology, at 44% of all subscriptions in 2019. However, LTE subscriptions grew by approximately 35% during 2019, taking a 34% share of total mobile subscriptions in the region. In India, as a result of the strong growth in the number of LTE subscriptions over the past couple of years, LTE has emerged as the dominant technology during 2019. By year end 2019, LTE accounted for 48% of total mobile subscriptions, and the share of 2G subscriptions stood at 41%.

The overall telecom market in South East Asia, Oceania and India has strong fundamentals in terms of the growth in subscriptions, smartphone penetration and data consumption. At the same time, operators are challenged by intense competition and the cost of managing increased data traffic. The demand for 5G is growing across most markets as a means of increasing efficiency, improving customer experience and creating new revenue opportunities. 5G has been launched commercially in Australia and there have been 5G trials during 2019 across India, Indonesia, New Zealand, the Philippines, Malaysia, Singapore, Thailand and Vietnam. However, spectrum allocation constraints

mean that the majority of 5G deployments across South East Asia and India are a few years away.

Key announcements 2019

 

    Australia’s first 5G network goes live

 

    dtac and Ericsson sign partnership for advanced network operations

 

    Telkomsel Indonesia to deploy Ericsson core in preparation for 5G

 

    Airtel selects Ericsson for VoLTE expansion

 

    XL Axiata selects Ericsson to modernize transport network in Indonesia

 

    Optus launches 5G in Australia

 

    Ericsson to deploy 5G-ready LTE equipment for Vodafone Idea Ltd.’s network in India

Sales development 2019

Sales remained stable in 2019. Growth in Managed Services was driven by add-on sales and by a contract that was signed in 2018. Digital Services sales decreased, due to lower legacy product sales in India.

Sustainability focus

In South East Asia, Oceania and India in 2019, the identified significant sustainability topics in priority order were: information security and privacy, anti-corruption, management of legal and regulatory environment, product energy performance and occupational health and safety.

    

 

 

 

 

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25  The business – Market areas

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

North East Asia

 

Market trends

In 2019, 5G took off in South Korea as all three major operators started commercial 5G services targeting mobile broadband subscribers. 69 days after network launch in April 2019, there were already more than 1 million 5G subscribers and by year-end the numbers of subscribers had increased to more than 4.6 million. Network deployments for nationwide 5G coverage will continue in 2020.

In Japan, 5G spectrum auctions were concluded in the first half of 2019, and all large operators are preparing for larger scale deployments and commercial launches in 2020. The 2020 summer Olympic Games in Tokyo is expected to be an important showcase for the 5G technology.

Initial 5G services were launched by all three major operators in mainland China in the second half of 2019. Investments in 4G were reduced as the operators were planning for the large scale 5G deployments in 2020.

The initial focus of the 5G investments in North East Asia is on deploying enhanced mobile broadband services and will later move on to IoT connections and industrial services such as healthcare, transportation and smart manufacturing. Ericsson expects the 5G subscription penetration to exceed 56% by 2025.

Key announcements 2019

 

    Ericsson and SK Telecom team up on cloud native 5G core

 

    Ericsson wins 5G commercial deal with KT and SKT

 

    Top three operators in China, namely China Mobile, China Unicom and China Telecom have signed 5G framework agreements with Ericsson

 

    Ericsson and SoftBank Corp. to deploy multi-band 5G network

 

    Ericsson automated smart factory operational in China

 

    Ericsson and KDDI to deploy 5G network

 

    Korea’s LG U+ selects Ericsson as a 5G RAN and 5G Core vendor

Sales development 2019

Sales increased in 2019. The strong Networks sales growth was driven mainly by 5G deployment in South Korea, increased business volumes in Japan and initial launch of 5G in China. 4G in China continued to decline. Digital Services sales were stable.

Sustainability focus

In North East Asia in 2019, the identified significant sustainability topics in priority order were: anti-corruption, occupational health and safety, information security and privacy, critical incident risk management and management of legal and regulatory environment.

    

 

 

 

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26

 

 

The business – Our people

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Our people

We are on a journey, transforming our ways of working to create a great people experience that makes it even easier for us to focus on our customers, and deliver positive business results.

The foundation of our people story

 

Core values

Respect, professionalism and perseverance

Purpose

Empowering and intelligent, sustainable and connected world, by relentlessly innovating technologies that are easy to adopt, use and scale

To offer a great customer experience we must create a great people experience. This is key to the execution of our focused strategy. To achieve this, we must be clear about what we provide as an organization and what we expect from our people.

Leveraging our company purpose, our core

values and our people philosophies, we have articulated an aspiration for the experience people can expect when working at Ericsson.

Our philosophies

We have defined a set of people philosophies to build greater transparency and alignment about what informs some of our most critical people related decisions, and to reinforce our commitment to compliance and the importance of demonstrating ethical and responsible business practices in everything we do.

We believe that:

 

    Every individual is a talent.

 

    We perform at our best when we know what work needs to get done and why it’s important to Ericsson.
    We learn best when we are challenged and receive continuous feedback as we actively contribute to our team’s and Ericsson’s overall success.

 

    Diverse, inclusive teams drive performance and innovation, creating greater business value.

 

    We are engaged when we feel our work makes an impact, that we can work autonomously, are given opportunities to grow and that we are included and valued.

 

    Our leaders are the driving force behind our business performance and overall company culture.

 

    Our people should be paid in a fair way and be recognized and rewarded for the impact they create.
 

 

Focused activities 2019

 

During the past three years we set the foundation and re-designed our ways of working to create an even more positive employee experience in support of our company transformation. During 2019 we have focused on the following areas.

Ethics and compliance

In the course of investigations by the US SEC and DOJ, violations of Ericsson’s values and Code of Business Ethics were identified. One of the remedial actions in response to those findings was to enhance our vetting system for senior executives and introduce additional integrity and background checks in other critical positions. We are also taking a rigorous approach to remediation of breaches of the Code of Business Ethics. Whereas there is a dedicated Ethics & Compliance Function in charge of driving the overall Ethics & Compliance program throughout the organization, compliance is the responsibility of all our employees and management is expected to demonstrate visible leadership in responsible and ethical business. Read more on page 8.

Succession and people planning

We have continued to build a strong succession bench with our critical positions in focus. We actively manage the pipeline for those positions, in order to reduce risk of vacancy

and to ensure performance. This work, initiated in 2018, was cascaded during 2019, establishing a common way of working with strategic succession planning across the company.

Performance management

We have a flexible, future-focused, development-oriented and impact-based performance management framework. It supports individuals and teams to be clear on what needs to get done, how their work contributes to the company, and reinforces the importance of continuous feedback so that we can change direction when necessary to stay aligned with changing business demands.

Engagement

Our employee feedback tool, VOICE, has given us increased speed to action in a more transparent and inclusive way. Aligned with our improved company performance and an increased focus and investment in improving our employee experience, we see a clear positive trend. Both the results and response rate for our employee satisfaction survey have improved between 2018 and 2019. The Ericsson Care Framework was launched as a new holistic approach to occupational health, safety and wellbeing.

Building leadership capabilities for the digital world

Ericsson on the Move is our leadership culture transformation initiative to equip our people to lead in a digital world. This initiative is also deeply rooted in our commitment to develop ethical and responsible leaders across the organization.

The five focus areas for this initiative are fundamental to strengthen our leadership culture: foster a speak up environment; execute speedily; consistently make fact-based, courageous decisions; cooperate and collaborate to create One Ericsson; and increase our focus on humanness and empathy.

Learning and development

In 2019 we activated a new, mobile-first, learning ecosystem that amplifies our learning and teaching culture in a digital age of continual skill set and mindset growth. The ecosystem connects learners to both content and community, including over 23,000 educational experiences, as well as intensive upskilling and reskilling programs. 2.5 million hours were invested by employees in active learning and development, re-skilling/upskilling our people for business growth and individual career advancement.

 


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Financials – Letter from the Chair of the Board

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Letter from the Chair of the Board

Dear shareholders,

 

During 2019, important focus areas of the Board include corporate governance and to ensure that sufficient investments are being made available to strengthen the Ethics and Compliance program. Target areas include leadership and culture, compliance resources, third-party management and internal control.

In 2019, settlement discussions with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) resulted in a resolution that allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA). The resolution identified historical breaches of the United States Foreign Corrupt Practices Act and highlighted shortcomings in the way the Company has been doing business in the past. Strengthening the Ethics and Compliance program to ensure that Ericsson lives up to the highest standards remains a top priority for the Board. The Audit and Compliance Committee regularly receives reporting on compliance related matters from the Chief Legal Officer, the Chief Compliance Officer and the Head of Corporate Investigations.

Conducting business responsibly also includes a commitment to health and safety and responsible sourcing, and to continuing to build a robust speak-up culture. In addition, the Board continues to focus on accountability and talent management. Through employees, we can build a stronger Ericsson long term. It is a key priority for the Board that Ericsson is able to attract, retain and motivate talented people. The Company has implemented long term variable compensation programs with a focus on value creation and on retaining senior managers and key contributors in a competitive market.

We are convinced that digitalization and mobile broadband networks will help tackle some of the global challenges our world faces

today. We aim to be a trusted partner committed to building a better future for all stakeholders. In particular, the Company is delivering solutions that help customers and other industries be more efficient by reducing their energy consumption and climate impacts. We believe that combining business and societal value is the best way to create long term value for Ericsson.

Ericsson’s strategy is based on the needs of our customers, the telecom operators, and my aim as the Chair of the Board, is that each one of Ericsson’s employees share my passion for creating value for these customers. It is very impressive to see the strong competence and technology skills that the organization possesses. The Board supports the Company’s relentless focus on improving its product portfolio and staying relevant, and we view it as essential that the Company continues to build competitive advantages through increased R&D investments. This is crucial in order to achieve both technology and cost leadership. I am happy to see that the results of these efforts were clearly reflected in a strong business momentum during the year and I believe that investing in R&D is fundamental for reaching our financial targets for 2020 and 2022 and for long-term value creation.

During 2019, Ericsson’s global 5G footprint continued to grow. The competitive 5G portfolio is reflected in the sales momentum and the improved market footprint for future business. At a global level, 5G will initially provide an opportunity for telecom operators to increase the offering to customers; however, exciting new innovations for 5G will come with new industrial and IoT applications that will leverage the speed, latency and security characteristics of 5G. This will provide many new opportunities for our customers, the telecom operators, to capture revenues.

The work of the Board also includes analyzing and monitoring the company’s capital structure with the aim of retaining a strong balance sheet and a positive free cash flow.

Business plans, and investments in R&D and other assets, are carefully evaluated and allocated in line with our focused strategy and our ambition for overall capital efficiency. In 2019 Ericsson continued to show a positive free cash flow before M&A of SEK 7.6 billion, including payments of SEK 10.1 billion related to the resolution of the US SEC and DOJ investigations. The Board will propose a dividend for 2019 of SEK 1.50 (1.00) per share to the AGM. The increase underlines the Board’s confidence in Ericsson delivering on its financial targets and building a stronger company long term.

On behalf of all members of the Board, we look forward to continuing working with CEO Börje Ekholm and the full Ericsson team in 2020. I also want to take the opportunity to say thank you to all employees for a job well done in 2019.

Ronnie Leten

Chair of the Board

 


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Financials – Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

Board of Directors’ report

Full-year highlights

 

   

Reported sales increased by 8%. Sales adjusted for comparable units and currency increased by 4%, with Networks growing by 6%.

 

 

   

Reported operating income improved to SEK 10.6 (1.2) billion. Operating income was SEK 22.1 billion (operating margin 9.7%) excluding restructuring charges of SEK –0.8 billion and SEK –10.7 billion in costs related to a resolution of the US SEC and DOJ investigations1).

 

 

   

Gross margin was 37.3% (32.3%) with improvements in Networks, Digital Services and Managed Services.

 

 

   

Free cash flow before M&A amounted to SEK 7.6 (4.3) billion including payments of SEK 10.1 billion related to the resolution of the US SEC and DOJ investigations. Net cash at year-end was SEK 34.5 (35.9) billion.

 

 

   

The Board of Directors will propose a dividend for 2019 of SEK 1.50 (1.00) per share to the AGM.

 

 

1)

United States Securities and Exchange Commission (SEC) and United States Department of Justice (DOJ).

 

 

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Business in 2019

In 2019, sales increased by 8% driven by sales growth in Networks. Sales increased by 12% in Networks with an increased demand for radio access network equipment mainly in North America and in North East Asia. Sales increased in Digital services by 5% with growth in the new product portfolio. Managed Services sales declined by –1%, mainly as a result of contract exits. A weaker Swedish krona (SEK) had a positive impact on reported sales on all segments. Sales growth adjusted for comparable units and currency was 4%.

IPR licensing revenues were SEK 9.6 (8.0) billion driven by new contracts and a stronger USD to SEK.

Gross margin improved to 37.3% (32.3%) with improved gross margins in Networks, Digital Services and Managed Services. A negative impact from strategic contracts in Networks was more than offset by improved hardware margins, operational leverage and lower restructuring charges.

Operating expenses decreased to SEK –64.2 (–66.8) billion with positive impacts from lower restructuring charges and lower negative impact from the net of capitalized and amortized development expenses. R&D expenses were stable with increased investments in Networks and Managed Services offset by reductions in Digital Services and Emerging Business and Other.

After completing a major cost reduction

program in 2018, restructuring charges decreased to SEK –0.8 (–8.0) billion in 2019. With a continous focus on efficiency and structural improvements, the ambition is to maintain restructuring charges around 1% of sales going forward. In 2019, SG&A expenses were impacted by increased costs for digitalization of the business processes which will increase costs short term but is expected to improve productivity in 2021 and beyond. SG&A expenses were also impacted by increased investments in compliance and security.

Operating income was SEK 10.6 (1.2) billion. Operating income was SEK 22.1 billion (9.7% operating margin) excluding restructuring charges of SEK –0.8 billion and costs of SEK –10.7 billion related to a resolution with the US SEC and DOJ.

The number of employees increased to 99,417 (95,359) mainly due to the acqusition of the Kathrein antenna and filter business, and due to increased service delivery resources driven by higher sales.

Free cash flow before M&A amounted to SEK 7.6 (4.3) billion, including payments of SEK 10.1 billion related to the resolution of the US SEC and DOJ investigations. Cash flow was supported by an improved income and by improved working capital efficiency. Net cash at year end was SEK 34.5 (35.9) billion.

 


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Financials – Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

 

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Financial highlights

Net sales

Sales increased by SEK 16.4 billion or 8% to SEK 227.2 (210.8) billion. Networks sales increased by SEK 16.4 billion (12%), Digital Services sales increased by SEK 1.8 billion (5%), Managed Services sales decreased by SEK –0.2 billion (–1%) and Emerging Business and Other sales decreased by SEK –1.6 billion (–19%). Sales adjusted for comparable units and currency increased by 4%.

The sales increase in Networks was driven mainly by higher demand for radio access network equipment. Networks sales growth adjusted for comparable units and currency was 6%.

In Digital Services, growth in the new portfolio was offset by lower legacy product sales. Sales growth adjusted for comparable units and currency was –1%.

The sales decline in Managed Services was mainly a result of contract exits.

The sales decrease in segment Emerging Business and Other was due to the 51% divestment of MediaKind in February 2019. Sales growth adjusted for comparable units and currency was 14%, driven by iconectiv and IoT.

In the geographical dimension, sales-growth was driven by North America and North East Asia.

The sales mix by commodity was: software 21% (21%), hardware 38% (37%) and services 41% (42%).

Gross margin

Gross margin increased to 37.3% (32.3%) with improved margins in Networks, Digital Services and Managed Services. In Networks the negative impact from strategic contracts was offset by improved hardware margins, operational leverage and lower restructuring charges. Digital Services gross margin improved, since costs for a revised BSS strategy had a negative impact in 2018. Managed Services gross margin improved, driven by customer contract exits and efficiency measures. A reduced share of services sales and an increased share of IPR and licensing revenues had a positive impact on gross margin. Restructuring charges included in the gross margin decreased to SEK –0.3 (–5.9) billion.

Operating expenses

Operating expenses decreased to SEK –64.2 (–66.8) billion, with SG&A expenses of SEK –26.1 (–27.5) billion, R&D expenses of SEK –38.8 (–38.9) billion and impairment losses on trade receivables of SEK 0.7 (–0.4) billion. Restructuring charges included

in operating expenses were SEK –0.5 (–2.1) billion. Currency effects impacted operating expenses negatively while the 51% divestment of MediaKind had a positive impact.

R&D expenses were impacted by increased investments in R&D for Networks and Managed Services. This increase was partly offset by lower R&D in Digital Services and Emerging Business and Other. The net effect of capitalized and amortized development expenses was SEK 0.3 (–1.7) billion. Restructuring charges impacted R&D expenses by SEK –0.3 (–1.3) billion. R&D expenses increased by SEK 2.9 billion when excluding restructuring charges and the net effect from capitalized and amortized development expenses.

SG&A expenses were positively impacted by a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by lower restructuring charges of SEK –0.1 (–0.8) billion. Currency effects and increased investments in corporate projects for digital transformation, compliance and security had a negative impact compared to last year. Costs for customer financing revaluation declined to SEK –0.7 (–1.1) billion.

Costs for the resolution of the US SEC and DOJ investigations

In 2019, SEK 10.1 billion in payments were made as Ericsson announced the resolution of the previously disclosed investigations by the US DOJ and SEC regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA). In addition a provision of SEK 0.6 billion was made to cover future monitoring costs. The combined impact of SEK –10.7 billion was reported as Other operating expenses in segment Emerging Business and Other.

Other operating income and expenses

Other operating income and expenses was SEK –9.7 (–0.2) billion and was negatively impacted by SEK –10.7 billion in costs related to the resolution of the US SEC and DOJ investigations. 51% of MediaKind was divested with a capital gain of SEK 0.7 billion in the first quarter. Share in earnings of JV and associated companies was SEK –0.3 (0.1) billion, negatively impacted by the 49% ownership in MediaKind. The Company´s share in earnings of MediaKind was SEK –0.4 billion and the remaining investment is SEK 0.8 billion.

Restructuring charges

Restructuring charges amounted to SEK –0.8 (–8.0) billion. The cost reduction program announced in 2017 was completed in 2018. Restructuring costs related to the revised BSS strategy had a negative impact in 2018.

 


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Financials – Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

 

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Operating income and margin

Operating income improved to SEK 10.6 (1.2) billion driven by higher gross margin and higher sales. This improvement was partly offset by SEK –10.7 billion in costs related to the resolution of the US SEC and DOJ investigations. Operating margin was 4.6% (0.6%). Operating margin excluding the SEC and DOJ costs of SEK –10.7 billion and excluding restructuring charges of SEK –0.8 billion was 9.7%. Operating margin excluding restructuring charges of SEK –8.0 billion was 4.4% in 2018.

Financial income and expenses, net

The financial net improved to SEK –1.8 (–2.7) billion, mainly due to lower negative effects of foreign exchange revaluation, lower negative currency hedge effects and improved interest net. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK –0.3 (–0.5) billion. The SEK weakened against the USD between December 31, 2018 (SEK/USD rate 8.94) and December 31, 2019 (SEK/USD rate 9.32).

Taxes

Taxes were SEK –6.9 (–4.8) billion impacted by the increased income. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations are handled as non tax-deductible. Excluding these costs, the 2019 tax rate was approximately 35%. The Company has implemented IFRIC 23, which requires quarterly assessments of uncertain tax positions.

Net income and EPS

Net income improved to SEK 1.8 (–6.3) billion, driven by higher operating income and an improved financial net. EPS diluted was SEK 0.67 (–1.98) and EPS (non-IFRS) was SEK 1.07 (0.27).

Employees

The number of employees was 99,417 on December 31, 2019, an increase of 4,058 employees compared with December 31, 2018. The increase derives mainly from the acquired Kathrein antenna and filter business and increased service delivery resources driven by higher sales. The increase was partly offset by the MediaKind divestment.

Cash flow

Cash flow from operating activities reached SEK 16.9 (9.3) billion mainly supported by improved income. Working capital efficiency has improved as a result of an increased focus on cash flow. Accounts receivables days of

sales outstanding improved to 75 (91) days. Sale of trade receivables continued to trend downwards and decreased compared to last year. Due to the increase in 5G buildout this year, demand for customer financing solutions has increased. Most of such financing has been successfully transferred to banks and the balance of customer finance credits on the balance sheet remains low. The ambition is to maintain working capital efficiency and thereby effectively convert income to cash. Cash outlays related to provisions were SEK –7.6 (–6.9) billion, of which SEK –1.8 (–4.1) billion was related to restructuring charges. Cash flow from operating activities had a positive impact of SEK 3.0 billion from the implementation of IFRS 16 “Leases”. Financing activities were negatively impacted by amortization of the leasing liability of the same amount.

Cash flow from investing activities was SEK –3.5 (–4.1) billion, where interest-bearing securities impacted by SEK 4.2 (2.2) billion. Investments in property, plant and equipment was SEK –5.1 (–4.0) billion. The increase was mainly due to investments in 5G test equipment. Capitalized development expenses increased to SEK –1.5 (–0.9) billion due to 5G development projects. M&A was SEK –1.5 (–1.3) billion.

Cash flow from financing activities was SEK –6.9 (–4.1) billion. Dividends of SEK 4.5 (3.4) billion were paid out. The repayment of lease liabilities was SEK –3.0 (0.0) billion.

The improved result and focus on free cash flow, in combination with limited investing activities, resulted in free cash flow of SEK 6.1 (3.0) billion and in free cash flow before M&A of SEK 7.6 (4.3) billion. The negative effect of payments related to the resolution of the US SEC and DOJ investigations was more than offset by improved income and working capital efficiency.

Financial position

Gross cash increased to SEK 72.2 (69.0) billion while net cash decreased to SEK 34.5 (35.9) billion.

Liabilities for post-employments benefits increased to SEK 35.8 (28.7) billion mainly due to lower discount rates. The Swedish defined benefit obligation (DBO) has been calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 9.8 billion lower as of December 31, 2019.

The average maturity of long-term borrowings was 2.7 years as of December 31, 2019, a decrease from 3.4 years 12 months earlier.

 


31

 

 

Financials – Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2019

 

 

 

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Ericsson has an unutilized revolving credit facility of USD 2.0 billion, which will expire in 2022.

Ericsson drew on the credit facility of EUR 250 million, from the European Investment Bank (EIB), which was granted in 2018 to support R&D activities for 5G. The facility is set to mature in 2024.

Ericsson signed a new credit facility agreement of EUR 250 million with the European Investment Bank (EIB) in Q4 2019. The credit facility is undrawn.

Ericsson drew on the credit facility of USD 150 million, from the Nordic Investment Bank (NIB), which was signed in December 2019 to support investments in R&D for 5G technology. Part of the new funds, USD 98 million, replaced a credit with NIB that was set to mature in 2021, resulting in a net increase in funding of USD 52 million. The new facility is set to mature in 2025.

In July, Moody’s changed their outlook on Ericsson’s long-term rating from stable to positive. The rating of Ba2 was unchanged. In September, Standard & Poor’s changed their rating outlook on Ericsson from stable to positive. The rating BB+ remained unchanged. In 2019, Ericsson solicited Fitch for credit rating services. Fitch’s long-term rating for Ericsson is BBB- (“investment grade”) with stable outlook.

The capital turnover remained at 1.4 (1.4) times.

Research and development, patents and licensing

In 2019, R&D expenses amounted to SEK –38.8 (–38.9) billion. R&D expenses increased by SEK 2.9 billion when excluding restructuring charges of SEK –0.3 (–1.3) billion and the net effect of capitalized and amortized development expenses of SEK 0.3 (–1.7) billion. The number of R&D resources increased to 25,100 (24,800) and the number of patents continued to increase and amounted to more than 54,000 (49,000) by end of 2019.

Seasonality

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

 

Most recent three-year average seasonality

 

     First
quarter
    Second
quarter
    Third
quarter
    Fourth
quarter
 

Sequential change, sales

     –25     11     4     17

Share of annual sales

     22     24     25     29

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 2019, capital expenditure was SEK 5.1 (4.0) billion, representing 2.3% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

The increase in 2019 was mainly due to investments in 5G test equipment.

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, 2019, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

 

Capital expenditures 2017–2019

 

SEK billion

   2019     2018     2017  

Capital expenditures

     5.1       4.0       3.9  

Of which in Sweden

     2.0       1.3       1.5  

Share of annual sales

     2.3     1.9     1.9

Capitalized development expenses

Capitalized development expenses inreased to SEK 1.5 (0.9) billion due to 5G development projects. The net effect on operating income of capitalized and amortized development expenses was SEK 0.3 (–1.7) billion.

 


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Ericsson Annual Report on Form 20-F 2019

 

 

 

LOGO

Business results – Segments

Networks

Networks represented 68% (66%) of Group net sales in 2019. The segment solutions support all radio-access technologies and offer hardware, software and related services for both radio access and transport.

Net sales

Reported sales increased by 12% in 2019 to SEK 155.0 (138.6) billion. Sales adjusted for comparable units and currency increased by 6%. The sales increase was primarily in the US, South Korea, Italy, Germany and Saudi Arabia, driven by operator investments in LTE and 5G networks. The Networks share of IPR licensing revenues was SEK 7.9 (6.5) billion.

Gross margin

Gross income increased to SEK 64.7 (55.2) billion while gross margin increased to 41.8% (39.8%). The impact of strategic contracts was more than offset by improved hardware margins and operational leverage. Lower restructuring charges in 2019 contributed positively.

Operating income and margin

Operating income increased to SEK 24.8 (19.4) billion. Higher sales and gross margin as well as lower restructuring charges had a positive impact that was partly offset by increased operating expenses. Operating expenses increased mainly due to higher investments in R&D in line with the ambition to continue to strengthen the technology leadership.

Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK 1.1 (–0.3) billion. Restructuring charges were SEK –0.1 (–1.8) billion. Operating margin increased to 16.0% (14.0%).

Digital Services

Digital Services represented 18% (18%) of Group net sales in 2019. The segment solutions include products and services for operators in the areas of BSS, OSS, Cloud Core, Cloud Communication, NFV and Cloud infrastructure. It also includes consulting, learning and testing services.

Net sales

Reported sales increased by 5% in 2019 driven by growth in North America. Services sales increased driven by customer support. Sales in the new portfolio grew by 7% driven by customer investments in 4G and 5G, while sales in legacy products declined. Sales adjusted for comparable units and currency decreased by –1%.

Gross margin

Gross margin increased to 37.2% (21.8%). Gross margin excluding restructuring charges of SEK –0.2 (–4.0) billion improved to 37.8% (32.4%). 2018 was negatively impacted by costs related to the revised BSS strategy.

Operating income (loss)

Operating income improved to SEK –4.0 (–13.9) billion. Operating income excluding restructuring charges of SEK –0.6 (–5.4) billion improved to SEK –3.4 (–8.5) billion, supported by higher gross margin and higher sales. In addition, operating expenses excluding restructuring charges of SEK –0.4 (–1.4) billion declined by SEK –2.2 billion despite a currency headwind. The net impact of capitalized and amortized development expenses was SEK –0.9 (–1.8) billion.

 


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Ericsson Annual Report on Form 20-F 2019

 

 

 

LOGO

 

Breakdown of operating income in segment Emerging Business and Other

 

SEK billion

   Full year
2019
     Full year
2018
 

Segment operating income

     –12.5        –5.4  

of which Emerging Business, iconective, media businesses and common costs

     –2.4        –5.4  

of which SEC and DOJ settlement costs

     –10.7        —    

of which costs for ST Ericsson wind down

     –0.3        —    

of which a refund of social security costs in Sweden

     0.9        —    

Managed Services

Managed Services represented 11% (12%) of Group net sales in 2019. The segment provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to operators.

Net sales

Reported sales decreased by –1%. Sales adjusted for comparable units and currency decreased by –4%, mainly as a result of customer contract exits.

Gross margin

Gross margin increased to 15.6% (11.2%). mainly as a result of efficiency measures, customer contract exits and lower restructuing charges.

Operating income and margin

Operating income increased to SEK 2.3 (1.1) billion. Operating income excluding restructuring charges improved to SEK 2.4 (1.4) billion due to a positive effect from reversal of a provision for impairment of trade receivables made in Q1 2019, of SEK 0.7 billion, and higher gross margin.

Operating margin was 6.3%, excluding restructuring charges and the positive effect from reversal of a provision for impairment of trade receivables of SEK 0.7 billion in Q1 2019.

Restructuring charges amounted to SEK 0.0 (–0.3) billion.

Emerging Business and Other

Segment Emerging Business and Other represented 3% (4%) of Group net sales in 2019. The segment includes:

 

    Emerging Business, including IoT, iconectiv and New businesses

 

    Media businesses, including Red Bee Media and a 49% ownership of MediaKind.

Net sales

Reported sales decreased by –19% in 2019 due to the 51% divestment of MediaKind in February 2019. Sales adjusted for comparable units and currency increased by 14% driven by growth in the iconectiv business through a multi-year number portability contract in the US.

Gross margin

Gross margin declined mainly due to the 51% divestment of MediaKind. The decline was partly offset by lower restructuring charges.

Operating income (loss)

Operating income was impacted by costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations, a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by costs of SEK –0.3 billion related to the wind-down of the ST-Ericsson legal structure.

Operating income in Emerging Business, iconectiv and common costs improved, driven by profitable growth in iconectiv. Red Bee Media income improved supported by profit improvement activities. Media Solutions income improved driven by the 51% divestment of Media Kind, including a capital gain from the transaction.

 


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Ericsson Annual Report on Form 20-F 2019

 

 

 

LOGO

Business results – Market areas

North America

Sales increased in 2019. Networks sales increased driven by investments in 4G and 5G across all major customers. Digital Services sales increased as operators digitalize in preparation for 5G. Managed Services sales grew, driven by strong add-on sales in large customer contracts.

Europe and Latin America

Sales decreased slightly in 2019. Growth in Europe was driven by previously announced contract wins, partly offset by renegotiation and exits of low-performing and non-strategic businesses. Sales in Latin America declined due to timing of large deployment projects.

Middle East and Africa

Sales increased in 2019 in Networks and Digital Services, driven by 4G and 5G investments in the Middle East. Managed Services sales declined due to exit of non-strategic contracts.

 

South East Asia, Oceania and India

Sales remained stable in 2019. Growth in Managed Services was driven by add-on sales and by a contract that was signed in 2018. Digital Services sales decreased, due to lower legacy product sales in India.

North East Asia

Sales increased in 2019. The strong Networks sales growth was driven mainly by 5G deployment in South Korea, increased business volumes in Japan and initial launch of 5G in China. 4G in China continued to decline. Digital Services sales were stable.

Other1)

Sales declined as a result of the 51% divestment of the media business, which was transferred to MediaKind. IPR licensing revenues amounted to SEK 9.6 (8.0) billion.

 

1) 

Market Area “Other” includes primarily licensing revenues and the major part of segment Emerging Business and Other.

 

 

   LOGO


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Ericsson Annual Report on Form 20-F 2019

 

 

Corporate Governance

In accordance with the Annual Accounts Act and the Swedish Corporate Governance Code (the “Code”), a separate Corporate Governance Report, including an internal control section, has been prepared and appended to this Annual Report.

Continued compliance with the Swedish Corporate Governance Code

Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2019, Ericsson does not report any deviations from the Code.

Business integrity

Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity. Upon recruitment, new employees are asked to acknowledge the code. In 2019, the acknowledgment was repeated throughout the global Ericsson organization for purposes of ensuring the employees’ understanding and commitment to the principles of the Code of Business Ethics and securing that business is conducted responsibly.

Board of Directors

At the Annual General Meeting, held on March 27, 2019, Ronnie Leten was re-elected Chair of the Board, and Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Börje Ekholm, Eric A. Elzvik, Kurt Jofs, Kristin S. Rinne, Helena Stjernholm and Jacob Wallenberg were reelected members of the Board. As of March 27, 2019, Torbjörn Nyman, Kjell-Åke Soting and Roger Svensson were appointed employee representatives by the unions, with Anders Ripa, Loredana Roslund and Per Holmberg as deputies.

Management

Since 2017 Börje Ekholm is the President and CEO of the Group. The President and CEO is supported by the Group management, consisting of the Executive Team. During 2019 two new appointments were made to the Executive Team.

Ericsson has a global management system (EGMS) to ensure that Ericsson’s business is well managed and has the ability to fulfill the objectives of major stakeholders within established risk limits and with reliable internal control. The management system also aims to ensure compliance with applicable laws, listing requirements and governance codes.

Remuneration

Remuneration to the members of the Board of Directors and to Group management, as well as the Guidelines for remuneration to Group management resolved by the Annual General Meeting 2019, are reported in note G2, “Information regarding members of the Board of Directors and the Group management.”

The Board of Directors’ proposal for guidelines for remuneration to Group management

The Board of Directors proposes that the Annual General Meeting 2020 resolve on updated guidelines for remuneration to Group management, see pages 36–40. Compared with the guidelines resolved by the Annual General Meeting 2019, the guidelines have been updated to comply with the requirements under the European Union Shareholder Rights Directive II as implemented into Swedish law.

Long-Term Variable Compensation Program 2019 (LTV 2019) for the Executive Team

The Company operated a Long-Term Variable Compensation program (LTV) up until 2017, building on a common platform of investment in, and matching of, Ericsson shares. It consisted of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior managers. The program was designed to encourage long-term value creation in alignment with shareholders’ interests. Since 2017, no all-employee Stock Purchase Plan has been implemented. Instead share-based Long-Term Variable Compensation Programs for the Executive Team have been introduced. LTV 2019 for the Executive Team was approved by the Annual General Meeting 2019. Details of LTV 2019 are explained in note G3, “Share-based compensation.”

Material contracts

Material contractual obligations are outlined in note D4, “Contractual obligations.” These were primarily related to leases of office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations as well as the purchase of components for the Company’s own manufacturing.

The Company is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. Such provisions are not unusual

for certain types of agreements, such as for example financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, the Company believes that none of the agreements currently in effect would in and of itself entail any material consequence for Ericsson due to a change in control of the Company.

Risk management

Ericsson’s Enterprise Risk Management (ERM) framework is an integrated part of the Ericsson Group Management System. The aim of the ERM framework is to strengthen the Group’s governance by integrating risk management with strategy-setting and execution. The ERM framework is designed to establish an adequate and effective management of risk, i.e. the uncertainty in achieving the strategic objectives of the Company. The framework provides methods to identify, assess and treat the risks, and to agree on the Company’s risk appetite and risk tolerance.

Each manager is responsible for handling the risks that emerges from the respective area of responsibility. The responsibility for identified prime risks of the Company is always allocated to an Executive Team member. The Group Risk Management function is responsible for driving the ERM strategy execution and the ERM operations on Group level. The head of each group function, market area and business area, is accountable for appointing one or several risk manager(s) to drive risk management within the unit’s area of responsibility, and for overseeing the ERM in the respective unit. The Chief Financial Officer is accountable for performing oversight of ERM, and the Board of Directors and the Audit and Compliance Committee are responsible for reviewing the effectiveness and appropriateness of ERM.

For information on risks that could impact the fulfillment of objectives, and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, notes A2 “Critical accounting estimates and judgments,” F4 “Interest-bearing liabilities,” F1 “Financial risk management” and the chapter Risk factors.

Sourcing and supply

Ericsson’s hardware largely consists of electronics. For manufacturing, the Company purchases customized and standardized components and services from both global, regional and local suppliers.

 


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Ericsson Annual Report on Form 20-F 2019

 

 

The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies. Ericsson is focusing internal manufacturing on new product introductions and new technologies. Majority of the matured portfolio is outsourced through production partners. Ericsson has internal production sites in Estonia, China and Brazil. During 2020 a new production site will be established in the USA.

The Company negotiates global supply agreements with its primary suppliers. Ericsson’s suppliers are required to comply with the requirements of Ericsson’s Code of Conduct for Business Partners.

In general, Ericsson works to have alternative supply sources and seeks to avoid single source supply situations.

Sustainability and Corporate Responsibility

Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. The Company is committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, and the expertise of its employees. Ericsson’s approach to sustainability and corporate responsibility is an integral part of the Company’s strategy, business model and governance.

Ericsson has prepared a Sustainability Report in accordance with the Swedish Annual Accounts Act named the Sustainability and Corporate Responsibility Report 2019, appended to this Annual Report, pages 141–146.

US FCPA investigations

On December 7, 2019, Ericsson announced the resolution of the previously disclosed investigations by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA). While the DOJ and SEC conduct separate investigations, the same facts have been shared by Ericsson with both authorities.

The resolution relates to historical FCPA breaches ending Q1 2017. While the Company had a compliance program and a supporting control framework, they were not adequately implemented. Specifically, certain employees in some markets, some of whom were executives in those markets, acted in bad faith and knowingly failed to implement sufficient controls. They were able to enter

into transactions for illegitimate purposes and, together with people under their influence, used sophisticated schemes in order to hide their wrongdoing. The resolution allows us to bring an end to the investigations conducted by the US authorities since 2013 and 2015 into Ericsson’s compliance with the US Foreign Corrupt Practices Act (FCPA).

The DOJ proceeding is a criminal enforcement action and the SEC proceeding is a civil enforcement action. The agencies resolve their investigation independently of one another using their own discretion and applying different standards of proof. As a result, the DOJ and SEC have come to different conclusions based on the same facts.

DOJ resolution

Ericsson has agreed to enter into a Deferred Prosecution Agreement (DPA) with the DOJ to resolve criminal charges relating to violation of bribery provision of the FCPA in Djibouti. The DPA also resolves criminal charges relating to violations of the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait, and Vietnam. In connection with the matter in Djibouti, Ericsson’s Egyptian subsidiary pled guilty to bribery. As part of the resolution Ericsson paid a fine of USD 520,650,432.

SEC resolution

Ericsson has agreed with the SEC to the entry of a judgment to resolve claims related to allegations of violations of the accounting provisions of the FCPA in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam and of the bribery provisions of the FCPA in Djibouti, China and Saudi Arabia. As part of the resolution, Ericsson paid financial sanction of USD 458,380,000, plus pre-judgement interest of USD 81,540,000.

As part of the settlement, Ericsson has agreed to engage an independent compliance monitor for a period of three years while the Company continues to undertake significant reforms to strengthen its Ethics and Compliance program.

In parallel to the investigations, the Company has since 2016, together with external expert advisors, conducted a comprehensive review of the Company’s anti-corruption program. Based on this review, Ericsson has been taking significant steps to improve its Ethics and Compliance program. Pursuant to the resolutions, Ericsson has agreed to continue enhancing its internal controls and its compliance program.

Improvements to Ericsson’s Ethics and Compliance program include:

    Additional resources for the Compliance and Investigations functions.

 

    Reorganizing the allegation management process to ensure a centralized, professional intake of allegations, conduct of investigations and remediation.

 

    Refining the risk assessment process to consist of a tiered approach and systematic risk mitigation methodology.

 

    Enhancing the due diligence process of third-parties, including the overall monitoring of third-party engagements.

 

    Introducing more sophisticated analytic tools to better identify and prevent high-risk transactions and engagements

 

    Enhancing the ethics and compliance vetting process for senior leaders.

 

    Refreshing compliance training modules for employees, including workshops and face-to-face training for employees in exposed roles.

 

    Enhancing the internal anti-corruption and compliance related awareness campaigns (including the Company’s zero tolerance for corruption).

Legal proceedings

In April 2018, Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives were named defendants in a putative class action filed in the United States District Court for the Southern District of New York. The complaint alleges violations of United States securities laws, principally in connection with service revenues and recognition of expenses on long-term service projects. In October 2018 the plaintiffs filed a first amended complaint. In December 2018 Ericsson filed a motion to dismiss the complaint. In January 2019 the plaintiffs filed a second amended complaint. Ericsson again filed a motion to dismiss the complaint. On January 11, 2020 the court granted Ericsson’s motion to dismiss. At the same time the court granted plaintiffs leave to file a third amended complaint within thirty days. The plaintiffs did not file an amended complaint by the court-ordered deadline.

As part of its defense to a now settled patent infringement lawsuit filed by Ericsson in 2013 in the Delhi High Court against Indian handset company Micromax, Micromax filed a complaint against Ericsson with the Competition Commission of India (CCI). The CCI decided to refer the case to the Director General’s Office for an in-depth investigation. In January 2014, the CCI opened another investigation against Ericsson based on claims

 


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Ericsson Annual Report on Form 20-F 2019

 

 

made by Intex Technologies (India) Limited. Ericsson has challenged CCI’s jurisdiction in these cases before the Delhi High Court and is waiting for a final decision by the Delhi High Court.

In 2012 and 2013, Intellectual Ventures (“IV”) filed patent infringement lawsuits in the United States District Court for the District of Delaware accusing some of Ericsson’s US customers of infringing 16 US Patents, seeking an injunction and monetary damages. IV subsequently filed additional lawsuits in the District of Delaware accusing some of Ericsson’s US customers of infringing 12 US Patents, seeking monetary damages. In 2017, IV filed additional lawsuits in the Eastern District of Texas accusing Ericsson and some of Ericsson’s U.S customers of infringing ten US Patents. In February 2019, a jury awarded IV damages of USD 43 million in one of those lawsuits. In June 2019 Ericsson announced that Ericsson and IV had signed a license agreement ending all patent infringement lawsuits between the companies.

In December 2018, Sol IP sued AT&T, Verizon, and Sprint in East Texas, alleging infringement of 20 patents declared to the LTE standard. Sol IP is a non-practicing entity. The patents originated from Electronics and Telecommunications Research Institute (ETRI), a Korean government-funded research institution. In March 2019, Ericsson intervened in the litigation to defend its products against claims of infringement. In December 2019, Ericsson challenged the patentability of a number of the patents with the Patent Trial and Appeal Board. Ericsson has after the year-end 2019 resolved the litigation with Sol IP. The settlement resolves the litigation with Sol IP and involves a patent license agreement between Ericsson, Sol IP and ETRI.

In April 2019, Ericsson was informed by the Chinese SAMR (State Administration for Market Regulation) Anti-Monopoly Bureau that they have initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson is cooperating with the investigation.

In addition to the proceedings discussed above, the Company is, and in the future may be, involved in various other lawsuits, claims and proceedings incidental to the ordinary course of business. For information on risks e.g. relating to lawsuits, claims and proceedings, see the chapter Risk Factors.

Parent Company

Telefonaktiebolaget LM Ericsson (the Parent Company) business consists mainly of corporate management, holding company functions and internal banking activities. It also handles customer credit management, performed on a commission basis by Ericsson Credit AB.

The Parent Company has 3 (4) branch offices. In total, the Group has 77 (80) branch and representative offices.

Financial information

Income after financial items was SEK –3.1 (5.8) billion. The Parent Company had no sales in 2019 or 2018 to subsidiaries, while 35% (37%) of total purchases of goods and services were from such companies.

Major changes in the Parent Company’s financial position for the year included:

 

    Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations.

 

    Decreased current and non-current receivables from subsidiaries of SEK –17.0 billion.

 

    Decreased current and non-current liabilities to subsidiaries of SEK –13.9 billion.

 

    Decreased gross cash of SEK –1.6 billion.

At the end of the year, gross cash: cash, cash equivalents, short-term investments, and interest-bearing securities non-current amounted to SEK 56.5 (58.1) billion.

At the end of the year, non-restricted equity amounted to SEK 32.2 (40.8) billion and total equity amounted to SEK 80.4 (88.9) billion.

Share information

As of December 31, 2019, the total number of shares in issue was 3,334,151,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,072,395,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The largest shareholders of the Parent Company at year-end were Investor AB with approximately 22.53% of the votes (7.2% of the shares), AB Industrivärden with 15.14% of the votes (2.61% of the shares) and Cevian Capital with 4.99% of the votes (8.43% of the shares).

In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 17,203,792 treasury shares were distributed to employees or sold in 2019. The quotient value of

these shares was SEK 5.00 per share, totaling SEK 86 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 166.1 million.

The holding of treasury stock at December 31, 2019 was 19,853,247 Class B shares. The quotient value of these shares is SEK 5.00, totaling SEK 99 million, representing 0.6% of capital stock, and the purchase price amounts to SEK 144.2 million.

Proposed disposition of earnings

The Board of Directors proposes a dividend SEK 1.50 (1.00) per share, and that the Parent Company shall retain the remaining part of non-restricted equity. The dividend is proposed to be paid in two equal installments, SEK 0.75 per share with the record date April 2, 2020, and SEK 0.75 per share with the record date October 2, 2020.

The Class B treasury shares held by the Parent Company are not entitled to receive dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:

 

Amount to be paid to the shareholders

     SEK 5,001,227,602  

Amount to be retained by the Parent Company

     SEK 27,220,758,874  

Total non-restricted equity of the Parent Company

     SEK 32,221,986,476  

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 29.6% (32.7%) and a net cash amount of SEK 34.5 (35.9) billion.

The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.

The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is the Board of Directors’ assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the

 


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Ericsson Annual Report on Form 20-F 2019

 

 

Guidelines for Remuneration to Group Management

The Board of Directors proposes that the Annual General Meeting of shareholders 2020 resolve on the following guidelines for remuneration to Group Management. Compared to the guidelines resolved by the Annual General Meeting of shareholders 2019, the guidelines have been updated to comply with the requirements of the European Union Shareholder Rights Directive II (“SRD II”) as transposed into Swedish law.

Guidelines for Remuneration to Group Management

Group Introduction

These Guidelines for Remuneration to Group Management (the “Guidelines”) apply to the Executive Team of Telefonaktiebolaget LM Ericsson (the “Company” or “Ericsson”), including the President and Chief Executive Officer (the “President and CEO”) (“Group Management”). These Guidelines apply to remuneration agreed and changes to previously agreed remuneration after the date of approval of the Guidelines and are intended to remain in place for four years until the Annual General Meeting of shareholders 2024. For employments outside of Sweden, due adaptations may be made to comply with mandatory local rules or established local practices. In such cases, the overall purpose of these Guidelines shall be accommodated to the largest extent possible. These Guidelines do not cover remuneration resolved by the general meeting of shareholders, such as long-term variable compensation programs (“LTV”).

Objective

These Guidelines aim to ensure alignment with the current remuneration philosophy and practices applicable for the Company’s employees based on the principles of competitiveness, fairness, transparency and performance. In particular to:

 

    attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy,

 

    encourage behavior consistent with Ericsson’s culture and core values,

 

    ensure fairness in reward by delivering total remuneration that is appropriate but not excessive, and clearly explained,

 

    have a total compensation mix of fixed pay, variable pay and benefits that is competitive where Ericsson competes for talent, and

 

    encourage variable remuneration which aligns employees with clear and relevant targets, reinforces their performance and enables flexible remuneration costs.

The Guidelines and the Company’s strategy and sustainable long-term interest

A successful implementation of the Company’s strategy and sustainable long-term interests requires that the Company can attract, retain and motivate the right talent and can offer them competitive remuneration. These Guidelines aim to allow the Company to offer the members of the Group Management attractive and competitive total remuneration. Variable compensation covered by these guidelines shall be awarded against specific pre-defined and measurable business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either Group, Business Area or Market Area level, strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

The Company operates long-term variable compensation programs for the Group Management. These have been approved by the Annual General Meeting (“AGM”) and as a result are not covered by these Guidelines. Details of Ericsson’s current remuneration policy and how we deliver on our policy and guidelines and information on previously decided long-term variable compensation programs that have not yet become due for payment, including applicable performance criteria, can be found in the Remuneration Report and in note G2, “Information regarding members of the Board of Directors, the Group management” and note G3, “Share-based compensation” in the annual report 2019.

Governance of remuneration to Group Management

The Board has established a Remuneration Committee (the “Committee”) to handle compensation policies and principles and matters concerning remuneration to Group Management. The Board has authorized the Committee to determine and handle certain issues in specific areas. The Board may also on occasion provide extended authorization for the Committee to determine specific matters.

The Committee is authorized to review and prepare for resolution by the Board salary and other remuneration for the President and CEO. Further, the Committee