UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM20-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, 20162017
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 number000-12033
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)
Roland Hagman,Jonas Stringberg, Vice President, Group Function Financial ControlController
Telephone: +46 10 719716 53 80, Fax: +46 8 744 42 8220, jonas.stringberg@ericsson.com
SE-164 83 Stockholm, Sweden
(Name, Telephone,E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered | |
| American Depositary Shares (each representing one B share) | The NASDAQ Stock Market LLC | |
| B Shares * | The NASDAQ Stock Market LLC |
| * | Not for trading, but only in connection with the registration of the American Depositary Shares representing such B Shares pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
B shares (SEK 5.00 nominal value) | ||||
A shares (SEK 5.00 nominal value) | 261,755,983 | |||
C shares (SEK |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or an emerging growth company . See the definitions of “large accelerated filer” and “accelerated filer” and “emerging growth company” inRule 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. ☐
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒
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ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | ||||||||
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B. | Management’s Annual Report on Internal Control Over Financial Reporting | ||||||||
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ii
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ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | |||||||
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iii
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 Form20-F for the year ended December 31, 20162017 (the “2016“2017 Form20-F”). Reference is made to the English version of our Swedish Annual Report for 2016,2017, with certain adjustments made to comply with U.S. requirements, which is attached hereto as Exhibit 15.1 (the “2016“2017 Swedish Annual Report”). Only (i) the information included in this 20162017 Form20-F, (ii) the information in the 20162017 Swedish Annual Report that is incorporated by reference in this 20162017 FormForm 20-F, and (iii) the exhibits to the 20162017 Form20-F that are required to be filed pursuant to the Form20-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 FormForm F-3 filed on May 8, 2015 (FileNo. 333-203977) and any other document filed by us pursuant to the Securities Act of 1933, as amended, which incorporates by reference the 20162017 Form20-F. Any information in the 20162017 Swedish Annual Report that is not referenced in the 20162017 Form20-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 20162017 Form20-F are defined in the subsections entitled “Glossary” and “Financial Terminology” of the 20162017 Swedish Annual Report, which are incorporate 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 onwww.ericsson.com and other websites that appear in this 20162017 Form20-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 atwww.ericsson.com.
Forward-Looking Statements
This 20162017 Form20-F includesforward-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. performance, including, in particular the following:
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 intendedused to help identifyforward-looking statements.
Forward-looking statements may be found throughout this document, and include statements regarding:
circumstances, including any underlying assumptions, areforward-looking statements.
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure youWe caution investors that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results couldto differ materially from those describedexpressed in, or implied hereinor projected by, theforward-looking information and statements.
Important factors that could affect whether and to what extent any of ourforward-looking statements materialize include but are not limited to the factors described under “Item 3.D.in the section Risk Factors”Factors.
Theseforward-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 theseforward-looking statements, and the estimates and assumptions associated with them, after the date of this Form 20-F , to reflect events or changes in this 2016 Form20-F.
We undertake no obligation to publicly updatecircumstances or revise any forward-looking statements includedchanges in this 2016Form 20-F,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, 2017, 2016, 2015, 2014, and 2013 and 2012,, 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 20162017 Form20-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 20162017 Swedish Annual Report, which are incorporated herein by reference:
| 2016 | Change | 2015 | 2014 | 2013 | 2012 | 2017 | Change | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||||||
Income statement and cash flow items, SEK million | ||||||||||||||||||||||||||||||||||||||||||||||||
Net sales | 222,608 | –10 | % | 246,920 | 227,983 | 227,376 | 227,779 | 201,303 | –10 | % | 222,608 | 246,92 | 227,983 | 227,376 | ||||||||||||||||||||||||||||||||||
Operating expenses | –60,501 | –6 | % | –64,129 | –63,408 | –58,509 | –58,856 | –70,563 | 17 | % | –60,501 | –64,129 | –63,408 | –58,509 | ||||||||||||||||||||||||||||||||||
Operating income | 6,299 | –71 | % | 21,805 | 16,807 | 17,845 | 10,458 | |||||||||||||||||||||||||||||||||||||||||
Net income | 1,895 | –86 | % | 13,673 | 11,143 | 12,174 | 5,938 | |||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | –38,126 | — | 6,299 | 21,805 | 16,807 | 17,845 | ||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | –35,063 | — | 1,895 | 13,673 | 11,143 | 12,174 | ||||||||||||||||||||||||||||||||||||||||||
Restructuring charges | 7,567 | 50 | % | 5,040 | 1,456 | 4,453 | 3,447 | 8,501 | 12 | % | 7,567 | 5,04 | 1,456 | 4,453 | ||||||||||||||||||||||||||||||||||
Cash flow from operating activities | 14,010 | –32 | % | 20,597 | 18,702 | 17,389 | 22,031 | 9,601 | –31 | % | 14,01 | 20,597 | 18,702 | 17,389 | ||||||||||||||||||||||||||||||||||
Year-end position, SEK million | ||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 283,347 | 0 | % | 284,363 | 293,558 | 269,190 | 274,996 | 260,544 | –8 | % | 283,347 | 284,363 | 293,558 | 269,19 | ||||||||||||||||||||||||||||||||||
Property, plant and equipment | 16,734 | 5 | % | 15,901 | 13,341 | 11,433 | 11,493 | 12,857 | –23 | % | 16,734 | 15,901 | 13,341 | 11,433 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 139,817 | –5 | % | 146,525 | 144,306 | 140,204 | 136,883 | 99,540 | –29 | % | 139,817 | 146,525 | 144,306 | 140,204 | ||||||||||||||||||||||||||||||||||
Non-controlling interest | 675 | –20 | % | 841 | 1,003 | 1,419 | 1,600 | 636 | –6 | % | 675 | 841 | 1,003 | 1,419 | ||||||||||||||||||||||||||||||||||
Per share indicators | ||||||||||||||||||||||||||||||||||||||||||||||||
Earnings per share, basic, SEK | 0.53 | –87 | % | 4.17 | 3.57 | 3.72 | 1.80 | |||||||||||||||||||||||||||||||||||||||||
Earnings per share, diluted, SEK | 0.52 | –87 | % | 4.13 | 3.54 | 3.69 | 1.78 | |||||||||||||||||||||||||||||||||||||||||
Earnings (loss) per share, basic, SEK | –10.74 | — | 0.53 | 4.17 | 3.57 | 3.72 | ||||||||||||||||||||||||||||||||||||||||||
Earnings (loss) per share, diluted, SEK | –10.74 | — | 0.52 | 4.13 | 3.54 | 3.69 | ||||||||||||||||||||||||||||||||||||||||||
Dividends per share, SEK | 1.00 | –73 | % | 3.70 | 3.40 | 3.00 | 2.75 | 1.00 1 | ) | 0 | % | 1.00 | 3.70 | 3.40 | 3.00 | |||||||||||||||||||||||||||||||||
Dividend per share (USD) | 0.11 | –71 | % | 0.39 | 0.41 | 0.46 | 0.42 | |||||||||||||||||||||||||||||||||||||||||
Dividends per share, USD | 0.13 2 | ) | 13 | % | 0.11 | 0.39 | 0.41 | 0.46 | ||||||||||||||||||||||||||||||||||||||||
Number of shares outstanding (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
end of period, basic | 3,269 | — | 3,256 | 3,242 | 3,231 | 3,220 | 3,284 | 0 | % | 3,269 | 3,256 | 3,242 | 3,231 | |||||||||||||||||||||||||||||||||||
average, basic | 3,263 | — | 3,249 | 3,237 | 3,226 | 3,216 | 3,277 | 0 | % | 3,263 | 3,249 | 3,237 | 3,226 | |||||||||||||||||||||||||||||||||||
average, diluted | 3,303 | 1 | % | 3,282 | 3,270 | 3,257 | 3,247 | 3,317 | 0 | % | 3,303 | 3,282 | 3,27 | 3,257 | ||||||||||||||||||||||||||||||||||
Capital stock, SEK million | 16,657 | 16,526 | 16,526 | 16,526 | 16,526 | |||||||||||||||||||||||||||||||||||||||||||
Other information, SEK million | ||||||||||||||||||||||||||||||||||||||||||||||||
Additions to property, plant and equipment | 6,129 | –26 | % | 8,338 | 5,322 | 4,503 | 5,429 | 3,877 | –37 | % | 6,129 | 8,338 | 5,322 | 4,503 | ||||||||||||||||||||||||||||||||||
Depreciations and write-downs/impairments of property, plant and equipment | 4,569 | –3 | % | 4,689 | 4,316 | 4,209 | 4,012 | |||||||||||||||||||||||||||||||||||||||||
Depreciations and writedowns/impairments of property, plant and equipment | 6,314 | 38 | % | 4,569 | 4,689 | 4,316 | 4,209 | |||||||||||||||||||||||||||||||||||||||||
Acquisitions/capitalization of intangible assets | 5,260 | 1 | % | 5,228 | 6,184 | 4,759 | 13,247 | 1,759 | — | 5,26 | 5,228 | 6,184 | 4,759 | |||||||||||||||||||||||||||||||||||
Amortization and write-downs/impairments of intangible assets | 4,550 | –18 | % | 5,538 | 5,629 | 5,928 | 5,877 | 21,578 | — | 4,55 | 5,538 | 5,629 | 5,928 | |||||||||||||||||||||||||||||||||||
Research and development expenses | 31,635 | –9 | % | 34,844 | 36,308 | 32,236 | 32,833 | 37,887 | 20 | % | 31,635 | 34,844 | 36,308 | 32,236 | ||||||||||||||||||||||||||||||||||
as percentage of net sales | 14.2 | % | — | 14.1 | % | 15.9 | % | 14.2 | % | 14.4 | % | 18.8 | % | — | 14.2 | % | 14.1 | % | 15.9 | % | 14.2 | % | ||||||||||||||||||||||||||
Inventory turnover days | 69 | 8 | % | 64 | 64 | 62 | 73 | 64 | –7 | % | 69 | 64 | 64 | 62 | ||||||||||||||||||||||||||||||||||
| Alternative Performance Measures (APMs)1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Alternative Performance Measures (APMs) | ||||||||||||||||||||||||||||||||||||||||||||||||
Gross margin | 29.8 | % | — | 34.8 | % | 36.2 | % | 33.6 | % | 31.6 | % | 22.1 | % | — | 29.8 | % | 34.8 | % | 36.2 | % | 33.6 | % | ||||||||||||||||||||||||||
Operating margin | 2.8 | % | — | 8.8 | % | 7.4 | % | 7.8 | % | 4.6 | % | –18.9 | % | — | 2.8 | % | 8.8 | % | 7.4 | % | 7.8 | % | ||||||||||||||||||||||||||
EBITA margin | 4.0 | % | — | 10.5 | % | 9.3 | % | 9.8 | % | 6.6 | % | –10.7 | % | — | 4.0 | % | 10.5 | % | 9.3 | % | 9.8 | % | ||||||||||||||||||||||||||
Cash conversion | 175.0 | % | — | 85 | % | 84 | % | 79 | % | 116 | % | –58 | % | — | 175 | % | 85 | % | 84 | % | 79 | % | ||||||||||||||||||||||||||
Free cash flow | 5,109 | — | 254 | 7,515 | 4,593 | 8,337 | ||||||||||||||||||||||||||||||||||||||||||
Capital employed, SEK million | 190,901 | –2 | % | 195,150 | 189,839 | 180,903 | 176,653 | 158,230 | –17 | % | 190,901 | 195,15 | 189,839 | 180,903 | ||||||||||||||||||||||||||||||||||
Return on equity | 1.2 | % | — | 9.3 | % | 8.1 | % | 8.7 | % | 4.1 | % | –29.4 | % | — | 1.2 | % | 9.3 | % | 8.1 | % | 8.7 | % | ||||||||||||||||||||||||||
Return on capital employed | 3.2 | % | — | 11.6 | % | 9.8 | % | 10.7 | % | 6.7 | % | –22.0 | % | — | 3.2 | % | 11.6 | % | 9.8 | % | 10.7 | % | ||||||||||||||||||||||||||
Equity ratio | 49.6 | % | — | 51.8 | % | 49.5 | % | 52.6 | % | 50.4 | % | 38.4 | % | — | 49.6 | % | 51.8 | % | 49.5 | % | 52.6 | % | ||||||||||||||||||||||||||
Capital turnover | 1.2 | — | 1.3 | 1.2 | 1.3 | 1.3 | 1.2 | 0 | % | 1.2 | 1.3 | 1.2 | 1.3 | |||||||||||||||||||||||||||||||||||
Working capital, SEK million | 89,039 | –15 | % | 104,811 | 103,246 | 106,940 | 100,619 | 59,779 | –33 | % | 89,039 | 104,811 | 103,246 | 106,94 | ||||||||||||||||||||||||||||||||||
Gross cash, SEK million | 57,877 | –13 | % | 66,270 | 72,159 | 77,089 | 76,708 | 67,702 | 17 | % | 57,877 | 66,27 | 72,159 | 77,089 | ||||||||||||||||||||||||||||||||||
Net cash, SEK million2) | 31,191 | –24 | % | 41,150 | 48,014 | 47,634 | 48,041 | |||||||||||||||||||||||||||||||||||||||||
Net cash, SEK million | 34,657 | 11 | % | 31,191 | 41,15 | 48,014 | 47,634 | |||||||||||||||||||||||||||||||||||||||||
| Statistical data,year-end | ||||||||||||||||||||||||||||||||||||||||||||||||
Number of employees | 111,464 | –4 | % | 116,281 | 118,055 | 114,340 | 110,255 | 100,735 | –10 | % | 111,464 | 116,281 | 118,055 | 114,34 | ||||||||||||||||||||||||||||||||||
of which in Sweden | 15,303 | –10 | % | 17,041 | 17,580 | 17,858 | 17,712 | 13,864 | –9 | % | 15,303 | 17,041 | 17,58 | 17,858 | ||||||||||||||||||||||||||||||||||
Export sales from Sweden, SEK million | 107,036 | –9 | % | 117,486 | 113,734 | 108,944 | 106,997 | 86,812 | –19 | % | 107,036 | 117,486 | 113,734 | 108,944 | ||||||||||||||||||||||||||||||||||
| 1) |
| 2) |
Exchange Rates
The following tables provide information with respect to the exchange rate for SEK per USD 1.00 based on the noon buying rate for cable transfers in SEK as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate of 7 April16 March 2018 was SEK 9.05038.1960 per USD 1.00. The average exchange rate is computed using the noon buying rate on the last business day of each month during the period indicated.
Year ended December 31, | Average | Average | ||||||
2012 | 6.7247 | |||||||
2013 | 6.5152 | 6.5152 | ||||||
2014 | 6.9222 | 6.9222 | ||||||
2015 | 8.4643 | 8.4643 | ||||||
2016 | 8.5959 | 8.5959 | ||||||
2017 | 8.4798 | |||||||
Month | High | Low | ||||||
October 2016 | 9.0646 | 8.5641 | ||||||
November 2016 | 9.2686 | 8.8938 | ||||||
December 2016 | 9.4207 | 9.0784 | ||||||
January 2017 | 9.1583 | 8.8254 | ||||||
February 2017 | 9.0134 | 8.7176 | ||||||
March 2017 | 9.0664 | 8.7701 | ||||||
Month October 2017 November 2017 December 2017 January 2018 February 2018 High Low 8.3803 8.0534 8.4803 8.2769 8.5053 8.1732 8.2413 7.8549 8.2694 7.8588
Effects of exchange rate fluctuations on our business is described in the Notes to the Consolidated Financial Statements—Note C20, “Financial Risk Management and Financial Instruments.”
Noon buying rates are not used in the preparation of our financial statements. The exchange rates used in the preparation of our consolidated financial statements are presented below:
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
SEK/EUR | ||||||||||||||||
Average rate | 9.44 | 9.34 | ||||||||||||||
Average rate1) | 9.64 | 9.44 | ||||||||||||||
Closing rate | 9.56 | 9.17 | 9.83 | 9.56 | ||||||||||||
SEK/USD | ||||||||||||||||
Average rate | 8.56 | 8.39 | 8.53 | 8.56 | ||||||||||||
Closing rate | 9.06 | 8.40 | 8.20 | 9.06 | ||||||||||||
| 1) | Average rate is included for disclosure purposes only. Period income and expenses for each income statement are translated at period average exchange rates. |
| 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 20162017 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 20162017 Swedish Annual Report is incorporated herein by reference:
For capital expendituresexenditures we usually use available cash from operationsoperations.
General facts on the company
Legal and commercial name of the Parent Company: Telefonaktiebolaget LM Ericsson (publ).
Organization number: 556016-0680
Legal form of the Parent Company: A Swedish limited liability company, organized under the Swedish Companies Act.
Country of incorporation: Sweden.
Date of incorporation: The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile: Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 21, Kista, Sweden.
Telephone number: +46 10 719 0000
Website:www.ericsson.com. The information included on our website is not incorporated herein by reference.
Agent in the US: Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares: Ericsson’s Class A and Class B shares are traded on Nasdaq Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ New York.
Parent company operations: The business of the parent company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Our parent company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
Subsidiaries and associated companies: For a list of our significant subsidiaries, please see “Item 4C. Investments”. In addition to our joint ventureST-Ericsson (up until August 2, 2013), we are engaged in a number of minor joint ventures and cooperative arrangements. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements, please see “Item 3D. Financials–Risk Factors - Market, Technology and Business Risks”.
Company history and development
Innovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.
Today, Ericsson enables communications service providers to capture the full value of connectivity. The company’s portfolio spans Networks, Digital Services, Managed Services, and Emerging Business and is a leading providerdesigned to help our customers go digital, increase efficiency and find new revenue streams. Ericsson’s investments in innovation have delivered the benefits of communications equipment, telecom servicestelephony and support solutions. Our customers, in over 180 countries, are mainly operatorsmobile broadband to billions of communications networks worldwide. We manage networks, or parts of networks, for one billion subscribers.people around the world.
| B. | Business Overview |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
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Sustainability and corporate responsibility are integrated into Ericsson’s business processes and the Company’s commitment to the triple bottom line of responsible environmental performance and social and economic development is made clear to its stakeholders.
Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. Ericsson is committed to creating business value while reducing risk related to environmental, social, employee, human rights, corruption and bribery matters. Ericsson’s sustainability and corporate responsibility performance is regularly measured, assessed and assured. Group policies and directives have been implemented to ensure consistency across global operations.
Ericsson’s principal risks relating to sustainability and corporate responsibility are identified in Ericsson’s risk management framework.
The Board of Directors is briefed on sustainability and corporate responsibility issues regularly, or as needed on an ad hoc basis.
In 2017, the Chief Sustainability & Public Affairs Officer was a member of Ericsson’s Executive Team and reported to the President and CEO, and was responsible for handling theday-to-day management of Ericsson’s sustainability and corporate responsibility agenda.
Responsible business practices are embedded in Ericsson’s operations to prevent, mitigate and adapt to risks. The Ericsson Group Management System (EGMS) includes policies, processes and directives encompassing responsible sourcing, occupational health and safety, environmental management, anti-corruption and human rights, for example. External assurance providers audit the EGMS.
Some of the Group Policies and Directives that are of particular relevance from a sustainability and corporate responsibility perspective are the Code of Business Ethics, the Code of Conduct, the Sustainability Policy, the Occu-pational Health and Safety Policy, the Electro-magnetic Fields and Health Policy, the Sales Compliance Policy and the Anti-corruption Group Directive, which reflect how Ericsson shall work to secure responsible business practices. These policies and practices are reinforced by employee awareness training and monitoring. Compliance to Group Policies are mandatory for all employees and operations unless a deviation is approved by the CEO.
The Code of Business Ethics
The Code of Business Ethics sets the tone for how Ericsson conducts business globally, and is a guiding framework to support everyone performing work for Ericsson. The Code of Business Ethics is periodically reviewed and acknowledged by employees and has been translated into more than 30 languages to ensure that it is accessible to all employees and stakeholders. During 2017, 99% of active employees acknowledged that they have read and understood the Code of Business Ethics.
Employees are encouraged to report any conduct that they believe, in good faith, to be a violation of laws or the Code of Business Ethics. Ericsson provides employees and external stakeholders with a dedicated communication channel, called the Ericsson Compliance Line, for the reporting of serious compliance concerns involving group or local management and which relates to;
a) corruption or fraud
b) questionable accounting or auditing matters
c) other matters that might seriously affect the vital interest of Ericsson or personal health and safety.
The process around reporting of violations has been strengthened and further developed to include both centrally and locally reported allegations of violations in 2017. For this reason there is a significantly higher number of reports in 2017 in comparison with 2016.
During 2017 the Company received 412 cases reported through Ericsson’s whistle-blower tool, the Ericsson Compliance Line. This tool is available via phone or secure website, 24/7, 365 days a year, and is available in
188 countries and in over 75 languages.
Reported violations are handled by Ericsson’s Group Compliance Forum, which consists of representatives from Ericsson’s internal audit function, Group Function Legal Affairs, Group Security, and Group Function Human Resources. The Forum briefs the Audit Committee about all reported violations, providing them with the incident category, a description of the alleged violation, and information about the decision and outcome.
The Code of Conduct
Ericsson’s Code of Conduct applies to employees and suppliers and is based on the UN Global Compact ten principles on human rights, labor conditions, environmental management and anti-corruption. Ericsson is also committed to implementing the UN Guiding Principles on Business and Human Rights across its business operations.
Suppliers must comply with Ericsson’s Code of Conduct requirements. The Company uses a risk-based approach to assess compliance with the Code of Conduct requirements as part of supplier agreements. The Company has a strong focus on risk mitigation, targeting high-risk portfolio areas and high-risk markets. For prioritized areas such as road and vehicle safety, working at heights, working hours and labor rights, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements, and has also introduced consequence management. Findings are followed up to ensure that improvements are made.
Since 2017, the Ethics and Compliance Board – comprised of several members of the Executive Team and chaired by the CEO – has been responsible to oversee the overall governance of compliance within the Group.
Sustainability risks are defined according to short-term and long-term perspectives. They are related to long-term objectives as per the strategic direction as well as short-term objectives for the coming year. According to Ericsson’s risk framework, sustainability risks are categorized into industry and market risks, commercial risks, operational risks and compliance risks. The Company follow its risk management principles, which apply across all business activities, to manage sustainability risks.
Materiality assessment is a central component of the Company’s sustainability and corporate responsibility strategy, target setting, risks and opportunities management, and reporting process related to its impact on society and environment. Ericsson considers a wide range of economic, environmental and social impacts significant to the business, or which substantively influence the views and decisions of our key stakeholders. Since 2012, the Company has used a materiality assessment to review significant issues on an annual basis, taking into account emerging trends, stakeholder feedback and other input. Adjustments are made as needed to incorporate critical issues as they arise.
The Group Function Sustainability and Public Affairs coordinates management of certain sustainability risks, such as occupational health and safety, human rights, and environmental related risks. Risks related to corruption are coordinated by Group Function Legal Affairs, and diversity issues are coordinated by Group Function Human Resources.
For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the Swedish Annual Report 2017, Note C20 “Financial risk management and financial instruments” and the Risk Factors section in the Board of Directors’ report in the Swedish Annual Report 2017.
Corruption carries serious legal and reputational risks; impedes business growth; damages relations with staff, customers, shareholders, suppliers and society as a whole; and is a considerable obstacle to economic and social development in countries around the world. With customers in 180 countries, many of which are considered to be exposed to a high risk of corruption, prevention and accountability are paramount for Ericsson.
Ericsson has azero-tolerance approach to corruption expressed in the Company’s Code of Business Ethics. The Company has embedded this guiding principle at its highest levels and implemented it throughout its global organization with a set of policies and processes. This includes an anti-corruption directive with more detailed guidelines, for example about appropriate levels of gifts and entertainment.
The Company’s anti-corruption program, focusing on prevention and accountability, is headed by a Chief Compliance Officer, who since October 2017 reports directly to the Audit Committee of the Board of Directors. The Audit Committee also reviews and evaluates the program at least annually. Further, since 2016, an Ethics and Compliance Board, comprised of several members of the Executive Team and chaired by the CEO, has been responsible for the overall governance of compliance within the Group.
During 2016–2017 we invited external experts to evaluate the robustness of our anti-corruption program. Following the review, we adjusted the anti-corruption program to closer align with the US Foreign Corrupt Practices Act (FCPA). In 2017, the program was strengthened with adding resources on group level and appointing Regional Compliance Officers in all Market Areas. Moreover, one of the elements of the Group targets for sustainability and corporate responsibility is anti-corruption.
In 2017 the Company continued to roll out an automated anti-corruption screening tool for supplier and third party due diligence, which was launched in 2016. By the end of 2017, close to 93% of active employees had completed the Company’santi-corruptione-learning course since the training was launched in 2013. A customized online anti-corruption training is also available for Ericsson’s suppliers on the Company website.
In 2017, Ericsson introduced a vetting process that focuses on ethics and compliance. So far we have used it for appointments to the Executive Team and for approximately 110 employees in exposed positions. All members of the current Executive Team have been vetted, and all future recruitments to these positions will also go through mandatory vetting. Business Partner Review Boards have been established in all Market Areas toover-see mitigation of the corruption risks in relation to onboarding of new business partners.
Ericsson is currently voluntarily cooperating with inquiries from the United States Securities and Exchange Commission and the United States Department of Justice regarding its compliance with the U.S. Foreign Corrupt Practices Act. As of today, these inquiries concern a period from January 1, 2007 and onwards, and the Company will make additional disclosures regarding these inquiries to the extent required.
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA)
Ericsson has conducted business in Iran/Persia since the late nineteenth century, opened an office in Iran in 1973 and later established a local subsidiary in the country. Ericsson strongly believes in enabling communication for all and believes that access to communications can enable the right to health, education and freedom of expression. Ericsson’s business activities in Iran principally involve the sale of communications infrastructure related products and services, including support, installation and maintenance services. Ericsson’s exports from the European Union (the “EU”) to Iran are performed under export licenses from the Swedish Agency forNon-Proliferation 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 difficult 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 2016,2017, Ericsson sold communications infrastructure related products and services in Iran to the following telecommunications companies operating in the country: MTNIrancell,Farabord Dadehavare Iranian (“Farabord”), Hiweb, Mobile Communication Company of Iran (“MCCI”), MTNIrancell and Dadeh Gostare Asre NovinPars Online. During 2017, Ericsson and Telecommunications Company of Iran (“Hiweb”TCI”). has had discussions relating to potential future such sales by Ericsson also contracted with Pars Online for such sales.to TCI. During 2016,2017, Ericsson’s gross revenue (reported as net sales) related to sales to Farabord, Hiweb, MCCI and MTNIrancell and MCCIPars Online in Iran was approximately SEK 2,8011,945 million.
Ericsson does not normally allocate net profit (reported as net income) on acountry-by-country oractivity-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, after internal cost allocation was approximately SEK - 332-117 million during 2016.2017. Ericsson intends to continue to engage with existing customers and explore opportunities with new customers in Iran while continuously monitoring international developments as they relate to Iran and its government.
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 Bank Mellat, Tejarat Bank, Melli Bank and Saderat Bank. Although some bonds and guarantees are still in place, no new performance bonds or similar guarantees involving these threefour banks with respect to Ericsson’s business activities in Iran were issued during 2016,2017, nor were payments made to beneficiaries under any such existing bond or guarantee.guarantee during 2017.
During 2016,2017, Maskan Bank, Mellat, Post Bank of Iran and Tejarat Bank (local banks in Iran) issued bank guarantees to secure Iranian customer payment obligations to Ericsson and Eghtesad Novin Bank (a local bank in Iran) issued a letter of credit to one of Ericsson’s banks outside Iran, to secure an Iranian customer’s payment obligations to Ericsson. 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, such as Bank Mellat, Tejarat Bank, Bank Melli, Saderat Bank, Keshavarzi Bank, Eghtesad Novin Bank, Refah Bank and Bank Sepah.Iran. Ericsson also received payments from customers to Ericsson’s accounts outside Iran.
| C. | Organizational Structure |
The following list shows certain shareholdings owned directly and indirectly by our parent company as of December 31, 2016.2017. A complete list of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Companies Registration Office (Bolagsverket), may be obtained upon request to: Telefonaktiebolaget LM Ericsson, External Reporting,SE-164 83 Stockholm, Sweden.
Shares owned directly by the Parent Company
Company | Reg. No. | Domicile | Percentage of ownership | Par value in local currency, million | Carrying value, SEK million | |||||||||||||||
Subsidiary companies | ||||||||||||||||||||
Ericsson AB | 556056-6258 | Sweden | 100 | 50 | 20,731 | |||||||||||||||
Ericsson Shared Services AB | 556251-3266 | Sweden | 100 | 361 | 2,216 | |||||||||||||||
Netwise AB | 556404-4286 | Sweden | 100 | 2 | 306 | |||||||||||||||
Datacenter i Rosersberg AB | 556895-3748 | Sweden | 100 | — | 88 | |||||||||||||||
Datacenter i Mjärdevi Aktiebolag | 556366-2302 | Sweden | 100 | 10 | 69 | |||||||||||||||
AB Aulis | 556030-9899 | Sweden | 100 | 14 | 6 | |||||||||||||||
Ericsson Credit AB | 556326-0552 | Sweden | 100 | 5 | 5 | |||||||||||||||
Other (Sweden) |
|
|
|
|
|
| — | — | 1,642 | |||||||||||
Ericsson Austria GmbH |
|
|
| Austria | 100 | 4 | 65 | |||||||||||||
Ericsson Danmark A/S |
|
|
| Denmark | 100 | 90 | 216 | |||||||||||||
Oy LM Ericsson Ab |
|
|
| Finland | 100 | 13 | 196 | |||||||||||||
Ericsson Participations France SAS |
|
|
| France | 100 | 26 | 524 | |||||||||||||
Ericsson Germany GmbH |
|
|
| Germany | 100 | — | 4,232 | |||||||||||||
Ericsson Hungary Ltd. |
|
|
| Hungary | 100 | 1,301 | 120 | |||||||||||||
L M Ericsson Limited |
|
|
| Ireland | 100 | 4 | 34 | |||||||||||||
Ericsson Telecomunicazioni S.p.A. |
|
|
| Italy | 100 | 44 | 5,357 | |||||||||||||
Ericsson Holding International B.V. |
|
|
| The Netherlands | 100 | 222 | 3,200 | |||||||||||||
Ericsson A/S |
|
|
| Norway | 100 | 75 | 114 | |||||||||||||
Ericsson Television AS |
|
|
| Norway | 100 | 161 | 1,670 | |||||||||||||
Ericsson Corporatia AO |
|
|
| Russia | 100 | 5 | 5 | |||||||||||||
Ericsson España S.A. |
|
|
| Spain | 100 | 43 | 170 | |||||||||||||
Ericsson AG |
|
|
| Switzerland | 100 | — | — | |||||||||||||
Ericsson Holdings Ltd. |
|
|
| United Kingdom | 100 | 328 | 4,094 | |||||||||||||
Other (Europe, excluding Sweden) |
|
|
|
|
|
| — | — | 680 | |||||||||||
Ericsson Holding II Inc. |
|
|
| United States | 100 | 2,897 | 29,907 | |||||||||||||
Companía Ericsson S.A.C.I. |
|
|
| Argentina | 95 | 1) | 41 | 15 | ||||||||||||
Ericsson Canada Inc. |
|
|
| Canada | 100 | — | 51 | |||||||||||||
Belair Networks |
|
|
| Canada | 100 | — | 170 | |||||||||||||
Ericsson Telecom S.A. de C.V. |
|
|
| Mexico | 100 | 939 | 1,050 | |||||||||||||
Other (United States, Latin America) |
|
|
|
|
|
| — | — | 96 | |||||||||||
Teleric Pty Ltd. |
|
|
| Australia | 100 | 20 | 100 | |||||||||||||
Ericsson Ltd. |
|
|
| China | 100 | 2 | 2 | |||||||||||||
Ericsson (China) Company Ltd. |
|
|
| China | 100 | 65 | 475 | |||||||||||||
Ericsson India Private Ltd. |
|
|
| India | 100 | 725 | 147 | |||||||||||||
Ericsson India Global Services PVT. Ltd |
|
|
| India | 100 | 389 | 64 | |||||||||||||
Ericsson Media Solutions Ltd |
|
|
| Israel | 100 | 9 | 711 | |||||||||||||
Ericsson-LG CO Ltd. |
|
|
| Korea | 75 | 375 | 2,544 | |||||||||||||
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) |
|
|
|
|
|
| — | — | 299 | |||||||||||
|
|
|
| |||||||||||||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
| 81,564 | |||||||
|
|
|
| |||||||||||||||||
Joint ventures and associated companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
ST-Ericsson SA | Switzerland | 50 | 137 | — | ||||||||||||||||
Rockstar Consortium Group | Canada | 21 | 1 | — | ||||||||||||||||
Ericsson Nikola Tesla d.d. | Croatia | 49 | 65 | 330 | ||||||||||||||||
|
|
|
| |||||||||||||||||
Total | 330 | |||||||||||||||||||
|
|
|
| |||||||||||||||||
Company | Reg. No. | Domicile | Percentage of ownership | Par value in local currency, million | Carrying value, SEK million | |||||||||||||||
Subsidiary companies | ||||||||||||||||||||
Ericsson AB | 556056-6258 | Sweden | 100 | 50 | 20,731 | |||||||||||||||
Ericsson Shared Services AB | 556251-3266 | Sweden | 100 | 361 | 2,216 | |||||||||||||||
Netwise AB | 556404-4286 | Sweden | 100 | 2 | 306 | |||||||||||||||
Datacenter i Rosersberg AB | 556895-3748 | Sweden | 100 | — | 88 | |||||||||||||||
Datacenter i Mjärdevi Aktiebolag | 556366-2302 | Sweden | 100 | 10 | 69 | |||||||||||||||
AB Aulis | 556030-9899 | Sweden | 100 | 14 | 6 | |||||||||||||||
Ericsson Credit AB | 556326-0552 | Sweden | 100 | 5 | 5 | |||||||||||||||
Other (Sweden) | — | — | 1,645 | |||||||||||||||||
Company Ericsson Austria GmbH Ericsson Danmark A/S Oy LM Ericsson Ab Ericsson Participations France SAS Ericsson Germany GmbH Ericsson Hungary Ltd. L M Ericsson Limited Ericsson Telecomunicazioni S.p.A. Ericsson Holding International B.V. Ericsson A/S Ericsson Television AS Ericsson Corporatia AO Ericsson España S.A. Ericsson AG Ericsson Holdings Ltd. Other (Europe, excluding Sweden) Ericsson Holding II Inc. Companía Ericsson S.A.C.I. Ericsson Canada Inc. Belair Networks Ericsson Telecom S.A. de C.V. Other (United States, Latin America) Teleric Pty Ltd. Ericsson Ltd. Ericsson (China) Company Ltd. Ericsson India Private Ltd. Ericsson India Global Services PVT. Ltd Ericsson Media Solutions Ltd Ericsson-LG CO Ltd. Ericsson (Malaysia) Sdn. Bhd. Ericsson Telecommunications Pte. Ltd. Ericsson South Africa PTY. Ltd Ericsson Taiwan Ltd. Ericsson (Thailand) Ltd. Other countries (the rest of the world) Total Joint ventures and associated companies ST-Ericsson SA Rockstar Consortium Group Ericsson Nikola Tesla d.d. Total Reg. No. Domicile Percentage
of
ownership Par value
in local
currency,
million Carrying
value,
SEK million Austria 100 4 94 Denmark 100 90 216 Finland 100 13 196 France 100 26 524 Germany 100 — 4,232 Hungary 100 1,301 120 Ireland 100 4 34 Italy 100 44 3,857 The Netherlands 100 222 3,200 Norway 100 75 114 Norway 100 161 270 Russia 100 5 5 Spain 100 43 170 Switzerland 100 — — United Kingdom 100 328 1,994 — — 684 United States 100 2,897 25,907 Argentina 95 1) 41 15 Canada 100 — 51 Canada 100 108 170 Mexico 100 939 1,050 — — 118 Australia 100 20 100 China 100 2 2 China 100 65 475 India 100 544 122 India 100 291 51 Israel 100 9 711 Korea 75 285 2,279 Malaysia 70 2 4 Singapore 100 2 1 South Africa 70 — 135 Taiwan 90 270 36 Thailand 49 2) 90 17 — — 295 72,316 Switzerland 50 137 — Canada 21 1 — Croatia 49 65 330 330
| 1) | Through subsidiary holdings, total holdings amount to 100% of Compania Ericsson S.A.C.I. |
| 2) | Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. |
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 | ||||||||||
Drutt Corporation Inc. | United States | 100 | ||||||||||
Redback Networks Inc. | United States | 100 | ||||||||||
Telcordia Technologies Inc. | United States | |||||||||||
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 |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
Sustainability and corporate responsibility are integrated into Ericsson’s business processes and the Company’s commitment to the triple bottom line of responsible environmental performance and social and economic development is made clear to its stakeholders.
Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. Ericsson is committed to creating business value while reducing risk related to environmental, social, employee, human rights, corruption and bribery matters. Ericsson’s sustainability and corporate responsibility performance is regularly measured, assessed and assured. Group policies and directives have been implemented to ensure consistency across global operations.
Ericsson’s principal risks relating to sustainability and corporate responsibility are identified in Ericsson’s risk management framework.
The Board of Directors is briefed on sustainability and corporate responsibility issues regularly, or as needed on an ad hoc basis.
In 2017, the Chief Sustainability & Public Affairs Officer was a member of Ericsson’s Executive Team and reported to the President and CEO, and was responsible for handling theday-to-day management of Ericsson’s sustainability and corporate responsibility agenda.
Responsible business practices are embedded in Ericsson’s operations to prevent, mitigate and adapt to risks. The Ericsson Group Management System (EGMS) includes policies, processes and directives encompassing responsible sourcing, occupational health and safety, environmental management, anti-corruption and human rights, for example. External assurance providers audit the EGMS.
Some of the Group Policies and Directives that are of particular relevance from a sustainability and corporate responsibility perspective are the Code of Business Ethics, the Code of Conduct, the Sustainability Policy, the Occupational Health and Safety Policy, the Electro-magnetic Fields and Health Policy, the Sales Compliance Policy and the Anti-corruption Group Directive, which reflect how Ericsson shall work to secure responsible business practices. These policies and practices are reinforced by employee awareness training and monitoring. Compliance to Group Policies are mandatory for all employees and operations unless a deviation is approved by the CEO.
The Code of Business Ethics
The Code of Business Ethics sets the tone for how Ericsson conducts business globally, and is a guiding framework to support everyone performing work for Ericsson. The Code of Business Ethics is periodically reviewed and acknowledged by employees and has been translated into more than 30 languages to ensure that it is accessible to all employees and stakeholders. During 2017, 99% of active employees acknowledged that they have read and understood the Code of Business Ethics.
Employees are encouraged to report any conduct that they believe, in good faith, to be a violation of laws or the Code of Business Ethics. Ericsson provides employees and external stakeholders with a dedicated communication channel, called the Ericsson Compliance Line, for the reporting of serious compliance concerns involving group or local management and which relates to;
a) corruption or fraud
b) questionable accounting or auditing matters
c) other matters that might seriously affect the vital interest of Ericsson or personal health and safety.
The process around reporting of violations has been strengthened and further developed to include both centrally and locally reported allegations of violations in 2017. For this reason there is a significantly higher number of reports in 2017 in comparison with 2016.
During 2017 the Company received 412 cases reported through Ericsson’s whistle-blower tool, the Ericsson Compliance Line. This tool is available via phone or secure website, 24/7, 365 days a year, and is available in
188 countries and in over 75 languages.
Reported violations are handled by Ericsson’s Group Compliance Forum, which consists of representatives from Ericsson’s internal audit function, Group Function Legal Affairs, Group Security, and Group Function Human Resources. The Forum briefs the Audit Committee about all reported violations, providing them with the incident category, a description of the alleged violation, and information about the decision and outcome.
The Code of Conduct
Ericsson’s Code of Conduct applies to employees and suppliers and is based on the UN Global Compact ten principles on human rights, labor conditions, environmental management and anti-corruption. Ericsson is also committed to implementing the UN Guiding Principles on Business and Human Rights across its business operations.
Suppliers must comply with Ericsson’s Code of Conduct requirements. The Company uses a risk-based approach to assess compliance with the Code of Conduct requirements as part of supplier agreements. The Company has a strong focus on risk mitigation, targeting high-risk portfolio areas and high-risk markets. For prioritized areas such as road and vehicle safety, working at heights, working hours and labor rights, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements, and has also introduced consequence management. Findings are followed up to ensure that improvements are made.
Since 2017, the Ethics and Compliance Board – comprised of several members of the Executive Team and chaired by the CEO – has been responsible to oversee the overall governance of compliance within the Group.
Sustainability risks are defined according to short-term and long-term perspectives. They are related to long-term objectives as per the strategic direction as well as short-term objectives for the coming year. According to Ericsson’s risk framework, sustainability risks are categorized into industry and market risks, commercial risks, operational risks and compliance risks. The Company follow its risk management principles, which apply across all business activities, to manage sustainability risks.
Materiality assessment is a central component of the Company’s sustainability and corporate responsibility strategy, target setting, risks and opportunities management, and reporting process related to its impact on society and environment. Ericsson considers a wide range of economic, environmental and social impacts significant to the business, or which substantively influence the views and decisions of our key stakeholders. Since 2012, the Company has used a materiality assessment to review significant issues on an annual basis, taking into account emerging trends, stakeholder feedback and other input. Adjustments are made as needed to incorporate critical issues as they arise.
The Group Function Sustainability and Public Affairs coordinates management of certain sustainability risks, such as occupational health and safety, human rights, and environmental related risks. Risks related to corruption are coordinated by Group Function Legal Affairs, and diversity issues are coordinated by Group Function Human Resources.
For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the Swedish Annual Report 2017, Note C20 “Financial risk management and financial instruments” and the Risk Factors section in the Board of Directors’ report in the Swedish Annual Report 2017.
Corruption carries serious legal and reputational risks; impedes business growth; damages relations with staff, customers, shareholders, suppliers and society as a whole; and is a considerable obstacle to economic and social development in countries around the world. With customers in 180 countries, many of which are considered to be exposed to a high risk of corruption, prevention and accountability are paramount for Ericsson.
Ericsson has azero-tolerance approach to corruption expressed in the Company’s Code of Business Ethics. The Company has embedded this guiding principle at its highest levels and implemented it throughout its global organization with a set of policies and processes. This includes an anti-corruption directive with more detailed guidelines, for example about appropriate levels of gifts and entertainment.
The Company’s anti-corruption program, focusing on prevention and accountability, is headed by a Chief Compliance Officer, who since October 2017 reports directly to the Audit Committee of the Board of Directors. The Audit Committee also reviews and evaluates the program at least annually. Further, since 2016, an Ethics and Compliance Board, comprised of several members of the Executive Team and chaired by the CEO, has been responsible for the overall governance of compliance within the Group.
During 2016–2017 we invited external experts to evaluate the robustness of our anti-corruption program. Following the review, we adjusted the anti-corruption program to closer align with the US Foreign Corrupt Practices Act (FCPA). In 2017, the program was strengthened with adding resources on group level and appointing Regional Compliance Officers in all Market Areas. Moreover, one of the elements of the Group targets for sustainability and corporate responsibility is anti-corruption.
In 2017 the Company continued to roll out an automated anti-corruption screening tool for supplier and third party due diligence, which was launched in 2016. By the end of 2017, close to 93% of active employees had completed the Company’s anti-corruptione-learning course since the training was launched in 2013. A customized online anti- corruption training is also available for Ericsson’s suppliers on the Company website.
In 2017, Ericsson introduced a vetting process that focuses on ethics and compliance. So far we have used it for appointments to the Executive Team and for approximately 110 employees in exposed positions. All members of the current Executive Team have been vetted, and all future recruitments to these positions will also go through mandatory vetting. Business Partner Review Boards have been established in all Market Areas toover-see mitigation of the corruption risks in relation to onboarding of new business partners.
Ericsson is currently voluntarily cooperating with inquiries from the United States Securities and Exchange Commission and the United States Department of Justice regarding its compliance with the U.S. Foreign Corrupt Practices Act. As of today, these inquiries concern a period from January 1, 2007 and onwards, and the Company will make additional disclosures regarding these inquiries to the extent required.
Primary manufacturing and assembly facilities
We continuously adjust our production capacity to meet expected customer demand. During 2016,2017, our overall capacity utilization was around 85%.
The table below summarizes where we have major sites and the total floor space atyear-end. Facilities are leased. The majority of the floor space within our production facilities is used for assembly.
| 2016 | 2015 | 2014 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||
| Sites | Thousands of sq meters** | Sites* | Thousands of sq meters** | Sites | Thousands of sq meters** | Sites* | Thousands of sq meters** | Sites | Thousands of sq meters** | Sites | Thousands of sq meters** | |||||||||||||||||||||||||||||||||||||
Sweden | 4 | 21.3 | 4 | 21.3 | 4 | 20.7 | 1 | 5 | 4 | 21.3 | 4 | 21.3 | ||||||||||||||||||||||||||||||||||||
China | 2 | 13 | 2 | 13 | 3 | 19.8 | 1 | 10 | 2 | 13 | 2 | 13 | ||||||||||||||||||||||||||||||||||||
Estonia | 1 | 6 | 1 | 6 | 1 | 9.1 | 1 | 6 | 1 | 6 | 1 | 6 | ||||||||||||||||||||||||||||||||||||
Italy | 0 | 0 | 0 | 0 | 1 | 16 | ||||||||||||||||||||||||||||||||||||||||||
Brazil | 1 | 4.5 | 1 | 4.5 | 1 | 25.3 | 1 | 4.5 | 1 | 4.5 | 1 | 4.5 | ||||||||||||||||||||||||||||||||||||
Mexico | 1 | 0.8 | 1 | 0.8 | 1 | 0.8 | 0 | 0 | 1 | 0.8 | 1 | 0.8 | ||||||||||||||||||||||||||||||||||||
India | 1 | 10.8 | 1 | 10.8 | 1 | 24.5 | 0 | 0 | 1 | 10.8 | 1 | 10.8 | ||||||||||||||||||||||||||||||||||||
Total | 10 | 56.4 | 10 | 56.4 | 12 | 116.2 | 4 | 25.5 | 10 | 56.4 | 10 | 56.4 | ||||||||||||||||||||||||||||||||||||
| * | In |
| ** | Floor space in square meters does not include any warehouses |
| ITEM 4A. | Unresolved Staff Comments |
None.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| A. | Operating Results |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
Operating results for the years ended December 31, 20142015 and 20152016
Reporting structure in 2016
Starting July 1, 2016, Ericsson implemented an organizational change. The financial reporting during 2016 has been carried out according to the same segment structure as in 2015; Networks, Global Services and Support Solutions. The 2016 reporting structure is appliedbelow.
From January 1, 2017, financial reporting is done according to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.
Full-year highlights
Reported sales decreased by –10% mainly due to weaker demand for mobile broadband, especially in markets with a weak macroeconomic environment. IPR licensing revenues declined to SEK 10.0 (14.4) billion.
Operating income declined to SEK 6.3 (21.8) billion due to lower sales and a changed business mix in mobile broadband, with a lower proportion of capacity business. This was partly offset by lower operating expenses.
Cash flow from operating activities was SEK 14.0 (20.6) billion. Net cash atyear-end was SEK 31.2 billion.
The Board of Directors proposes a dividend for 2016 of SEK 1.00 (3.70) per share to the AGM.
Business in 20152016
In 2015,2016, net sales increaseddecreased by 8%–10% mainly due to sales growthlower demand for mobile broadband, especially in India, North America and Mainland China as well as higher IPR licensing revenues. Allmarkets with a weak macroeconomic environment. Sales declined in all three segments showed sales growth.segments. Both operating income and margin increaseddecreased compared to last year despite significantly higher restructuring charges. The increase is mainly relateddue to higher lower sales and lower gross margin, partly offset by lower operating expenses.
IPR licensing revenues lower negative currency hedge effects and lower operating expenses, excluding restructuring charges. In the year, the US dollar strengthened towards a number of currencies includingwere SEK impacting sales and operating income positively.
The IPR strategy, to generate value from investments in R&D, has been successful and over the last five years10.0 (14.4) billion. IPR licensing revenues have more than tripled. IPR revenuesin 2015 were SEK 14.4 (9.9) billion. Ericsson now has agreementspositively impacted by a global patent license agreement signed with the majority of handset suppliers.Apple, which included an initial payment.
In 2015, there was good progress inFull-year sales for the targeted growth areas; IP network, Cloud, OSS and BSS, TV and Media as well as Industry and Society. Ericsson continued to invest in order to establish leadership in these areas.
The effort to restore Network Rollout to a sustainable profitable business progressed well, with a break-even operating income, excluding restructuring charges,Society, were flat and accounted for the second half20% of 2015.group sales.
The global cost and efficiency program, progressedfirst initiated in November 2014, and expanded in 2016, -progressed according to plan, withplan. The target of the targetprogram is to achieve netreduce the annual savingsrun rate of SEK 9 billion during 2017 compared with 2014. Operatingoperating expenses, excluding restructuring charges, declined to SEK 61.4 (63.0)53 billion in the second half of 2017. Operating expenses in 2016 decreased to SEK 60.5 (64.1) billion which included restructuring charges of SEK –4.1 (–2.8) billion. Ericsson will continue to address operating expenses and increase efforts to further reduce cost of sales in order to improve the gross margin.
Ericsson delivered a full-year cash flow from operating activities of SEK 20.6 (18.7)14.0 (20.6) billion, exceeding the 70% cash conversion target of more than 70%. The Board of Directors proposes a dividend of SEK 3.70 (3.40) per share for 2015, an increase of 9% compared with last year.target.
Financial highlights
Net Salessales
Reported sales increaseddecreased by 8%.–10% mainly due to lower demand for mobile broadband, especially in markets with a weak macroeconomic environment. Sales growth in India,Europe declined following completion of mobile broadband projects in 2015. Mobile broadband sales in North America and Mainland China as well as higher IPR licensing revenues were partly offset by lower sales in Japan, Russia and Brazil.
All three segments showed sales growth. Globalremained stable while Professional Services sales grewdeclined, mainly due to lower managed services activities. A significant managed services contract in North America was renewed with reduced scope. Sales in South East Asia increased, driven by 11%, with 15% growthlarge deliveries in Professional Services, while Network Rollout sales were almost flat. Networks sales grew by 5% and Support Solutions sales by 19%.coverage projects.
IPR licensing revenues amounted to SEK 14.4 (9.9)10.0 (14.4) billion. InSales in 2015 were positively impacted by a global patent license agreement was signed with Apple.Apple, which included an initial payment. The baseline for current IPR licensing contract portfolio is approximately SEK 7 billion on an annual basis. Smartphone volume growth, agreements with currently unlicensed handset suppliers and IoT licensing will determine growth opportunities going forward.
In the year, the US dollar strengthened towards a number of currencies including SEK, impacting sales positively. At the same time the strong US dollar gradually impacted investments negatively in some emerging markets.
Currency exchange rates had no material impact on full-year sales. Sales, adjusted for comparable units and currency, decreased by –5%–10%.
Full-year sales for targeted growth areas were flat and accounted for 20% of group sales. The partnership with Cisco has to date generated more than 100 deals across all regions.
The sales mix by commodity was: software 22% (23%), hardware 33% (34%) and services 45% (43%).
Gross margin
Gross margin declined to 34.8% (36.2%). Excluding restructuring charges, the gross margin declined to 35.7% (36.6%29.8% (34.8%) due to a sales mix with a lower share of mobile capacity business, and higher share of Global Services sales. This was partly offset by highersales and lower IPR licensing revenues and effects of implemented efficiency measures.
The mix of sales by commodity was; software 23% (24%), hardware 34% (34%) and services 43% (42%).as well as lower Global Services margins. In addition, restructuring charges included in the gross -margin increased to SEK –3.5 (–2.3) billion.
Restructuring charges and global cost and efficiency program
Restructuring charges amounted to SEK –5.0–7.6 (–1.5) billion, in line with previous estimates.5.0) billion. The charges were mainly related to the global cost and efficiency program initially announced in November 2014.2014, and expanded in 2016. The global cost and efficiency program is progressing according to plan and the target is expected to generate netreduce the annual savingsrun rate of operating expenses, excluding restructuring charges, to SEK 953 billion duringin the second half of 2017. Efforts continue in order to reduce cost of sales, targeting to improve gross margin in the second half of 2017 compared with 2014.
full-year 2016. With current visibility,plans, total restructuring charges for 20162017 are estimated to be approximately SEK 3–43 billion. This includes both restructuring charges related to the global cost and efficiency program and normal restructuring charges for the ongoing business transformation.
Operating expenses
Total operating expenses increaseddecreased to SEK 64.1 (63.4) billion. Operating expenses, excluding restructuring charges, decreased from SEK 63.0 to SEK 61.460.5 (64.1) billion due to lower R&D expenses amounting to SEK 32.8 (36.0) billion. This is partlyas a result of implementation of activities related to the global cost and efficiency program. Additions to capitalized development-efficiency program and lower amortizations of intangible assets. Operating expenses amounted toincluded restructuring charges of SEK 3.5 (1.5)–4.1 (–2.8) billion. The increase was due to higher activity in technology platform development than a year ago.
Other operating income and expenses
Other operating income and expenses improved towere SEK 0.10.4 (0.2) billion. Currency hedge contract effects impacted the result with SEK –0.9 (–2.2) billion. The increase is mainly related to currency hedge effects of SEK –1.1 (–2.8)1.1) billion. They derive from the hedge contract balance-balance in US dollar, which has further decreased in value.USD. The SEK has weakened towardsagainst the US dollarUSD between December 31, 20142015 (SEK/USD rate 7.79)8.40) and December 31, 2015 (8.40)2016 (SEK/USD rate 9.06). The negative currency hedge effects were more than offset by several minor positive items and a capital gain of SEK 0.3 billion related to a real estate divestment in the US.items.
Operating income
Operating income increaseddecreased to SEK 21.8 (16.8)6.3 (21.8) billion despite significantly higher restructuring charges. The increase is mainly relateddue to higher IPR licensing revenues, lower negative currency hedge effectssales and lower gross margin, partly offset by lower operating expenses, excluding restructuring charges. The net currency effect had a positive impact on operating income.expenses. Operating margin was 8.8% (7.4%2.8% (8.8%).
Financial net
FinancialThe financial net amounteddeclined to SEK –1.9–2.3 (–1.0) billion. The decrease is mainly1.9) -billion following decreased interest rates and depreciated local currencies in certain markets.
Taxes
Tax cost decreased to SEK –2.1 (–6.2) billion due to lower net income, offset by prior-year adjustments andnon-deductible expenses. These factors resulted in a negative effecttax rate of foreign currency revaluation and lower interest rates.
Taxes
The53% in 2016 compared with the more normal tax rate of 31% in 2015. Average tax rate for the years 2011–2015 was 31% compared with 30% in 2014, negatively impacted by the geographical mix. Tax costs were SEK –6.2 (–4.7) billion.32%.
Net income and EPS
Net income increaseddecreased to SEK 13.7 (11.1) billion,1.9 (13.7) billion., for the same reasons as for the increasedecrease in operating income. EPS diluted was SEK 4.13 (3.54)0.52 (4.13) and EPS(Non-IFRS) was SEK 2.66 (6.06).
Business results – Segments
Networks
ReportedBackground
Networks represented 48.7% of net sales increasedin 2016 (50.1% in 2015), The segment delivers products and solutions that are needed for mobile and fixed communication, several generations of radio networks, IP and transmission networks, core networks and cloud.
Business in 2016
Sales as reported decreased by 5% compared to last year.–12%. The increasedecrease was mainly due to higherlower sales of mobile broadband, reduced sales of core networks and lower IPR licensing revenues. Operator investments in mobile broadband in India and South East Asia increased. The large-scale LTE deployments in Mainland China continued at a high pace in 2015. Sales in North America were flat comparedCore networks sales declined due to last year, supportedlower sales of legacy products, not offset by growth of the strengthened US dollar. new portfolio.
Mobile broadband investments in North America were negatively impacted by operator focus on cash flow optimizationa weak macroeconomic environment in order to finance major acquisitions and spectrum auctions.
In 2015, sales in targeted growth area IP networks grew, mainly driven by investments in packet core, VoLTE and user data management.
During the year, the US dollar strengthened towards a number of currencies, including SEK, impactingmarkets such as Latin America, the Middle East and South Africa. In addition, sales positively. Atdeclined in Europe following the same time,completion of large coverage projects in 2015 and in India due to delayed spectrum auctions. The sales decline was partly offset by sales growth in South East Asia where large deliveries in mobile broadband coverage projects were made.
In North America and in North East Asia, investments in network equipment were stable. In Mainland China, large-scale LTE deployments continued for the strong US dollar gradually impacted investments negatively in some emerging markets. third consecutive year.
Sales, adjusted for comparable units and currency,-currency, decreased by –8% compared to last year.–13%.
Operating income and margin decreased, mainly due to a higherlower share of mobile broadband coverage businesscapacity sales and higher restructuring charges. Increasedlower IPR licensing revenues, lowerrevenues. The decrease was partly offset by reduced operating expenses, and lower negativemainly as an effect of currency hedge contracts contributed positively to operating income and margin.
The year started with a high level of R&D expenses which gradually decreased as a result of the globalongoing cost and efficiency program. The ambitionwork to improve Networks profitability remains.continued with significant headcount reductions and structural changes.
Restructuring charges amounted to SEK –2.8–4.0 (–0.4)2.8) billion and the negative effect from currency hedge contracts was SEK –0.9–0.7 (–2.1)0.9) billion.
Global Services
ReportedBackground
Global Services represented 45.7% of net sales increasedin 2016 (43.7% in 2015). The segment delivers network rollout services and professional services (i.e., managed services, consulting and systems integration (CSI), customer support as well as network design and optimization services).
Business in 2016
Sales as reported decreased by 11% compared to last year.–6%. Professional Services reported sales grew 15%declined due to lower managed services activities in North America where a contract has been renewed with strong development across the portfolio and with growth in all ten regions.
Consulting and Systems Integrationreduced scope. CDMA sales grew, driven by OSS and BSS transformation projects and by solutions for Industry & Society customers. Sales in Manageddeclined YoY impacting -Professional Services grew by 17% and the number of signed contracts increased by more than 40% compared with 2014.
sales negatively. Network Rollout sales were flat. Lower coverage project activitiesdeclined due to lower mobile broadband demand, primarily in Japan, North AmericaEurope and Latin America impacted sales negatively.America.
Global Services sales, adjusted for comparable units and currency, declined –2%.
Global Services operating income increased by more than 30% compared with 2014, driven by increased sales in Professional Services and reduced losses in Network Rollout. Professional Services margin was stable compared to last year.
The effort to restore Network Rollout profitability progressed well with a break-even result, excluding restructuring, for the second half of the year. Network Rollout full-year operating income improved to SEK –1.4 (–2.5) billion.
Restructuring charges for Global Services increased to SEK –1.7 (–0.8) billion. The implementation of the Global Services delivery strategy accelerated during the year as part of the global cost and efficiency program, resulting in a remote delivery rate of 50% (44%). The ambition to optimize service delivery and improve profitability will continue.
The effect of currency hedge contracts on operating income was SEK –0.2 (–0.6) billion.
Support Solutions
Reported sales increased by 19% compared with 2014, with North America and India as main contributors. Sales, adjusted for comparable units and currency,-currency, decreased by –5%.
Global Services operating income decreased to SEK 3.3 (8.2) billion. Activities were flat. performed to adapt the service delivery organization to lower business volumes and to increase the -efficiency. Restructuring charges increased to SEK –3.0 (–1.7) billion.
Professional Services operating income declined to SEK 5.2 (9.6) billion due to increased restructuring charges of SEK –2.3 (–0.7) billion, lower sales and a negative impact from large projects in systems integration transformation, where operators are looking to transform their IT environments to increase efficiency and prepare for 5G. Ericsson has been successful and won several IT transformation contracts. However, the short-term margin impact from these contracts is challenging as a consequence of investments in competencebuild-up and market share.
Network Rollout operating income declined to SEK –1.9 (–1.4) billion due to lower sales in combination with increased cost and negative effects from a few contracts in emerging markets. The effort to improve Network Rollout -profitability continues through efficiency improvements including implementation of global methods and tools.
Support Solutions
Background
Support Solutions represented 5.6% of net sales in 2016 (6.1% in 2015). The portfolio of Support Solutions is designed around measurable performance improvements in an operator’s business processes, with software that is scalable, configurable and that providesend-to-end capabilities. The business segment develops and delivers software-based solutions for OSS and BSS as well as TV and media solutions.
Business in 2016
Sales as reported decreased by –17%, partly due to lower IPR licensing revenues. OSS and BSS sales declined due to lower sales of legacy products and lower software sales in digital transformation projects where sales are mainly project milestone based. In addition, sales declined in markets with a weak macroeconomic environment.
Sales in TV & Media declined due to lower sales of legacy products primarily in North America. Customer trials on the next-generation TV & Media platform are ongoing, but have not yet translated into sales.
Operating income declined to SEK –1.0 (1.5) billion mainly due to lower IPR licensing revenues and lower sales in both OSS and BSS as well as in TV & Media. Several activities in order to reduce cost and adjust the organization to lower business volumes are ongoing.
The overall transition of business models -continues, from traditional telecom software licenses to recurrent license revenue deals, continued.
Sales in OSS and BSS developed favorably. Growth of mobile broadband drives operators to transform their OSS and BSS solutions, in order to monetize the data growth while at the same time managing the increased complexity. Two important TV & Media agreements were announced in North America in the second half of the year, showing the strong position Ericsson has in this transforming market.
IPR licensing revenues increased compared with 2014.
Operating Income and margin improved significantly compared with 2014, driven by higher sales. Focus going forward is to improve earnings leverage through increased recurring software sales and efficiencies.
Restructuring charges increased to SEK –0.5 (–0.1) billion due to the global cost and efficiency program. The effect of currency hedge contracts on operating income was SEK –0.1 (–0.2) billion.deals.
Business results – Regions
North America
Mobile broadband investments were slow as operators focused on cash flow optimization in order to finance major acquisitions and spectrum auctions. Investments stabilized during the second half of the year, driven by data traffic growth. ICT transformation, TV & Media andstable. Professional Services developed favorably.sales were negatively impacted by reduced scope in a managed services contract. Support Solutions sales declined due to delayed investment decisions by customers. The focus on 5G strongly increased, with -trials ongoing with all major customers.
Latin America
Sales decreased comparedfollowing reduced mobile broadband investments due to last year mainlya weak macroeconomic environment in the region and due to devaluation of local currencies. The strong momentum for digital transformation continued. Professional Services sales declined due to lower activities in Brazil. Operator investments increased in local currency, but not enough to compensate for the depreciation towards the US dollar and currency restrictions in many parts of the region. Professional Services sales grew, mainly in OSS and BSS.managed services.
Northern Europe and Central Asia
Sales declined, primarily due to continued lower mobile broadband investments in Russia with sales of SEK 4.7 (6.7) billion. However, sales stabilized in the second half of the year, but at a lower level compared to the same period last year. ProfessionalRussia. Global Services sales were flat with a decline in Network Rollout, offset by increased driven by Managed Services sales in Sweden. OSS and ICT transformation projects in the Nordics.BSS sales were flat while TV & Media and OSS and BSS developed favorably, driving sales growth in Support Solutions.declined.
Western and Central Europe
InvestmentsSales declined as the initial LTE deployments were finalized. Operators continue to focus on transforming their networks to meet the increasing demand for coverage and capacity, while at the same time improving efficiency.
Mediterranean
Sales declined due to lower investments in mobile broadband were driven by the transition from 3Ginfrastructure, mainly related to 4Gcapacity business. Operator investments in ICT transformation and capacity enhancements. At the same time, some important projects peaked. Sales were stable with a shift towards Professional Services and Support Solutions, as operators focus on network optimization, efficiency and new functionality.
Mediterranean
Sales increased somewhat, driven by Managed Services. Investments in mobile broadband were driven by the transition from 3G to 4G and improvements of the quality and capacity of the networks.demand for managed services continued.
Middle East
Sales increased,declined, primarily in Networks due to lower broadband investments in Egypt, Pakistan, Ethiopia and Turkey. The decrease was partly offset by growth in Global Services. In the first half of the year, NetworkServices sales, growth was mainly driven by some major mobile broadband projects, which were completed in the second half of the year.network rollout and optimization services in Saudi Arabia.
Sub-Saharan Africa
Sales increased across all segments,Investments declined, impacted by a weak -macroeconomic environment, local currency depreciation in key markets as well as low oil and commodity prices.
India
Mobile broadband sales declined mainly driven by strong consumer demand for mobile broadband, despite a challenging regulatory environment and recent macro-economic development. Operators’ focus on network quality and efficiency drovedelayed spectrum auctions which delayed operator investments. Professional Services sales growth.
India
Sales growth was driven by increased operator investments in mobile broadband infrastructure and Professional Services. Increasedremained stable with operators’ higher focus on network quality and cost optimization continued to drive strong sales growth for Managed Services. Support Solutions sales showed significant growth, driven by OSS and BSS.
optimization.
North East Asia
Sales growth was driven by 4G deploymentsdeclined slightly due to lower investments in Mainland China and Korea, partly offset by lower operatormarket share gains in Japan and Taiwan. In Mainland China 4G deployments continued. However, reduced investments in Japan. Professional Services showed growth, supportedlegacy technologies and significantly reduced investment by the acquisition of Sunrise Technologies’ telecom business.one customer, impacted sales negatively.
South East Asia and Oceania
Sales increased, primarily driven by mobile broadband deployments across several markets. Professional Services sales developed favorably as operators focusedfocus on efficiency and network optimization. TV & Media showed a positive development during the year.optimization services.
Other
Sales increased, driven by the Apple global patent license agreement and currency, as a majority of the IPR contracts are in US dollar. Broadcast services showed good growth. IPR licensing revenues amounted to SEK 14.4 (9.9)10.0 (14.4) billion. Sales in 2015 were positively impacted by a global patent license agreement signed with Apple, which included an initial payment.
| B. | Liquidity and Capital Resources |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
See “Item 8.B. Financial Information – Significant Changes” herein.
Balance sheet and other performance indicators for the years ended December 31, 20142015 and 20152016
Cash flow
Cash flow from operating activities was SEK 20.6 (18.7)14.0 (20.6) billion. The positive earnings were somewhat offset by increased working capital,decline was mainly due to a business mixlower income, larger tax payments and last year’s signed global patent license agreement with a high shareApple, which included an initial payment. Operating net assets decreased by SEK 6.0 -billion, supported by reduced trade receivables and increased provisions. In addition, trade payables increased supported by implementation of coverage projects in Mainland China and emerging markets.supply chain financing. Inventory increased slightly.
Days sales outstanding (DSO) decreased to 87 (105) days and Inventory turnover days remained stable at 64 days. Accounts payable days decreased to 53 (56) days. Provisions amounted to SEK 3.8 (4.4) billion at year end. Cash outlays of SEK 2.8 billion related to restructuring charges were madeSEK –2.4 (–2.8) billion during the year.
TotalCash flow from investing activities amounted to SEK –8.0 billion. Investmentswas impacted by investments in property, plant and equipment increased toof SEK –8.3–6.1 (–5.3)8.3) billion, driven bywith continued investments in the Global ICT centers. In addition, SEK –4.5 (–3.3) billion of development expenses were capitalized. The capitalized development expenses refer to development of new ICT centersproduct platforms like the new IPTV platform, Ericsson MediaFirst, and the new BSS platform, Ericsson Revenue Manager. The company invested SEK 0.6 (2.2) billion in Swedenacquisitions of smaller companies, such as Ericpol and Canada. AcquisitionsNode-Prime in 2016.
Cash flow from financing activities amounted to SEK –2.2 (–4.4) billion.
Financing activities were–11.7 billion, impacted by SEK –12.3 billion of dividend payouts of SEK –11.3 (–9.8) billion.payouts.
Financial position
Net cash decreased to SEK 18.5 (27.6)31.2 (41.2) billion in 2015, despite stronger cash flow from operating activities, mainly due to increased investments in ICT centerslower income and in new facilities in Santa Clara, California, as well as increased dividends. The decrease was partly offset by reduced -operating assets.
Pension liabilities increased by SEK 2.31.1 billion, following actuarial adjustments. The net cash position, excluding post-employment benefits (in the amount of SEK 22.7 billion) was SEK 41.2 (48.0) billion. Reported net cash was SEK 18.5 billion.due to decreased discount rates.
In 2016, Standard & Poor’s and Moody’s downgraded Ericsson’s long-term rating from BBB+/Baa1 with stable outlook to BBB/Baa3 with negative outlook.
The average maturity of long-term borrowings as of December 31, 20152016, was 4.83.8 years, compared with 5.74.8 years 12 months earlier. Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion. The facility expires in 2020.2021. In addition, the company signed a new EUR 0.5 billion term loan facility in 2016. The new facility has a tenure of two years with one extension option of one year. The facility serves for general corporate purposes and is unutilized.
Intangible assets
The amount of intellectual property rights and other intangible assets amounted to SEK 51.1 (50.4) billion, including goodwill of SEK 43.4 (41.1) billion. The goodwill impairment testing has been based on the new segments that became effective as per January 1, 2017. For the Media segment the headroom is SEK 5.6 billion when a discount of 8.0% is applied. The recoverable amount is equal to its carrying amount when the discount factor is increased to 10.0%. For more information, see Note 3 “Segment reporting” and Note 10 “Intangible assets.”
Employees
In 2015,2016, the number of employees decreased by 1,774.almost 5,000 driven by the ongoing cost and efficiency program. At the end of 2015,year-end 2016, the total number of employees was 116,281 (118,055)111,464 (116,281). Almost 15,000 employees joined Ericsson during the year and close to 17,000 employees left Ericsson, reflecting the natural attrition rate and ongoing company transformation.
Research and development, patents-patents and licensing
In line with the global cost and efficiency program, the Company has decreased its R&D activities. The largest contribution to savings is a result of discontinuation of the modems operations. Approximately half of the global cost and efficiency program annual net savings of SEK 9 billion is estimated to come from operating expenses. In 2016, R&D expenses amounted to SEK 34.8 (36.3)31.6 (34.8) billion. The number of R&D resources increased mainly due to an acquisition of Ericpol, a long-time supplier to Ericsson with software development in Poland and Ukraine. Approximately 2,000 employees joined Ericsson from Ericpol. The number of patents continued to increase and amounted to approximately 42,000 by end of 2016.
Research and development, patents and licensing
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||||
Expenses (SEK billion) | 34.8 | 36.3 | 32.2 | 31.6 | 34.8 | 36.3 | ||||||||||||||||||
As percent of Net sales | 14.1 | % | 15.9 | % | 14.2 | % | 14.2 | % | 14.1 | % | 15.9 | % | ||||||||||||
Employees within R&D as of December 31 1) | 23,700 | 25,700 | 25,300 | 24,100 | 23,700 | 25,700 | ||||||||||||||||||
Patents 1) | 39,000 | 37,000 | 35,000 | 42,000 | 39,000 | 37,000 | ||||||||||||||||||
IPR revenues, net (SEK billion) | 14.4 | 9.9 | 10.6 | |||||||||||||||||||||
IPR revenues, net (SEK -billion) | 10.0 | 14.4 | 9.9 | |||||||||||||||||||||
| 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 five-year average seasonality
| First quarter | Second quarter | Third quarter | Fourth quarter | First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||||||||||||||||||
Sequential change, sales | –22 | % | 9 | % | 0 | % | 21 | % | –24 | % | 9 | % | –2 | % | 24 | % | ||||||||||||||||
Share of annual sales | 22 | % | 24 | % | 24 | % | 29 | % | 22 | % | 24 | % | 24 | % | 30 | % | ||||||||||||||||
Off-balance sheet arrangements
There are currently no materialoff-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 2015,2016, capital expenditures wereexpenditure was SEK 8.3 (5.3)6.1 (8.3) billion, representing 3.4%2.8% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.
Investments have been made in three new global ICT centers. The centers will support R&D and services in developing and verifying solutions more efficiently and bringing innovation faster to the market. The first center, in Linköping, Sweden, was opened in 2014. The second center, in Rosersberg, Sweden, was opened in the beginning of 2016. The third center,-center, in Montreal, Canada, is plannedwas opened in December 2016. The level of capital expenditure will continue to be opened duringdecline as the second quarter of 2016. investments in the Global ICT centers peaked in 2015.
In addition, Ericsson has invested in twoseveral buildings in Santa Clara, California and in Manchester, U.K. The purpose with the purposeinvestments in Santa Clara is to consolidate Ericsson’s Silicon Valley operations. In Manchester Ericsson is investing in a new dedicated customer technical facility for its broadcast media business. The new facility is expected to be ready in April 2017 and is part of a larger transformation and investment strategy.
Apart from these investments, Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs in most locations.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, 2015,2016, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
Capital expenditures 2011–20152012–2016
SEK billion | 2015 | 2014 | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Capital -expenditures | 8.3 | 5.3 | 4.5 | 5.4 | 5.0 | 6.1 | 8.3 | 5.3 | 4.5 | 5.4 | ||||||||||||||||||||||||||||||
Of which in -Sweden | 2.6 | 2.4 | 1.9 | 1.3 | 1.7 | 2.0 | 2.6 | 2.4 | 1.9 | 1.3 | ||||||||||||||||||||||||||||||
Share of annual sales | 3.4 | % | 2.3 | % | 2.0 | % | 2.4 | % | 2.2 | % | 2.8 | % | 3.4 | % | 2.3 | % | 2.0 | % | 2.4 | % | ||||||||||||||||||||
| C. | Research and Development, Patents and Licenses |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| D. | Trend Information |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
See “Item 8.B. Financial Information – Significant Changes” herein.
| E. | Off-Balance Sheet Arrangements |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| F. | Tabular Disclosure of Contractual Obligations |
The information set forth under the section “Financials – Notes to the consolidated financial statements – Note C31 – Contractual obligations” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and Senior Management |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
See “Item 8.B. Financial Information – Significant Changes” herein.
| B. | Compensation |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
See “Item 8.B. Financial Information – Significant Changes” herein.
| C. | Board Practices |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
See “Item 8.B. Financial Information – Significant Changes” herein.
| D. | Employees |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
We consider that our relationship with the labor unions that represent our employees is good.
Number of employees by region atyear-end | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
North America | 11,547 | 14,548 | 15,516 | |||||||||
Latin America | 9,513 | 10,412 | 11,066 | |||||||||
Northern Europe & Central Asia1) 2) | 19,136 | 20,700 | 21,633 | |||||||||
Western & Central Europe2) | 13,646 | 12,220 | 12,617 | |||||||||
Mediterranean2) | 12,578 | 12,702 | 13,387 | |||||||||
Middle East | 3,346 | 3,639 | 3,858 | |||||||||
Sub-Saharan Africa | 2,086 | 2,301 | 2,406 | |||||||||
India | 22,552 | 21,999 | 19,971 | |||||||||
North East Asia | 13,042 | 13,706 | 13,464 | |||||||||
South East Asia & Oceania | 4,018 | 4,054 | 4,137 | |||||||||
|
|
|
|
|
| |||||||
Total | 111,464 | 116,281 | 118,055 | |||||||||
|
|
|
|
|
| |||||||
1) Of which in Sweden | 15,303 | 17,041 | 17,580 | |||||||||
2) Of which in EU | 42,625 | 43,117 | 45,202 | |||||||||
| 2017 | 2016 | |||||||
South East Asia, Oceania and India | 24,495 | 26,570 | ||||||
North East Asia | 12,456 | 13,042 | ||||||
North America | 10,009 | 11,547 | ||||||
Europe and Latin America1) 2) | 49,231 | 54,873 | ||||||
Middle East and Africa | 4,544 | 5,432 | ||||||
|
|
|
| |||||
Total | 100,735 | 111,464 | ||||||
|
|
|
| |||||
1) Of which in Sweden | 13,864 | 15,303 | ||||||
2) Of which in EU | 39,508 | 42,625 | ||||||
| E. | Share Ownership |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. | Major Shareholders |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| B. | Related Party Transactions |
The information set forth under the section “Financials – Notes to the consolidated financial statements – Note C29 – Related party transactions” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| 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 20162017 Swedish Annual Report is incorporated herein by reference:
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 |
New segment structure from January 1, 2017
From January 1, 2017, financial reporting is done accordingEricsson strengthens focus on innovation and makes changes to the new structure, i.e., by the new segments Networks, IT & Cloud and Media.
Börje Ekholm took office as CEO and President on January 16, 2017Executive Team
On January 16, 2017,31, 2018, Ericsson announced that in connection with Börje Ekholm assumingchanges to the position as Presidentgroup structure and CEO of Ericsson, Jan Frykhammar, who had temporarily held the position as Presidentits Executive Team.
A Business Area Emerging Business was created to increase focus on innovation and CEO, remained a member of the Executive Leadership Team and wasnew business development. Effective April 1, 2018, Åsa Tamsons is appointed ExecutiveSenior Vice President and advisor to the CEO. Jan Frykhammar has been supporting Börje Ekholm during the transition period and has focused on corporate governance and efficiency. Magnus Mandersson remains Executive Vice President, advisor to the CEO, focusing on customer relationships, and a member of the Executive Leadership Team. Magnus Mandersson also remains Chairperson of four out of Ericsson’s ten regions. Carl Mellander remains acting Chief Financial Officer and a member of the Executive Leadership Team.
Ericsson issues two bonds of EUR 500 million each, maturing in 2021 and 2024, on February 24, 2017
Ericsson has successfully placed one Euro denominated 500 million four year bond with a fixed coupon rate of 0.875% and one Euro denominated 500 million seven year bond with a fixed coupon rate of 1.875% per year.
The bonds were issued under Ericsson’s Euro Medium Term Note Program (EMTN).
Joint bookrunners were Citi, Credit Agricole CIB and SEB andco-managers were Nordea, Standard Chartered and Swedbank.
The proceeds will be used to refinance debt maturing in 2017 and for general corporate purposes.
Ericsson presented focused business strategy
On March 28, 2017, Ericsson presented a focused business strategy to revitalize technology and market leadership, improve group profitability and enable customer success. The company announced that it will reallocate resources and increase investments in the following core portfolio areas: networks, digital services (OSS, BSS and telecom core) and Internet of Things (IoT).
In addition, the company will implement a refocused strategy for Managed Services to improve profitability and also explore strategic opportunities for the Media and Cloud infrastructure hardware businesses. When announced, the refocused strategy was estimated to have the following financial consequences in the short term: write down of assets to be made in Q1, 2017, with an estimated impact on operating income of SEK 3-4 b, restructuring charges estimated to approximately SEK 6-8 b. for 2017, of which approximately SEK 2 b. in Q1. The actual result reported in Q1 2017 was in line with the estimates: write down of assets were SEK 3.3 b., restructuring charges in Q1 2017 were SEK 1.7 b.
Separately, but in the same announcement, the company announced that it would make provisions of an estimated SEK 7-9 b. in Q1, triggered by recent negative developments related to certain large customer projects. The actual result recognized in Q1 2017 was SEK 8.4 b. and in line with the estimate.
In March, 2017, the Company made a restructuring provision of SEK 0.9 billion related to the reduction of operations in Borås and Kumla in Sweden. This was recognized in the first quarter of 2017.
Ericsson Simplifies Organization and Names Executive Team
In line with the business strategy announced on March 28, 2017, Ericsson has simplified its organizational structure by removing thetwo-tiered leadership structure, Executive Leadership Team and Global Leadership Team, and forming a single Executive Team. In addition, the geographical setup with ten regions has become five market areas, and the business areas werere-defined and reduced to three. The new Executive Team roles and the new organization took effect April 1, 2017.
The following Business Area and Market Area structure has been applied to Ericsson as of April 1, 2017:
Effective April 1, 2017, Ericsson’s Executive Team members are:
President and CEO – Börje Ekholm
Business Area Networks – Fredrik Jejdling, Senior Vice President, previously head of Business Unit Network Services
Area Emerging Business and member of Ericsson’s Executive Team. The new Business Area Managed Services – Peter Laurin, Senior Vice President, previously head of Region Northern Europe and Central AsiaEmerging Business will be reported under Segment Other.
Business Area Digital Services –is undergoing significant transformation to create a profitable and strong offering in this strategically important area. Ulf Ewaldsson Senior Vice President, previouslyhas decided to step down from leading the unit, following the completion of its build up phase. Jan Karlsson, currently head of Group Function Strategy & Technology
MarketSolution Area North America – Rima Qureshi, Senior Vice President, previously head of Region North America
Market Area Europe & Latin America – Arun Bansal, Senior Vice President, previouslyBSS, will step in as acting head of Business Unit Network ProductsArea Digital Services. Ulf Ewaldsson will take on a role as advisor to CEO BörjeEkholm.
Market Area Middle East & AfricaThe company is also simplifying its group function structure, from currently six functions to four. In light of the change in responsibilities Elaine Weidman-Grunewald has decided to leave the company to pursue other opportunities.
Ericsson concludes strategic review of Media Solutions and Red Bee Media
On January 31, 2018, Ericsson concluded the review of strategic opportunities for its Media business – Rafiah Ibrahim, Senior Vice President, previously headMedia Solutions and Red Bee Media – which was initiated in conjunction with the announcement of Region Middle East
Market Area North East Asia – Chris Houghton, Senior Vice President, previously head of Region North East Asia
South East Asia, Oceania & India – Nunzio Mirtillo, Senior Vice President, previously head of Region Mediterranean
Technology & Emerging Business – Niklas Heuveldop, Senior Vice President, previously head of Group Function Sales
Finance & Common Functions – Carl Mellander, Senior Vice President, previously acting Head of Group Function Finance & Common Functions
Human Resources – MajBritt Arfert, Senior Vice President, previously acting Head of Group Function Human Resources
Marketing & Communications – Helena Norrman, Senior Vice President, previouslythe company’s focused business strategy on March 28, 2017. Ericsson has implemented substantial performance improvement programs while continuing to invest in the same role
Sustainability & Corporate Responsibility – Elaine Weidman Grunewald, Senior Vice President, previously in the same role
Legal Affairs – Nina Macpherson, Senior Vice President, previously in the same role
Advisor to the CEO – Jan Frykhammar, Executive Vice President¸ previously in the same role
Advisor to the CEO – Magnus Mandersson, Executive Vice President, previously in the same role
Per Borgklint, Anders Lindblad, Jean-Philippe Poirault and Charlotta Sund left the Executive Leadership Team effective April 1,respective businesses. Both units have made significant progress during 2017.
Changes resolved in connection withOutcome of the Annual General Meeting of shareholders (AGM) held on March 29, 2017
Decisions at the AGM 2017 included:strategic review:
Ericsson restated financial information for IFRS 15
On March 16, 2018, Ericsson announced restated consolidated income statement information, in line with the membersnew accounting standard IFRS 15, applied as of the Global Leadership Team, including a share issue of and authorization to the Board to buy back 3,000,000 shares for the program.
Information on new Board members
Jon Fredrik Baksaas
Born 1954. Master of Science in Economics, NHH Norwegian School of Economics & Business Administration, Norway.
Board member: Svenska Handelsbanken AB.
Holdings in Ericsson:None.*
Principal work experience and other information: President and CEO of Telenor (2002-2015). Previous positions within the Telenor Group since 1989, including deputy CEO, Chief Financial Officer and CEO of TBK AS. Previous positions include CFO of Aker AS, finance director of Stolt Nielsen Seaway AS and controller at Det Norske Veritas, Norway and Japan. Member of the GSMA Board (2008-2016) and Chairman of the GSMA Board (2014-2016).
Jan Carlson
Born 1960. Master of Science degree in Engineering Physics and Electrical Engineering, the University of Linköping, Sweden.
Board Chairman: Autoliv Inc.
Board member: BorgWarner Inc., Teknikföretagen, The Confederation of Swedish Enterprise and Trelleborg AB.
Holdings in Ericsson: 7,900 Class B Shares.*
Principal work experience and other information: President and CEO of Autoliv Inc. since 2007 and Chairman of Autoliv Inc. since 2014. Previous positions within the Autoliv Group since 1999, including President Autoliv Europe, Vice President Engineering of Autoliv and President Autoliv Electronics. Previous positions include President of Saab Combitech and of Swedish Gate Array.
Eric A. Elzvik
Born 1960. Master of Science in Business Administration, Stockholm School of Economics, Sweden.
Board member: IMD Foundation, Lausanne and the Swiss Swedish Chamber of Commerce, Zurich, Switzerland.
Holdings in Ericsson: 10,000 Class B shares*.
Principal work experience and other information: Chief Financial Officer and member of the Group Executive Committee of ABB Ltd (2013-2017). Division CFO ABB Discrete Automation & Motion (2010-2012) and division CFO Automation Products Division (2006-2010). Previous positions within the ABB Group since 1984, including senior management positions within finance, mergers & acquisitions and new ventures.January 1, 2018.
The minutes from the AGM 2017 are available on Ericsson’s website.
The employee representatives appointed as of March 29, 2017 are: Kjell-Åke Soting, Roger Svensson and Karin Åberg, with the deputies Torbjörn Nyman, Anders Ripa and Loredana Roslund.
The Nomination Committee’s independence assessment
Before the AGM 2017, the Nomination Committee considered that at least the following Board members were independent in respect of all applicable independence requirements:
a. Jon Fredrik Baksaas
b. Jan Carlson
c. Nora Denzel
d. Eric A. Elzvik
e. Leif Johansson
f. Kristin Skogen Lund
g. Kristin S. Rinne
h. Sukhinder Singh Cassidy
New Board Committee on Technology and Science and new Committee members
At the statutory Board meeting held in connection with the Annual General Meeting 2017, the Board resolved to establish a new Board Committee on Technology and Science and the following Board members were appointed members of the new Committee: Kristin S. Rinne (Chairman), Jan Carlson, Nora Denzel and Roger Svensson (employee representative).
The tasks of the Committee include monitoring and preparing for consideration and/or resolution of the Board various matters relating to technology strategy and direction, technical matters, technology ecosystem and science direction.
The Board members appointed to the other Board Committees as of March 29, 2017 are:
Audit Committee: Eric A. Elzvik (Chairman), Nora Denzel, Kristin Skogen Lund and Karin Åberg (employee representative) Finance Committee: Leif Johansson (Chairman), Helena Stjernholm, Jacob Wallenberg and Roger Svensson (employee representative) Remuneration Committee: Leif Johansson (Chairman), Jon Fredrik Baksaas, Sukhinder Singh Cassidy and Kjell Åke Soting (employee representative)”.
For information about our results for the first quarter of 2017, see the report on Form6-K filed with the SEC on April 26 2017, which is incorporated herein by reference.
| ITEM 9. | THE OFFER AND LISTING |
| A. | Offer and Listing Details |
The information set forth under the section “Shareholders“Share information – Share informationThe Ericsson share – Share and ADS prices” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
The information set forth the section “Shareholders“Share information – The Ericsson Share information – Share trading” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
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 of Association, 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.
Our Articles of Association do not stipulate anything regarding:
Applicable provisions are found in the Swedish Companies Act (2005:551) (the “Swedish Companies Act”), as referred to in “Certain Powers of Directors and the President” below..
In addition to 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, Increases of Share Capital and Preferential Rights of Shareholders
The Articles of Association of Ericsson provide that the share capital of the Company 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 the Company shall amount to no less than 3,000,000,000 and no more than 12,000,000,000. The registered share capital is SEK 16,655,758,67816,670,758,678 and the Company has in total issued 3,331,151,7353,334,151,735 shares.
The Company’s shares are divided into three series: Class A shares, Class B shares and Class C shares; however, no Class C shares are currently outstanding. 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 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 and Class C shares by means of a cash issue, or an issue against payment throughset-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 throughset-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.
If we decide to issue warrants or convertibles through a cash issue or an issue against payment throughset-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 throughset-off of claims.
Dividends
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 of Association. 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 of Directors (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 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 taken into account the type of business activities of the company, their 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, or to the address of that person. 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 of Directors 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.
Voting
In a general meeting of Ericsson, each Class A share shall carry one vote, each Class B share one tenth of one vote and each Class C shareone-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 of association. 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 of association. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:
| a) | a resolution to amend the articles of association requires a majority oftwo-thirds of the votes cast as well astwo-thirds of the shares represented at the meeting, except in those circumstances described in b—d below; |
| b) | a resolution to amend the articles of association 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 the articles of association 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 representingtwo-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 ofone-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 atwo-thirds majority of votes cast at the meeting as well astwo-thirds of the shares represented at the meeting; |
| a resolution to reduce the outstanding share capital requires atwo-thirds majority of votes cast at the meeting as well astwo-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 atwo-thirds majority of the votes cast at the meeting andtwo-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.
Purchase of Own 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 astwo-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. As of December 31, 2016,2017, the Company held an aggregate of 62,192,39050,265,499 treasury stock of Class B shares.
Investment Restrictions
There are no limitations imposed by Swedish law or by our Articles of Association in respect of the rights ofnon-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.
| C. | Material Contracts |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| D. | Exchange Controls |
There is no Swedish legislation affecting the import or export of capital or the remittance of dividends, interest or other payments tonon-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 anon-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, tonon-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 anon-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 tonon-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 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 amark-to-market method of recording for their securities holdings, financial institutions, insurance companies, a person required to accelerate the recognition of any item of gross income with respect to our 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 anon-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 anon-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 anon-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 anon-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 “established securities market,” ifmarket” 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
Anon-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 2016.2017. 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:
Under these rules:
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 electmark-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 themark-to-market election is available and you electmark-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 includedmark-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 includedmark-to-market income. Any loss in excess of previously includedmark-to-market income will be treated as a capital loss. However, amark-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 section “Financials – Notes to the consolidated financial statements – Note C20 – Financial risk management and financial instruments” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| B. | Qualitative information about market risk |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| C. | Interim periods |
Not applicable.
| D. | Safe harbor |
Not applicable.
| E. | Small business issuers |
Not applicable.
| 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
OnAs of October 24, 2016,2017, Ericsson implemented an annual service fee of $0.02 per ADS, for the operation and maintenance costs in administering the depositary of our ADSs,ADS program.The Depositary, Deutsche Bank Trust Company America (“Deutsche Bank”) agreed to an amendment to, established October 10, 2017 as the Deposit Agreement with Deutsche Bank and holders of our ADRs. The Deposit Agreement, as amendment, is filed as an exhibit to this Annual Report on form20-F. The disclosure below reflects the amendment.record date.
Fees and charges payable by ADS holders
Service | Rate | By whom paid | ||||
1) | Receipt of deposits and issuance of receipts | Up to USD 5 per 100 American Depositary Shares of 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 | 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 |
Except as otherwise provided in the Deposit Agreement, any and all other expenses of the depositary, including without limitation, expenses or charges for printing, stationery, postage, insurances, cables, etc, are to be borne by the depositary, or by the Company in accordance with agreements entered into from time to time with the Company.
Fees payable by the Depositary to the Issuer
Deutsche Bank has agreed to pay Ericsson a yearly fixed amount for revenues collected by Deutsche Bank as a result of charging issuance and cancellations fees and dividend or administrative fees from our ADS holders. In 2016,2017, such amount received by Ericsson totalled approximately USD 88.25 million.
Deutsche Bank has further agreed to waive the costs associated with the administration of the ADS Program and reporting services. In 2016,2017, the total amount of such expenses was approximately USD 78,000.84,600.
| 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 section “Corporate Governance –- Corporate Governance report 20162017 – Internal control over financial reporting 20162017 – Disclosure controls and procedures” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| 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 20162017 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 20162017 Swedish Annual Report is incorporated herein by reference.
| D. | Changes in Internal Control Over Financial Reporting |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
| ITEM 16. | [RESERVED] |
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
The information set forth under the section “Corporate Governance – Corporate Governance report 20162017 – Committees of the Board of Directors – Audit Committee – Members of the Audit Committee” of the 20162017 Swedish Annual Report is incorporated herein by reference.
| ITEM 16B. | CODE OF ETHICS |
The information set forth under the following headings of the 20162017 Swedish Annual Report is incorporated herein by reference:
Sustainability and corporate responsibility are integrated into Ericsson’s business processes and the Company’s commitment to the triple bottom line of responsible environmental performance and social and economic development is made clear to its stakeholders.
Ericsson’s ambition is to be a responsible and relevant driver of positive change in society. Ericsson is committed to creating business value while reducing risk related to environmental, social, employee, human rights, corruption and bribery matters. Ericsson’s sustainability and corporate responsibility performance is regularly measured, assessed and assured. Group policies and directives have been implemented to ensure consistency across global operations.
Ericsson’s principal risks relating tosustain- ability and corporate responsibility are identified in Ericsson’s risk management framework.
The Board of Directors is briefed on sustainability and corporate responsibility issues regularly, or as needed on an ad hoc basis.
In 2017, the Chief Sustainability & Public Affairs Officer was a member of Ericsson’s Executive Team and reported to the President and CEO, and was responsible for handling theday-to-day management of Ericsson’s sustainability and corporate responsibility agenda.
Responsible business practices are embedded in Ericsson’s operations to prevent, mitigate and adapt to risks. The Ericsson Group Management System (EGMS) includes policies, processes and directives encompassing responsible sourcing, occupational health and safety, environmental management, anti-corruption and human rights, for example. External assurance providers audit the EGMS.
Some of the Group Policies and Directives that are of particular relevance from a sustain- ability and corporate responsibility perspective are the Code of Business Ethics, the Code of Conduct, the Sustainability Policy, the Occu-pational Health and Safety Policy, the Electromagnetic Fields and Health Policy, the Sales Compliance Policy and the
Anti-corruption Group Directive, which reflect how Ericsson shall work to secure responsible business practices. These policies and practices are reinforced by employee awareness training and monitoring. Compliance to Group Policies are mandatory for all employees and operations unless a deviation is approved by the CEO.
The Code of Business Ethics
The Code of Business Ethics sets the tone for how Ericsson conducts business globally, and is a guiding framework to support everyone performing work for Ericsson. The Code of Business Ethics is periodically reviewed and acknowledged by employees and has been translated into more than 30 languages to ensure that it is accessible to all employees and stakeholders. During 2017, 99% of active employees acknowledged that they have read and understood the Code of Business Ethics.
Employees are encouraged to report any conduct that they believe, in good faith, to be a violation of laws or the Code of Business Ethics. Ericsson provides employees and external stakeholders with a dedicated communication channel, called the Ericsson Compliance Line, for the reporting of serious compliance concerns involving group or local management and which relates to;
a) corruption or fraud
b) questionable accounting or auditing matters
c) other matters that might seriously affect the vital interest of Ericsson or personal health and safety.
The process around reporting of violations has been strengthened and further developed to include both centrally and locally reported allegations of violations in 2017. For this reason there is a significantly higher number of reports in 2017 in comparison with 2016.
During 2017 the Company received 412 cases reported through Ericsson’s whistle- blower tool, the Ericsson Compliance Line. This tool is available via phone or secure website, 24/7, 365 days a year, and is available in 188 countries and in over 75 languages.
Reported violations are handled by Ericsson’s Group Compliance Forum, which consists of representatives from Ericsson’s internal audit function, Group Function Legal Affairs, Group Security, and Group Function Human Resources. The Forum briefs the Audit Committee about all reported violations, providing them with the incident category, a description of the alleged violation, and information about the decision and outcome.
The Code of Conduct
Ericsson’s Code of Conduct applies to employees and suppliers and is based on the UN Global Compact ten principles on human rights, labor conditions, environmental management and anti-corruption. Ericsson is also committed to implementing the UN Guiding Principles on Business and Human Rights across its business operations.
Suppliers must comply with Ericsson’s Code of Conduct requirements. The Company uses a risk-based approach to assess compliance with the Code of Conduct requirements as part of supplier agreements. The Company has a strong focus on risk mitigation, targeting high-risk portfolio areas and high-risk markets. For prioritized areas such as road and vehicle safety, working at heights, working hours and labor rights, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements, and has also introduced consequence management. Findings are followed up to ensure that improvements are made.
Since 2017, the Ethics and Compliance Board – comprised of several members of the Executive Team and chaired by the CEO – has been responsible to oversee the overall governance of compliance within the Group.
Sustainability risks are defined according to short-term and long-term perspectives. They are related to long-term objectives as per the strategic direction as well as short-term objectives for the coming year. According to Ericsson’s risk framework, sustainability risks are categorized into industry and market risks, commercial risks, operational risks and compliance risks. The Company follow its risk management principles, which apply across all business activities, to manage sustainability risks.
Materiality assessment is a central component of the Company’s sustainability and corporate responsibility strategy, target setting, risks and opportunities management, and reporting process related to its impact on society and environment. Ericsson considers a wide range of economic, environmental and social impacts significant to the business, or which substantively influence the views and decisions of our key stakeholders. Since 2012, the Company has used a materiality assessment to review significant issues on an annual basis, taking into account emerging trends, stakeholder feedback and other input. Adjustments are made as needed to incorporate critical issues as they arise.
The Group Function Sustainability and Public Affairs coordinates management of certain sustainability risks, such as occupational health and safety, human rights, and environmental related risks. Risks related to corruption are coordinated by Group Function Legal Affairs, and diversity issues are coordinated by Group Function Human Resources.
For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the Swedish Annual Report 2017, Note C20 “Financial risk management and financial instruments” and the Risk Factors section in the Board of Directors’ report in the Swedish Annual Report 2017.
Corruption carries serious legal and reputational risks; impedes business growth;dam-ages relations with staff, customers, share- holders, suppliers and society as a whole; and is a considerable obstacle to economic and social development in countries around the world. With customers in 180 countries, many of which are considered to be exposed to a high risk of corruption, prevention and accountability are paramount for Ericsson.
Ericsson has azero-tolerance approach to corruption expressed in the Company’s Code of Business Ethics. The Company has embedded this guiding principle at its highest levels and implemented it throughout its global organization with a set of policies and processes. This includes an anti-corruption directive with more detailed guidelines, for example about appropriate levels of gifts and entertainment.
The Company’s anti-corruption program, focusing on prevention and accountability, is headed by a Chief Compliance Officer, who since October 2017 reports directly to the Audit Committee of the Board of Directors. The Audit Committee also reviews and evaluates the program at least annually. Further, since 2016, an Ethics and Compliance Board, comprised of several members of the Executive Team and chaired by the CEO, has been responsible for the overall governance of compliance within the Group.
During 2016–2017 we invited external experts to evaluate the robustness of our anti-corruption program. Following the review, we adjusted the anti-corruption program to closer align with the US Foreign Corrupt Practices Act (FCPA). In 2017, the program was strengthened with adding resources on group level and appointing Regional Compliance Officers in all Market Areas. Moreover, one of the elements of the Group targets for sustainability and corporate responsibility is anti-corruption.
In 2017 the Company continued to roll out an automated anti-corruption screening tool for supplier and third party due diligence, which was launched in 2016. By the end of 2017, close to 93% of active employees had completed the Company’s anti-corruptione-learning course since the training was launched in 2013. A customized online anti- corruption training is also available for Ericsson’s suppliers on the Company website.
In 2017, Ericsson introduced a vetting process that focuses on ethics and compliance. So far we have used it for appointments to the Executive Team and for approximately 110 employees in exposed positions. All members of the current Executive Team have been vetted, and all future recruitments to these positions will also go through mandatory vetting. Business Partner Review Boards have been established in all Market Areas toover-see mitigation of the corruption risks in relation to onboarding of new business partners.
Ericsson is currently voluntarily cooperating with inquiries from the United States Securities and Exchange Commission and the United States Department of Justice regarding its compliance with the U.S. Foreign Corrupt Practices Act. As of today, these inquiries concern a period from January 1, 2007 and onwards, and the Company will make additional disclosures regarding these inquiries to the extent required.
Our Code of Business Ethics is included on our web site atwww.ericsson.com/code-of-business-ethics. We intend to disclose any waivers to or amendments of our Code of Business Ethics for the benefit of our executive officers on our website to the extent public disclosure is required under applicable rules.
| ITEM 16C. |
The information set forth under the Section “Financials – Notes to the consolidated financial statements – Note C30 – Fees to auditors” of the 20162017 Swedish Annual Report is incorporated herein by reference.
Audit committeepre-approval policies and procedures
The Audit Committee reviews and approves the scope of audits to be performed by external and internal auditors and analyzes their results and costs. The 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 establishedpre-approval policies and procedures for audit andnon-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 andnon-audit services that requirepre-approval by the Committee. Such services fall into two broad categories:
All services provided by the independent auditors werepre-approved in 2016.2017.
| ITEM 16D. | EXEMPTIONS |
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 Rule10A-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 arenon-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 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 |
None.
| 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.
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 rules include a specific exemption from these independence requirements for Audit Committee members of foreign private issuers who arenon-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 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:
See “Item 8.B. Financial Information – Significant Changes” herein.
| ITEM 16H. | MINE SAFETY DISCLOSURE |
Not applicable.
| ITEM 17. | FINANCIAL STATEMENTS |
See our consolidated financial statements and accompanying notes of the 20162017 Swedish Annual Report.
| ITEM 18. | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 19. | EXHIBITS |
The exhibit index attached hereto is incorporate herein by reference.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form20-F on its behalf.
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Date: April 26, 2017
EXHIBIT INDEX
The agreements and other documents filed as exhibits to this 20162017 Form20-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.
| * | 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 15.1is incorporated by reference into this |
| *** | As permitted by Rule 405(a)(2)(ii) of Regulation S-T, the registrant’s XBRL (eXtensible Business Reporting Language) information will be furnished in an amendment to this Form 20-F that will be filed no more than 30 days after the date hereof. 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.” |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form20-F on its behalf.
| TELEFONAKTIEBOLAGET LM ERICSSON | ||
| By: | /s/ JONAS STRINGBERG | |
| Name: | Jonas Stringberg | |
| Title: | Vice President, Group Controller | |
| By: | /s/ NINA MACPHERSON | |
| Name: | Nina Macpherson | |
| Title: | Senior Vice President, Chief Legal Officer | |
Date March 27, 2018
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