Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

 

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

OR

 

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

For the Fiscal Year Ended December 31, 2020

OR

 

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

OR

 

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

Commission file number 000-12033

TELEFONAKTIEBOLAGET LM ERICSSON

(Exact Name of Registrant as Specified in its Charter)

LM ERICSSON TELEPHONE COMPANY

(Translation of Registrant’s name into English)

Kingdom of Sweden

(Jurisdiction of incorporation or organization)

SE-164 83 Stockholm, Sweden

(Address of principal executive offices)

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

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

SE-164 83 Stockholm, Sweden

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

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

 

Title of Each Class

 

Trading symbol(s)

 

Name of Each Exchange on which Registered

American Depositary Shares (each representing one B share)

B Shares *

  ERIC   The NASDAQ Stock Market LLC

 

*

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

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

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

B shares (SEK 5.00 nominal value)

     3,072,395,752  

A shares (SEK 5.00 nominal value)

     261,755,983  

C shares (SEK 5.00 nominal value)

     0  

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  ☒    No  ☐

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

 

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

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

 

☐  U.S. GAAP

                  ☒       International Financial Reporting Standards as issued by the International Accounting Standards Board   ☐  Other

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

Item 17  ☐    Item 18  ☐

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I INTRODUCTION      1  

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      1  

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      1  

ITEM 3.

  KEY INFORMATION      1  
  A      Selected Financial Data      1  
  B    Capitalization and Indebtedness      1  
  C    Reasons for the Offer and Use of Proceeds      1  
  D    Risk Factors      1  

ITEM 4.

  INFORMATION ON THE COMPANY      2  
  A    History and Development of the Company      2  
  B    Business Overview      2  
  C    Organizational Structure      3  
  D    Property, Plant and Equipment      5  

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      5  

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      5  
  A    Operating Results      6  
  B    Liquidity and Capital Resources      6  
  C    Research and Development, Patents and Licenses      6  
  D    Trend Information      6  
  E    Off-Balance Sheet Arrangements      6  
  F    Tabular Disclosure of Contractual Obligations      7  

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      7  
  A    Directors and Senior Management      7  
  B    Compensation      7  
  C    Board Practices      7  
  D    Employees      7  
  E    Share Ownership      8  

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      8  
  A    Major Shareholders      8  
  B    Related Party Transactions      8  
  C    Interests of Experts and Counsel.      8  

ITEM 8.

  FINANCIAL INFORMATION      8  
  A    Consolidated Statements and Other Financial Information.      8  
  B    Significant Changes      8  

ITEM 9.

  THE OFFER AND LISTING      8  
  A    Offer and Listing Details      8  
  B    Plan of Distribution      9  
  C    Markets      9  
  D    Selling Shareholders      9  
  E    Dilution      9  
  F    Expenses of the Issue      9  

ITEM 10.

  ADDITIONAL INFORMATION      9  
  A    Share Capital      9  
  B    Memorandum and Articles of Association      9  
  C    Material Contracts      9  
  D    Exchange Controls      9  
  E    Taxation      9  
  F    Dividends and Paying Agents      11  
  G    Statement by Experts      11  
  H    Documents on Display      11  
  I    Subsidiary Information      11  

 

i


Table of Contents

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    11

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES    13
  A    Debt Securities    13
  B    Warrants and Rights    13
  C    Other Securities    13
  D    American Depositary Shares    13
PART II      14

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES    14

ITEM 14.

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

ITEM 15.

  CONTROLS AND PROCEDURES    14
  A      Disclosure Controls and Procedures    14
  B    Management’s Annual Report on Internal Control Over Financial Reporting    14
  C    Attestation Report of the Registered Public Accounting Firm    14
  D    Changes in Internal Control Over Financial Reporting    14

ITEM 16.

  [RESERVED]    14

ITEM 16A

  AUDIT COMMITTEE FINANCIAL EXPERT    14

ITEM 16B

  CODE OF ETHICS    14

ITEM 16C

  PRINCIPAL ACCOUNTANT FEES AND SERVICES    14

ITEM 16D

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES    14

ITEM 16E

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS    15

ITEM 16F

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT    15

ITEM 16G

  CORPORATE GOVERNANCE    15

ITEM 16H

  MINE SAFETY DISCLOSURE    16
PART III      16

ITEM 17.

  FINANCIAL STATEMENTS    16

ITEM 18.

  FINANCIAL STATEMENTS    16

ITEM 19.

  EXHIBITS    16

 

ii


Table of Contents

PART I

INTRODUCTION

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

This document is our Annual Report on Form 20-F for the year ended December 31, 2020 (the “2020 Form 20-F”). Reference is made to the English version of our Swedish Annual Report for 2020, with certain adjustments made to comply with U.S. requirements, which is attached hereto as Exhibit 15.1 (the “2020 Swedish Annual Report”). Only (i) the information included in this 2020 Form 20-F, (ii) the information in the 2020 Swedish Annual Report that is incorporated by reference in this 2020 Form 20-F, and (iii) the exhibits to the 2020 Form 20-F that are required to be filed pursuant to the Form 20-F shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statement on Form F-3 filed on March 27, 2018 (File No. 333-223954) and any other document filed by us pursuant to the Securities Act of 1933, as amended, which incorporates by reference the 2020 Form 20-F. Any information in the 2020 Swedish Annual Report that is not referenced in the 2020 Form 20-F or filed as an exhibit thereto shall not be deemed to be so incorporated by reference. Certain industry, technical and financial terms used in this 2020 Form 20-F are defined in the subsections entitled “Glossary” and “Financial Terminology” of the 2020 Swedish Annual Report, which are incorporated herein by reference.

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

The information included on http://www.ericsson.com/ and other websites that appear in this 2020 Form 20-F is not incorporated by reference herein. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding our company is routinely posted on and accessible at http://www.ericsson.com/.

Forward-Looking Statements

This 2020 Form 20-F includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, in particular the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

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

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

 

ITEM 1. IDENTITY

OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER

STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY

INFORMATION

A. Selected Financial Data

The selected financial data previously required this Item has been omitted in reliance on SEC Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.

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 “Financial Report – Risk Factors” of the 2020 Swedish Annual Report is incorporated herein by reference.

 

1


Table of Contents

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

General facts on the company

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

Organization number: 556016-0680

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

Country of incorporation: Sweden.

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

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

Telephone number: +46 10 719 0000

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

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

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

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

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

Subsidiaries and associated companies: For a list of our significant subsidiaries, please see “Item 4C. Shares owned directly by the Parent Company ”. We are engaged in a number of minor joint ventures and cooperative arrangements. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements, please see “Item 3D. Financial Report–Risk Factors”.

Company history and development

Innovating to empower people, business and society

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

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

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

This is Ericsson

 

   

Business strategy

 

   

Business model

 

   

Board of Directors’ Report

 

   

Business in 2020

 

   

Financial Highlights – Capital expenditures

For capital expenditures we usually use available cash from operations.

 

   

Notes to the Consolidated financial statements

 

   

Note E2 – Business combinations

 

   

Note H6 – Events after the reporting period

B. Business Overview

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

This is Ericsson

 

   

Business strategy

 

   

Business model

 

   

Board of Directors’ report

 

   

Business in 2020

 

   

Financial highlights – Research and development, patents and licensing

 

   

Financial highlights – Seasonality

 

   

Business results – Segments

 

2


Table of Contents
   

Business results – Market Areas

 

   

Sourcing and supply

 

   

Sustainability and Corporate Responsibility

 

   

Notes to the consolidated financial statements

 

   

Note B1 – Segment information

 

   

Risk factors

 

   

Risks related to business activities and industry

 

   

Risks related to Ericsson’s financial situation

 

   

Legal and regulatory risk

 

   

Internal control risk

 

   

Environmental, social and governance risk

 

   

Corporate Governance Report

 

   

Regulation and compliance

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

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

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

Ericsson always strives to honor its engagements with existing customers in compliance with applicable export controls, sanctions and other laws, rules and regulations, carefully evaluates the implications of any sanctions and continues to monitor developments in this area as it relates to the ability to continue delivering products and services to customers. As a result of the US withdrawal from the Joint Comprehensive Plan of Action (the JCPOA) in 2018, Ericsson has reduced its business and organization in Iran significantly but still continues to provide critical services and support to its customers in order for their networks to function. As Ericsson provides such services and support, it may need to interact with other counterparties. Ericsson continues to explore, including with EU and US authorities, whether and how the last years’ disruptive impact on the overall ability to support its customers can be reduced and, by doing so endeavor to avoid undue impacts on the access of the people of Iran to humanitarian items/basic services such as telecommunications.

During 2020, Ericsson sold communications infrastructure related products and services in Iran to the following telecommunications companies operating in the country: Mobile Communication Company of Iran (MCCI), and MTN Irancell. During 2020, Ericsson’s gross revenue (reported as net sales) related to sales to MCCI and MTN Irancell in Iran was approximately SEK 168 million. Ericsson does not normally allocate net profit (reported as net income) on a country-by-country or activity-by-activity basis, other than as set forth in Ericsson’s consolidated financial statements prepared in accordance with IFRS as issued by the IASB. However, Ericsson has estimated that its operating income (income before taxes and financial net) from such sales was, after internal cost allocation approximately SEK 90 million during 2020.

Ericsson uses the local banks Saman Bank and Pasargad Bank for local transactions in local currency, cash management and deposits. In some instances, Ericsson has had to arrange performance bonds or similar financial guarantees to secure Ericsson’s performance of obligations under the commercial agreements Ericsson has entered into relating to the business in Iran. In such instances, Ericsson usually engages its banks outside Iran, who in turn engage local banks in the country. These local banks include Tejarat Bank, Melli Bank, Parsian Bank, Saman Bank and Saderat Bank. Although some bonds and guarantees are still in place, no new performance bonds or similar guarantees involving these five banks with respect to Ericsson’s business activities in Iran were issued during 2020. During 2020, existing bank guarantees issued by Maskan Bank, Parsian Bank, Post Bank of Iran, Bank Mellat and Tejarat Bank (local banks in Iran) to secure Iranian customer payment obligations to Ericsson were renewed. Further, some payments made to Ericsson’s local subsidiary and payments required to be made by the local subsidiary to suppliers involve banks that may be controlled by the government of Iran.

C. Organizational Structure

The following list shows certain shareholdings owned directly and indirectly by our parent company as of December 31, 2020. 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.

 

3


Table of Contents

Shares owned directly by the Parent Company

 

Company

   Reg. No.      Domicile      Percentage of
ownership
    Par value in
local currency,
million
     Carrying
value,
SEK million
 

Subsidiary companies

             

Ericsson AB

     556056-6258        Sweden        100       50        20,731  

Ericsson Shared Services AB

     556251-3266        Sweden        100       361        2,216  

Ericsson Software Technology Holding AB

     559094-8963        Sweden        100       —          6  

Datacenter i Rosersberg AB

     556895-3748        Sweden        100       —          88  

Datacenter i Mjärdevi Aktiebolag

     556366-2302        Sweden        100       10        69  

AB Aulis

     556030-9899        Sweden        100       14        6  

Ericsson Credit AB

     556326-0552        Sweden        100       5        5  

Other (Sweden)

           —         —          1,709  

Ericsson Austria GmbH

        Austria        100       4        94  

Ericsson Danmark A/S

        Denmark        100       90        216  

Oy LM Ericsson Ab

        Finland        100       13        196  

Ericsson France SAS

        France        100       21        524  

Ericsson Antenna Technology Germany GmbH

        Germany        100       2        21  

Ericsson Germany GmbH

        Germany        100       1        4,232  

Ericsson Hungary Ltd.

        Hungary        100       1,301        120  

L M Ericsson Limited

        Ireland        100       4        34  

Ericsson Telecomunicazioni S.p.A.

        Italy        100       44        3,857  

Ericsson Holding International B.V.

        The Netherlands        100       222        3,200  

Ericsson A/S

        Norway        100       75        114  

Ericsson Television AS

        Norway        100       161        270  

Ericsson Corporatia AO

        Russia        100       5        5  

Ericsson España S.A.

        Spain        100       43        14  

Ericsson AG

        Switzerland        100       —          —    

Ericsson Holdings Ltd.

        United Kingdom        100       328        10  

Other (Europe, excluding Sweden)

           —         —          664  

Ericsson Holding II Inc.

        United States        100       —          25,907  

Ericsson Smart Factory Inc.

        United States        100       —          191  

Companía Ericsson S.A.C.I.

        Argentina        95 1)      193        99  

Ericsson Canada Inc.

        Canada        100       8        51  

Belair Networks

        Canada        100       108        170  

Ericsson Telecom S.A. de C.V.

        Mexico        100       939        363  

Other (United States, Latin America)

           —         —          121  

Teleric Pty Ltd.

        Australia        100       20        100  

Ericsson Ltd.

        China        100       2        2  

Ericsson (China) Company Ltd.

        China        100       65        475  

P.T. Ericsson Indonesia

        Indonesia        95       3,279        10  

Ericsson India Global Services PVT. Ltd

        India        100       291        51  

Ericsson Kenya Limited

        Kenya        100       —          69  

Ericsson-LG CO Ltd.

        Korea        75       285        2,279  

Ericsson (Malaysia) Sdn. Bhd.

        Malaysia        70       2        4  

Ericsson Telecommunications Pte. Ltd.

        Singapore        100       2        1  

Ericsson South Africa PTY. Ltd

        South Africa        70       —          135  

Ericsson Taiwan Ltd.

        Taiwan        90       270        36  

Ericsson (Thailand) Ltd.

        Thailand        49 2)      90        17  

Other countries (the rest of the world)

           —         —          316  

Total

                68,798  

Joint ventures and associated companies

             

Concealfab Co

        USA        28       7        64  

Leone Media Inc.

        USA        49       134        790  

Rockstar Consortium Group

        Canada        21       1        —    

Ericsson Nikola Tesla d.d.

        Croatia        49       65        330  

Total

                1,184  

 

1)

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

2)

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

 

4


Table of Contents

Shares owned by subsidiary companies

 

Company

   Reg. No.      Domicile      Percentage
of ownership
 

Subsidiary companies

        

Ericsson Cables Holding AB

     556044-9489        Sweden        100  

Ericsson France SAS

        France        100  

Ericsson Telekommunikation GmbH 1)

        Germany        100  

Ericsson Telecommunicatie B.V.

        The Netherlands        100  

Ericsson Telekomunikasyon A.S.

        Turkey        100  

Ericsson Ltd.

        United Kingdom        100  

Creative Broadcast Services Holdings Ltd.

        United Kingdom        100  

Ericsson Inc.

        United States        100  

Ericsson Wifi Inc.

        United States        100  

Redback Networks Inc.

        United States        100  

Telcordia Technologies Inc.

        United States        83  

Ericsson Telecomunicações S.A.

        Brazil        100  

Ericsson Australia Pty. Ltd.

        Australia        100  

Ericsson (China) Communications Co. Ltd.

        China        100  

Nanjing Ericsson Panda Communication Co. Ltd.

        China        51  

Ericsson Japan K.K.

        Japan        100  

Ericsson Communication Solutions Pte Ltd.

        Singapore        100  

 

1)

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

D. Property, Plant and Equipment

Primary manufacturing and assembly facilities

We continuously adjust our production capacity to meet expected customer demand. During 2020, our overall capacity utilization** was around 62%.

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

 

     2020      2019      2018      2017  
     Sites      Thousands
of sq meters
*
     Sites      Thousands
of sq meters
*
     Sites      Thousands
of sq meters
*
     Sites      Thousands
of sq meters
*
 

Sweden

     1        5        1        5        1        5        1        5  

China

     1        13.9        1        13.9        1        13.9        1        10  

Estonia

     1        9        1        9        1        8        1        6  

Brazil

     1        6.5        1        6.7        1        4.3        1        4.5  

USA

     1        6        0        0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5        40.4        4        34.6        4        31.2        4        25.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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

**

Test capacity utilization.

In March 2020, the Company opened its first fully-automated smart factory in Lewisville, TX, United States. The 300,000 square-foot smart factory began commercial operations producing millimeter-wave Street Macro base stations, which is key to Ericsson’s 5G portfolio for its North American customers. The company’s direct investment in the factory was approximately USD $100 million.

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

The investments were financed by cash flow from operations or by the financing activities described in our Swedish Annual Report 2019 and 2020.

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Financial highlights – Capital expenditures

 

   

Notes to the consolidated financial statements

 

   

Note C2 – Property, plant and equipment

 

   

Note C3 – Leases

 

   

Risk factors

 

   

Legal and regulatory risk

 

   

Environmental, social and governance risk

 

ITEM 4A. Unresolved

Staff Comments

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Year-to-year comparisons between 2019 and 2018 have been omitted from this 2020 Form 20-F but may be found in “Item 5. Operating and Financial Review and Prospects” in our Form 20-F for the fiscal year ended December 31, 2019, which discussion is incorporated herein by reference.

https://www.sec.gov/Archives/edgar/data/717826/000119312520078974/0001193125-20-078974-index.htm

 

5


Table of Contents

A. Operating Results

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

This is Ericsson

 

   

Business strategy

 

   

Business model

 

   

Board of Directors’ report

 

   

Business in 2020

 

   

Financial highlights

 

   

Business results – Segments

 

   

Business results – Market Areas

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note A1 – Significant accounting policies

 

   

Note F1 – Financial risk management– Foreign exchange risk

 

   

Risk Factors

 

   

Five-year summary – Financial information

 

   

Five-year summary – Non-Financial

 

   

Alternative performance measures

B. Liquidity and Capital Resources

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Financial highlights – Cash flow

 

   

Financial highlights – Financial position

 

   

Financial highlights – Seasonality

 

   

Financial highlights – Capital expenditures

 

   

Notes to the consolidated financial statements

 

   

Note B9 – Other current liabilities

 

   

Note D2 – Contingent liabilities

 

   

Note F1 – Financial risk management

 

   

Note F4 – Interest-bearing liabilities

 

   

Note H3 – Statement of cash flows

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

C. Research and Development, Patents and Licenses

The information set forth under the following headings of the 2020Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Business Strategy – technology leadership

 

   

Board of Director’s—Research and development, patents and licensing

 

   

Risk factors – Risks related to busines activities and industry

D. Trend Information

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:    

 

   

Financial Report

 

   

CEO Comment

 

   

Board of Directors’ Report

 

   

Business in 2020

 

   

Financial highlights – Seasonality

 

   

Business results – Segments

 

   

Business results – Market Areas

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

E. Off-Balance Sheet Arrangements

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Financial highlights – Off-balance sheet arrangements

 

   

Notes to the consolidated financial statements

 

   

Note A1 – Significant accounting policies

 

   

Note F1 – Financial Risk Management

 

   

Note D2 – Contingent liabilities

 

6


Table of Contents

F. Tabular Disclosure of Contractual Obligations

 

   

Financial Report

 

   

Notes to the consolidated financial statements

 

   

Note D4 – Contractual obligations

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance Report

 

   

Members of the Board of Directors

 

   

Members of the Executive Team

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

B. Compensation

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Corporate governance – Remuneration

 

   

Guidelines for Remuneration to Group Management

 

   

Notes to the consolidated financial statements

 

   

Note G1 – Post-employment benefits

 

   

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

 

   

Note G3 – Share-based compensation

 

   

Corporate Governance Report

 

   

Remuneration to Board members

 

   

Remuneration report

 

   

Remuneration report 2020

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

C. Board Practices

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Notes to the consolidated financial statements

 

   

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

 

   

Corporate Governance Report

 

   

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

 

   

Committees of the Board of Directors – Audit and Compliance Committee

 

   

Committees of the Board of Directors – Remuneration Committee

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

D. Employees

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Financial Highlights – Employees

 

   

Notes to the Consolidated financial statements

 

   

Note G4 – Employee Information

 

   

Five-year summary – Financial information – Statistical data, year-end

 

   

Five-year summary – Non-financial information – Statistical data, year-end

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

 

7


Table of Contents

Number of employees by market area at year-end

 

     2020      2019      2018  

South East Asia, Oceania and India

     25,869        24,559        23,959  

North East Asia

     13,944        13,783        12,788  

North America

     10,175        9,643        9,727  

Europe and Latin America 1)

     46,580        47,135        44,621  

Middle East and Africa

     4,256        4,297        4,264  
  

 

 

    

 

 

    

 

 

 

Total

     100,824        99,417        95,359  
  

 

 

    

 

 

    

 

 

 

1) Of which in EU

     35,552        37,989        35,268  

Of which in Sweden

     13,173        12,730        12,502  

E. Share Ownership

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

The Ericsson share – Shareholders

 

   

Notes to the consolidated financial statements

 

   

Notes G2 – Information regarding members of the Board of Directors and Group Management

 

   

Corporate Governance Report

 

   

Members of the Board of Directors

 

   

Members of the Executive Team

 

   

Remuneration report

 

   

Remuneration report 2020

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

The Ericsson Share – Shareholders

 

   

Corporate Governance Report

 

   

Governance structure – Ownership structure

B. Related Party Transactions

The information set forth under the following heading of the 2020 Swedish Annual Report is incorporated herein by reference.

 

   

Financial Report

 

   

Notes to the consolidated financial statements

 

   

Note H4 – Related party transactions

C. Interests of Experts and Counsel.

Not applicable.

 

ITEM 8. FINANCIAL

INFORMATION

A. Consolidated Statements and Other Financial Information.

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Legal proceedings

 

   

Parent Company – Proposed disposition of earnings

 

   

Consolidated financial statements

 

   

Notes to the consolidated financial statements

 

   

Report of independent registered public accounting firm

 

   

Five-year summary – Financial information—Statistical data, year-end

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

Refer also to item 8.B herein

B. Significant Changes

Not applicable.

 

ITEM 9.

 THE OFFER AND LISTING

A. Offer and Listing Details

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

 

8


Table of Contents

B. Plan of Distribution

Not applicable.

C. Markets

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

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

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

C. Material Contracts

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Material contracts

D. Exchange Controls

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

E. Taxation

General

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

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

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

Certain Swedish Tax Considerations

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

Taxation on Capital Gains

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

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

Taxation on Dividends

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

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

 

9


Table of Contents

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

Taxation on Interest

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

Net Wealth Taxation

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

Certain United States Federal Income Tax Consequences

The following discussion is a summary of the material United States federal income tax consequences relevant to the ownership and disposition of ADSs or Class B shares. This discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion is not a full discussion of all tax considerations that may be relevant to the ownership and disposition of ADSs or Class B shares, and does not address the Medicare tax on net investment income or the effects of any state, local or foreign tax laws. The discussion applies only if you will hold the ADSs and/or the Class B shares as capital assets and you use the USD as your functional currency. It does not deal with the tax treatment of investors subject to special rules, such as grantor trusts, real estate investment trusts, regulated investment companies, banks, brokers or dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of recording for their securities holdings, financial institutions, insurance companies, persons required to accelerate the recognition of any item of gross income with respect to our ADSs or Class B shares as a result of such income being recognized on an applicable financial statement, tax-exempt entities, investors liable for alternative minimum tax, holders (either actually or constructively) of 10% or more of the voting power or the value of our shares, persons holding ADSs and/or Class B shares as part of a hedging, straddle, conversion or constructive sale transaction and persons who are resident or ordinarily resident in Sweden. In addition, investors holding ADSs and/or Class B shares indirectly through partnerships are subject to special rules not discussed below. You should consult your own tax advisors about the United States federal, state, local and foreign tax consequences to you of the ownership and disposition of the ADSs or Class B shares.

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

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

Dividends

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

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

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

Sale or Exchange of ADSs or Class B shares

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

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

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

Passive Foreign Investment Company Status

A non-U.S. corporation is a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (a) at least 75% of its gross income is passive income or (b) at least 50% of the quarterly average value of its assets is attributable to assets that produce or are held to produce passive income. Based on the market value of our shares, the composition of our assets and income and our operations, we believe we were not a PFIC during the year 2020. 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.

 

10


Table of Contents

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

 

   

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

 

   

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

Under these rules:

 

   

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

 

   

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

 

   

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

 

   

an interest charge would be imposed.

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

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

Information Reporting and Backup Withholding

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

Additional Reporting Requirements

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

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

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

I. Subsidiary Information

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

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A. Quantitative information about market risk

The information set forth under the following heading of the 2020 Swedish Annual Report is incorporated herein by reference.

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note F1 – Financial risk management

 

11


Table of Contents

B. Qualitative information about market risk

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Financial Report

 

   

Board of Directors’ report

 

   

Risk management

 

   

Notes to the consolidated financial statements

 

   

Note F1 – Financial risk management

 

   

Corporate Governance Report

 

   

Management

 

   

Risk management

C. Interim periods

Not applicable.

D. Safe harbor

Not applicable.

E. Small business issuers

Not applicable.

 

12


Table of Contents

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

Depositary fees, charges and payments

During 2020, an annual service fee of $0.02 was charged per ADS, for the operation and maintenance costs in administering the ADS program. The Depositary, Deutsche Bank Trust Company Americas (“Deutsche Bank”), established October 20, 2020 as the record date for payment of annual servicing fees. During 2020, an annual dividend fee of $0.01 was charged per ADS. The Depositary, Deutsche Bank, established April 2, 2020 and October 2, 2020 as the record dates for payments of the dividend fee.

Fees and charges payable by ADS holders

 

    

Service

  

Rate

  

By whom paid

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

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

Fees payable by the Depositary to the Issuer

Effective January 2019, Deutsche Bank agreed to pay Ericsson an amount equal to a fixed percentage of the net revenues, if any, collected by it as a result of charging ADS holders issuance and cancellation fees, and dividend processing and annual servicing fees. In 2020, such amount totaled approximately USD11.5 million.

Effective January 2019, Deutsche Bank waived the cost of providing the ADS program administrative and reporting services to the extent provided by Deutsche Bank, and has agreed to bear the cost of certain third-party out-of-pocket costs related to the ADS program up to USD 50,000 per year. These costs include costs for the local custodian’s administration of matters relating to meetings of shareholders and costs of certain transfer agent administration services, such as the registration and transfer of depositary receipts. In 2020, such amount totaled approximately USD 76,200.

 

13


Table of Contents

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

None.

ITEM 15. CONTROLS AND PROCEDURES

A. Disclosure Controls and Procedures

The information set forth under the following heading of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance Report

 

   

Internal control over financial reporting – Disclosure controls and procedures

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

The information set forth under the section “Financial Report – Management’s report on internal control over financial reporting” of the 2020 Swedish Annual Report is incorporated herein by reference.

C. Attestation Report of the Registered Public Accounting Firm

The information set forth under the section “Financial Report – Report of independent registered public accounting firm” of the 2020 Swedish Annual Report is incorporated herein by reference.

D. Changes in Internal Control Over Financial Reporting

The information set forth under the following heading of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance Report

 

   

Internal control over financial reporting – Internal control over financial reporting

ITEM  16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

The information set forth under the following heading of the 2020 Swedish Annual Report is incorporated herein by reference.

 

   

Corporate Governance Report

 

   

Committees of the Board of Directors

 

   

Audit Committee – Members of the Audit Committee

ITEM 16B. CODE OF ETHICS

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

The information set forth under the following headings of the 2020 Swedish Annual Report is incorporated herein by reference:

 

   

Corporate Governance Report

 

   

Regulation and Compliance – Code of business ethics

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the Section “Financial Report – Notes to the consolidated financial statements—Note H5 – Fees to auditors” of the 2020 Swedish Annual Report is incorporated herein by reference.

Audit and Compliance Committee Pre-Approval Policies and Procedures

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

 

   

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

 

   

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

All services provided in 2020 by the independent auditors were pre-approved in accordance with the pre-approval policies and procedures described above.

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

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

 

14


Table of Contents

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

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

The Nomination Committee, which is comprised of the Chair of the Board of Directors and representatives of Ericsson’s largest shareholders by voting power, is responsible for proposing the external auditor for election by the shareholders, upon recommendation from the Audit and Compliance Committee of the Board of Directors. Under applicable auditor rotation rules, Ericsson was required to change auditors from its previous auditor Pricewaterhouse Coopers AB no later than in 2021. In light of the foregoing and to secure a timely auditor relation, in 2018, Ericsson initiated a tendering process, overseen by the Audit and Compliance Committee, for appointment of Ericsson’s auditor for the financial year 2020 to be elected by the shareholders at the 2020 Annual General Meeting of shareholders, held on March 31, 2020 (“2020 AGM”). Based on the results of this tendering process, the Audit and Compliance Committee recommended the Nomination Committee to propose that Deloitte AB (“Deloitte”) be elected new auditor at the 2020 AGM. The Nomination Committee’s proposal to elect Deloitte as new auditor, was made public by the Company on February 21, 2020. During the 2020 AGM, Deloitte was elected new auditor for the fiscal year ending December 31, 2020 and after the 2020 AGM, PwC resigned as auditors.

In respect of fiscal years 2018 and 2019 and the subsequent interim period through March 31, 2020:

 

   

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

 

   

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

Ericsson provided PwC with a copy of the foregoing disclosure in connection with its Annual Report on Form 20-F for the year ended December 31, 2020, and requested that they furnish it with a letter addressed to the US Securities and Exchange Commission stating whether it agrees with such disclosure and, if not, stating the respects in which it does not agree. A copy of PwC’s letter dated March 25, 2021, in which they stated that they agree with such disclosure, is incorporated by reference as Exhibit 16.1.

In respect of fiscal years 2018 and 2019 and the subsequent interim period through March 31, 2020, neither:

the Company nor anyone on its behalf consulted Deloitte regarding either the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company or oral advice was provided that Deloitte concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, or regarding any matter that was either the subject of a disagreement (as defined in Item 16F(a)(1)(iv)) or a reportable event (as defined in Item 16F(a)(1)(v)).

ITEM 16G. CORPORATE GOVERNANCE

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

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

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

These differences include the following:

 

   

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

 

   

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

 

   

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

 

   

The determination regarding independence of Board members is made by the Nomination Committee (instead of the Board) prior to the Annual General Meeting of Shareholders (“AGM”). Before the AGM 2020, the Nomination Committee determined that the following Board members were independent under all applicable independence requirements, including the NASDAQ New York rules: Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Eric A. Elzvik, Kurt Jofs and Kristin S. Rinne. When appointing members to the committees of the Board, the Board makes determinations regarding committee member independence.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

15


Table of Contents

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

See our consolidated financial statements and accompanying notes of the 2020 Swedish Annual Report.

 

   

Consolidated income statement and Consolidated statement of comprehensive income

 

   

Consolidated balance sheet

 

   

Consolidated statement of cash flows

 

   

Consolidated statement of changes in equity

 

   

Notes to the consolidated financial statements

 

   

Report of independent registered public accounting firm

ITEM 18. FINANCIAL STATEMENTS

Not applicable.

ITEM 19. EXHIBITS

 

16


Table of Contents

EXHIBIT INDEX

The agreements and other documents filed as exhibits to this 2020 Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the registrant in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

Securities Exhibit

 

Exhibit Number

  

Description

1    Articles of Association of Telefonaktiebolaget LM Ericsson (amended April 2016) (incorporated herein by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2016 filed by the registrant on April 26, 2017 (File No 000-12033)
2.1    Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January 7, 2014 (incorporated herein by reference to Exhibit 2 to the Annual Report on Form 20-F for the year ended December 31, 2014 filed by the registrant on March 31, 2015 (File No. 000-12033)
2.2    Amendment No. 1, dated as of October  24, 2016, to the Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January  7, 2014 (incorporated herein by reference to Exhibit 2.2 to the Annual Report on Form 20-F for the year ended December 31, 2016 filed by the registrant on April 26, 2017 (File No. 000-12033)
2.3    Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
6    See “Financials – Notes to the consolidated financial statements – Note A1—Significant accounting policies” of the 2020 Swedish Annual Report
7    For definitions of certain ratios used in this report, see the section of the 2020 Swedish Annual Report entitled “Financial Terminology”
8    See Item 4.C. Organizational Structure
11    Code of Ethics (amended October 2019, available on our website at https://www.ericsson.com/en/about-us/corporate-governance/code-of-ethics)
12.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1*    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2*    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1**    Swedish Annual Report for 2020 in English (adjusted version)
15.2    Consent of Deloitte AB
15.3    Consent of PricewaterhouseCoopers AB
16.1    Letter from PricewaterhouseCoopers AB regarding change in registrants’ certifying accountant, dated March 25, 2021
101**    XBRL Instance Document and related items

 

17


Table of Contents

Exhibit Number

 

Description

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

 

*

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

**

Certain of the information included in Exhibit 15.1 is incorporated by reference into this 2020 Form 20-F, as specified elsewhere in this report, in accordance with Rule 12b-23(a)(3) of the Securities Exchange Act of 1934, as amended. With the exception of the items so specified, the 2019 Swedish Annual Report is not deemed to be filed as part of this 2020 Form 20-F.

***

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

 

18


Table of Contents

SIGNATURES

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

 

TELEFONAKTIEBOLAGET LM ERICSSON
By:  

/s/ JONAS STRINGBERG

Name:   Jonas Stringberg
Title:  

Vice President, Head of Financial Control and

Business Services

 

By:  

/s/ XAVIER DEDULLEN

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

Date March 25, 2021

 

19

Exhibit 2.3

Description of Securities

Registered Pursuant to Section 12 of the

Securities Exchange Act of 1934

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

As of December 31, 2020, Ericsson had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: American Depositary Shares, each representing one Class B share. Ericsson’s Class A and Class B Shares are listed on Nasdaq Stockholm. In the United States, the American Depositary Shares representing Class B Shares are listed on NASDAQ New York under the symbol “ERIC”.

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

DESCRIPTION OF SHARE CAPITAL

REGISTER AND COMPANY PURPOSE

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

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

SUMMARY OF PROVISIONS RELATING TO CERTAIN

POWERS AND INTERESTS OF DIRECTORS

Our Articles do not stipulate anything regarding:

 

   

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

 

   

our directors’ power to vote for compensation to themselves;

 

   

our directors’ borrowing powers;

 

   

retirement rules for our directors; or

 

   

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

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

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


SHARE CAPITAL

As of December 31, 2020, our Articles provide that our share capital may not be less than SEK 6,000,000,000 nor more than SEK 24,000,000,000, and that the number of shares in Ericsson shall amount to no less than 3,000,000,000 and no more than 12,000,000,000. All of our outstanding shares are validly issued, fully paid and non-assessable, and are not redeemable and do not have any preemptive rights other than under the Swedish Companies Act and our Articles, as described below. In accordance with our Articles, Ericsson’s shares are divided into three classes of shares, denoted as Class A shares, Class B Shares and Class C shares; however, as of December 31, 2020, no Class C shares were outstanding.

ADDITIONAL SHARE ISSUANCES; PREEMPTIVE RIGHTS

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

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

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

DIVIDENDS AND OTHER DISTRIBUTIONS

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

Under Swedish law, only a general meeting of shareholders may decide on payment of dividends, which may not exceed the amount proposed by the Board (except in certain limited circumstances), and may only be paid from funds legally available for that purpose. Under Swedish law, no interim dividends may be paid in respect of any fiscal period for which audited financial statements of the company have not yet been adopted by the annual general meeting of shareholders. The market practice in Sweden is most often for dividends to be paid annually. Under the Swedish Companies Act, dividends to shareholders and other transfers of value from a company - such as purchases of its own shares (see below) - may only be made in case the company’s restricted equity remains fully covered after the transfer of value has been made. The calculation shall be based upon the most recently adopted balance sheet, and any changes in the restricted equity that has occurred after the balance sheet date shall be taken into account. In addition, dividends to shareholders and other transfers of value from the company may only be made if this is justifiable taking into account the type of business activities of the company, the scope and risks related thereto and the company’s need for financial resources, its liquidity and financial position. In respect of parent companies, also the business activities of the group, their scope and risks related thereto and the group’s need for financial resources, its liquidity and financial position shall be taken into account.

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


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

RIGHTS IN A LIQUIDATION

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

ANNUAL GENERAL MEETINGS: VOTING RIGHTS

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

We are required to publish notices to attend annual general meetings no earlier than six weeks and no later than four weeks prior to the annual general meeting and the same notice period requirements apply regarding extraordinary general meetings concerning changes in our Articles. Notices to attend other types of extraordinary general meetings at Ericsson must be published no earlier than six weeks and no later than three weeks prior to the general meeting. Due to the COVID-19 pandemic, the Swedish Government has issued temporary rules which allow for the collection of proxies and postal voting (advance voting) even if a company has not included such provisions in its articles of association. If a company choses to apply proxy solicitation or postal voting, the proxy form or the postal voting form must be made available on the company’s website together with information on how to participate in the general meeting prior to the meeting. The temporary rules have been issued in order to facilitate the conducting of general meetings during the pandemic and are valid until year-end 2021.

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, which is six banking days prior to the general meeting (however, a voting right registration requested by an owner (as per the record date) in such time that the voting right registration has been made by the relevant nominee no later than four banking days prior to the general meeting, will be taken into account in Euroclear’s compilation of the register of shareholders for the general meeting). Under the Swedish Companies Act, elections are determined by a plurality vote. Resolutions, other than elections, are passed by a simple majority of votes cast at the meeting with the chairman of the meeting having a decisive vote, unless otherwise required by law or a company’s Articles. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:

 

  a)

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

 

  b)

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

 

  c)

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


  d)

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

 

  e)

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

 

  f)

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

 

  g)

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

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

AMENDMENTS TO THE ARTICLES

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

PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY

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

REDEMPTION, REPURCHASE AND SURRENDER OF SHARES

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

LIMITATION ON OWNING SECURITIES

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

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

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


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

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Deutsche Bank Trust Company Americas, as depositary, has registered and delivered the ADSs. Each ADS represent ownership of one B share (or a right to receive one Class B share), deposited with Nordea Bank AB (publ), having its principal office at Nordea Bank Abp, Satamaradankatu 5, Helsinki, Finland, FI-00020 NORDEA, as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s principal office at which the ADSs are administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA.

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

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

HOLDING THE ADSs

How may you hold your ADSs?

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

DIVIDENDS AND OTHER DISTRIBUTIONS

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

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

 

   

Cash. The depositary will convert or cause to be converted any cash dividend or other cash distribution we pay on the shares or any net proceeds from the sale of any shares, rights, securities or other entitlements under the terms of the deposit agreement into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the United States and will distribute promptly the amount thus received. If the depositary determines in its judgment that such conversions or transfers are not practical or lawful or if any government approval or license is needed and cannot be obtained at a reasonable cost within a reasonable period or otherwise sought, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold or


 

cause the custodian to hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid and such funds will be held for the respective accounts of the ADS holders. It will not invest the foreign currency and it will not be liable for any interest for the respective accounts of the ADS holders.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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


   

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

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

DEPOSIT, WITHDRAWAL AND CANCELLATION

How are ADSs issued?

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

How do ADS holders cancel an ADS?

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

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

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

How do ADS holders vote?

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

The depositary will notify you of any meeting at which you are entitled to vote, and arrange to deliver our voting materials to you. The materials will contain (a) such information as is contained in our notice of meeting, solicitation of consent or proxy, (b) a statement that the ADS holders at the close of business in New York on the specified record date will be entitled, subject to Swedish law, our Articles and the deposit agreement, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the shares or other deposited securities represented by such holder’s ADSs; and (c) a brief statement as to the


manner in which blocking or voting instructions may be given to the depositary. Blocking or voting instructions may be given only in respect of a number of ADSs representing an integral number of shares or other deposited securities. For instructions to be valid, the depositary must receive them in writing on or before the date specified. The depositary will try, in so far as practicable and as permitted under Swedish law, our Articles, and the deposit agreement,, to vote or to have its agents block or vote the shares or other deposited securities (in person or by proxy) as you instruct. If the depositary timely receives blocking and voting instructions from you that fails to specify the manner in which the depositary is to vote the ADSs on one or more matters presented at the relevant meeting, the depositary will abstain on those items for which you failed to specify the manner in which the depositary is to vote.

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

COMPLIANCE WITH REGULATIONS

Disclosure of Interests

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

How may the deposit agreement be amended?

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

How may the deposit agreement be terminated?

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

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


BOOKS OF DEPOSITARY

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

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

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

LIMITATIONS ON OBLIGATIONS AND LIABILITY OF DEPOSITARY

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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


Requirements for Depositary Actions

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

 

   

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

 

   

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

 

   

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

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

Exhibit 12.1

Certification of Chief Executive Officer

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

I, Börje Ekholm, certify that:

 

1.

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

 

2.

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

 

3.

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

 

4.

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

 

  (a)

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

 

  (b)

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

 

  (c)

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

 

  (d)

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

 

5.

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

 

  (a)

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

 

  (b)

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

Dated March 25, 2021

 

/s/ Börje Ekholm

Börje Ekholm
President and Chief Executive Officer

Exhibit 12.2

Certification of Chief Financial Officer

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

I, Carl Mellander, certify that:

 

1.

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

 

2.

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

 

3.

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

 

4.

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

 

  (a)

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

 

  (b)

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

 

  (c)

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

 

  (d)

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

 

5.

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

 

  (a)

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

 

  (b)

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

Dated March 25, 2021

 

/s/ Carl Mellander

Carl Mellander
Executive Vice President and
Chief Financial Officer

Exhibit 13.1

Certification of Chief Executive Officer

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

 

  (i)

the Annual Report on Form 20-F of the Company for the period ended December 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  (ii)

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

Dated March 25, 2021

 

/s/ Börje Ekholm

Börje Ekholm
President and Chief Executive Officer

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

Exhibit 13.2

Certification of Chief Financial Officer

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

 

  (i)

the Annual Report on Form 20-F of the Company for the period ended December 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  (ii)

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

Dated March 25, 2021

 

/s/ Carl Mellander

Carl Mellander
Executive Vice President and
Chief Financial Officer

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

Exhibit 15.1

Swedish annual report for 2020

in English (adjusted version)


Contents

 

Financial report

  

CEO comment

     2  

Business in 2020

     4  

Letter from the Chair of the Board

     9  

Report of independent registered public accounting firm

     26  

Report of independent registered public accounting firm

     27  

Consolidated financial statements and notes

     29  

Report of independent registered public accounting firm

     80  

Management’s report on internal control over financial reporting

     81  

Risk factors

     82  

Five-year summaries

     95  

Alternative performance measures

     97  

The Ericsson share

     102  

Remuneration report

  

Statement from the Chair of the Remuneration Committee

     1  

Introduction

     2  

Remuneration 2020 at a glance

     3  

Total remuneration to the President and CEO and Executive Vice Presidents

     5  

Variable remuneration

     6  

Comparative information on the change of remuneration and Company performance

     11  

 

Corporate Governance report

  

Corporate Governance report

     1  
 

 

Ericsson Annual Report 2020

 

Our legal annual report consists of three parts published as one pdf, which can also be downloaded separately:

 

    The Financial report, including CEO comment, business strategy, the annual accounts and consolidated accounts of the Company

 

    The Corporate Governance report

 

    The Remuneration report

The Company’s annual accounts and consolidated accounts are included on pages 10–85 in the Financial report and are reported on by Deloitte in the auditor’s report. The Corporate Governance report and the Remuneration report have also been subject to assurance procedures by Deloitte. We also file an Annual Report on Form 20-F with the U.S. Securities and Exchange Commission (SEC). All parts of the legal annual report are available on Ericsson’s website. The report Ericsson 2020 in review, published on Ericsson’s website, describes the Company, its strategy and organization.

 


LOGO


1    Financial report 2020

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

This is Ericsson

Ericsson provides high-performing solutions to enable its customers to capture the full value of connectivity. The Company supplies communication infrastructure, services and software to the telecom industry and other sectors. Ericsson has approximately 100,000 employees and serves customers in more than 180 countries. Ericsson is listed on Nasdaq Stockholm and the Ericsson ADS trade on NASDAQ New York. The Company’s headquarters are located in Stockholm, Sweden.

It all started in a mechanical workshop in Stockholm in 1876 where Lars Magnus Ericsson designed telephones and his wife Hilda manufactured them by winding copper wire coils. With 5G now a commercial reality, we continue to invest to strengthen our 5G leadership. Our portfolio is designed to help our customers digitalize and to increase efficiency in an intelligent and sustainable way, while finding new revenue streams.

The business is divided into four segments with the telecom operators as the main customer group. The segments are Networks, Digital Services, Managed Services and Emerging Business and Other. The market is divided into five geographical market areas: North America, Europe and Latin America, Middle East and Africa, South East Asia, Oceania and India and North East Asia.


2

 

 

Financial report 2020 | CEO comment

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Entering a new chapter of growth and profitability

 

LOGO

 

Börje Ekholm

President and CEO

  

Despite a challenging environment in 2020, we completed our turnaround, delivered on our financial targets, and established a leadership position in 5G. More importantly, our people continued to deliver and to serve our customers with no disruptions. The pandemic showed the criticality of the digital infrastructure for society. Looking ahead, this infrastructure will increasingly drive global sustainable growth and Ericsson is well positioned to create value from the ongoing digital transformation.

 

“We were able to complete our turnaround, increase market share and accelerate our expansion into the enterprise market. We are also beginning a new chapter of profitable growth showing how critical our technology really is.”

During 2020, we have seen good momentum for our focused strategy. We were able to complete the turnaround, underscored by organic topline growth of 5%, a strong gross margin of 40.3%, operating margin of 12.0% and solid free cash flow before M&A amounting to SEK 22.3 billion. This means we have successfully exceeded our 2020 targets set three years ago.

As we move into the next phase of our journey, we do so from a strong position. We continue to transform the Company through maintained focus on R&D. Over the last few years, we have added more than 5,000 engineers and R&D now accounts for 26% of the total workforce. Technology leadership is critical for providing competitive solutions to our customers, but it is equally important for our cost competitiveness.

In November 2020, we presented a long-term profitability target of 15–18% EBITA margin excluding restructuring charges for the Group, and a long-term free cash flow target (before M&A) of 9–12% of sales. These targets will be achieved mainly by increasing market share in our primary segments and accelerating growth in the enterprise market. We stand firmly by our 2022 targets as an important stepping stone towards our long-term targets.

We made critical inroads into the enterprise market with the acquisition of Cradlepoint. With solutions for wirelessly connecting fixed and temporary sites such as field services and IoT devices, Cradlepoint complements our established enterprise offerings and creates new revenue streams for our mobile operator customers.

We continue to see that M&A will play an important role in further strengthening our

Company and our focus going forward will be on opportunities close to our portfolio. To ensure that we do not repeat mistakes, we have established a disciplined end-to-end process built on thorough evaluation, careful due diligence, integration planning as well as accountability and close follow-up.

The global pandemic

The COVID-19 pandemic has put the world under extreme stress. Our focus throughout has been on the health and safety of our employees, customers and other stakeholders. At the start of the pandemic, we transitioned nearly all of our staff to working from home and by the end of 2020 about 90,000 of our colleagues were working remotely, with minimal disruption to our customers. I am inspired by the level of commitment that my colleagues have shown throughout the past year. It has been a difficult one on many levels, but our people – all around the Company – have continued to deliver. All of them have my deepest gratitude.

The COVID-19 pandemic has accelerated the pace of digital transformation and confirmed that wireless connectivity is critical infrastructure that underpins society. Eventually we will return to more normal circumstances, but I don’t believe that we will revert back to the status quo that existed before. For example, we will most likely see remote working as part of the new normal.

Capturing the 5G opportunity

5G is a transformational technology, more so than previous generations of mobile connectivity. With 4G, the world had a global standard that empowered the emergence of platform companies whose value was

 


3

 

 

Financial report 2020 | CEO comment

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

multiplied by the underlying network. This ecosystem allowed consumers to digitalize. With 5G, enterprises will be able to choose cellular connectivity as a primary access technology, likely speeding up their digitalization.

However, I caution against looking for the killer 5G app. With 4G, we did not predict in advance the emergence of the many new business models such as streaming or ride hailing. Countries that built out their 4G infrastructure first, came to dominate the app economy. We believe this development will be similar for 5G, but for enterprise applications.

Despite the pandemic, the pace of introducing new 5G functionality increased during 2020. According to our estimates, there were 220 million global 5G subscriptions at the end of 2020, with China accounting for 175 million of those – or almost 80%. 5G is no longer an eventuality, it is here and now.

Europe used to be a leader in wireless technology but started to fall behind on 4G. It now runs the risk of falling even further behind North America and North East Asia. Europe must find ways to speed up the roll-out of 5G to avoid losing its competitiveness. Return on capital for European operators is lower than cost of capital. We believe that Europe needs to review its regulation of operators, spectrum policies, while also allowing for industry consolidation.

Our Company’s position

We are now a leader in 5G technology. Since 2015, we have shipped 6 million 5G-ready radios and during 2020, we announced 44 5G contracts and we closed the year with 122 commercial agreements and 79 live 5G networks globally. Through our focused strategy, we continue to develop and deploy products, solutions and services that push the industry forward – like the introduction of software enabling 5G to operate independently of 4G networks.

We firmly believe in openness and the value of standardization. Open RAN continues to be widely discussed in our industry and we are actively participating in defining Open RAN standards. We believe Open RAN standards will continue to evolve in the coming years, starting with less-demanding applications. In October 2020, we introduced a new Cloud RAN portfolio for increased network flexibility, as a complement to high-performing purpose-built networks. We will continue to strengthen our position in Open RAN, however 5G is happening now and our

focus must be on providing the wider ecosystem of developers and enterprises fast access to 5G so they can benefit from its full potential.

Our patent portfolio in cellular technology is world leading and through our 5G leadership we are confident in the strength of the portfolio long term. Thanks to our investments in R&D, we now have more than 57,000 granted patents and over 100 signed licensing agreements. Return on R&D investments, through licensing based on fair, reasonable, and non-discriminatory terms and conditions, is critical to ensure new investments in innovation and the continued success of open, collaborative standardization. However, when these terms are breached, we will take swift and firm action.

Sustainability and responsible business

Sustainability and corporate responsibility are integral parts of our business strategy and operations. We continue to support the ten principles of the UN Global Compact and the UN Guiding Principles on Business and Human Rights as important elements of our commitment to responsible business.

During 2020, Ericsson remained a driving force for global climate action. Our approach can help break the energy curve for mobile networks and how digitalization can reduce carbon emissions 15% by 2030 in sectors like transport and manufacturing. We have a target to be carbon neutral in our operations by 2030 and our 5G Smart Factory in the US, which integrates sustainability into its building design and operations, is an example of how this impacts our ways of working.

In addition, as part of our digital inclusion efforts we became the first private-sector partner of UNICEF’s Giga initiative which aims to connect every school on the planet to the internet by 2030.

We continue to improve and strengthen our Ethics and Compliance program. In June, we welcomed the independent compliance monitor who will oversee our progress in enhancing this program. While this will surely be a demanding process, I view it as a way to make sure we reach our high ambitions.

Most importantly perhaps, we remain steadfast in our efforts to foster a culture of integrity where we speak up and resolutely address any instance of incorrect behavior. We spend a significant amount of time in the Executive Team discussing these matters to ensure that we keep improving and be the company we want to be – and that

people expect us to be. We have taken many important steps to engage the workforce in a cross-functional fashion, including making our processes more robust and increasing our headcount in the compliance area. But this important work continues, as we need to make sure that compliance is an integral part of how we conduct all our business.

In summary

I am proud of our results during 2020. Not only were we able to complete our turnaround, we also showed the world how critical our technology is to economic growth and sustainable development. Vital parts of our society, such as hospitals and schools, as well as families and friends, depend on the infrastructure we provide. These achievements would not be possible without our incredible people. The spirit of resourcefulness, and grit, is why Ericsson employees truly rock!

We should, however, not be complacent. 2021 will be an investment year to further strengthen our competitiveness. We also see that earnings in the year could be negatively impacted by lower patent licensing revenues due to important contract renewals and that the acquisition of Cradlepoint will have a negative effect on our operating margin. Our 2022 targets remain in place and they are a milestone on the journey towards reaching our long-term target of 15–18% EBITA margin excluding restructuring charges.

When we are finally able to look back upon the pandemic, we will see that we accelerated the digitalization of society which altered many ways of working. These developments present a great opportunity for us, as 5G will be front and center in the post-pandemic world. At the same time, we all look forward to meeting our friends and colleagues face-to face again, to interact, trade ideas and innovate. This is a basic human need that will remain. And as the physical and digital worlds continue to merge, our technology and innovations will play an essential role.

Börje Ekholm

President and CEO

 


4

 

 

Financial report 2020 | Business Strategy

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Business strategy

 

Creating long-term value

Our strategy is to create long-term value through technology leadership. We aim to address long-term opportunities that present clear advantages of scale and new, profitable revenue streams. Our ambition is to grow faster than the market, with a focused approach based on the following criteria:

 

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

 

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

 

    Profitable: growth is managed for positive returns and to support Group financial targets. New contracts for increased market footprint, may in some cases be associated with challenging near-term returns as the cost for telecom operators to change vendors can be high, however contracts are expected to be profitable over time.

A customer centric strategy

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

 

    Capture new revenue streams and new opportunities made possible by 5G and Internet of Things (IoT).
    Improved end-customer experience – the main differentiator among telecom operators. Through Artificial Intelligence (AI) and automation, the customer experience can be considerably improved by ensuring coverage, performance and reliability. We can provide Key Performance Indicators for telecom operators so that the telecom operators can better analyze, understand, and optimize their networks to deliver a superior customer experience.

 

    Relentless efficiency improvements to lower the cost of delivering the increasing traffic in the networks. 5G will increase spectrum efficiency and is also significantly more power efficient, thereby reducing cost and supporting climate targets.
 

 

Ericsson business strategy

 

LOGO


5

 

 

Financial report 2020 | Business Strategy

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

The strategy stands on a foundation of four pillars:

Technology leadership

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

Ericsson has a strong commitment to R&D with substantial contributions to cutting-edge standards and technologies. It is the Company’s policy to protect and capitalize on its R&D investments by creating, securing, protecting and licensing a portfolio of patents in support of the overall business goals. The value of Ericsson’s IP portfolio by the end of 2020 extended to more than 57,000 granted patents.

Ericsson supports licensing standard essential patents on fair, reasonable, and non-discriminatory terms, known as FRAND, ensuring a healthy ecosystem for the future. These licensing terms support deep standardization and allow for scalable manufacturing, thereby lowering prices for consumers. Through FRAND licensing, innovative companies are compensated via patent royalties and are thus able to continue to reinvest in the next generation of technology, unlocking the latest digital experiences for everyone to enjoy.

Cost efficiency

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

Data-Driven Operations

Network complexity is rapidly increasing with 5G, Cloud, IoT and other new technologies, and it is becoming challenging for humans to keep up with this complexity. Running a 5G network, including data points in IoT, combined with demands of mission critical use-cases, is only possible when applying AI, automation and data analytics to drive the “Data-Driven Operations” of telecom networks.

Global scale and skill

Our global presence and our close interaction with our customers bring opportunities for us to grow with discipline, leading to increased market footprint and advantages of scale. The expertise that our people have is a key asset that enables us to work close to our customers across the world.

5G – new revenue opportunities

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

We aim to address these enterprise opportunities and continue to sell through our existing telecom operator relationships and go-to-market models. Our ambition is to service our customers by developing competitive industrial solutions that are easy to scale, such as our global IoT platform and private networks solutions. We have increased our M&A capabilities, and we see portfolio-near acquisitions as enablers for future growth. Our aim is to grow and create value by investing in solutions that support our customers’ new revenue streams, drive traffic to mobile networks and drive increased demand for network quality.

Driving our business through four segments and five market areas

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

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

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

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

In Emerging Business and Other we explore how our customers can leverage connectivity in order to create new revenue streams and new types of businesses within the enterprise segment.

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

Sustainability and Corporate Responsibility

Our approach to sustainability and corporate responsibility is an integral part of the Company’s strategy, business model, governance and culture and is embedded across its operations to drive business transformation and create value for stakeholders.

We are committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, operations and the expertise of its employees.

 


6

 

 

Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Business model

Our business model is constructed to manage changing market requirements and to capture new business opportunities. Customer focus and motivated employees are key to driving our business, creating stakeholder value and building a stronger company long term.

 

LOGO

 

We develop innovative and cost

competitive solutions for our customers.

  Motivated and talented employees drive our business.

 

LOGO


7

 

 

Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

LOGO

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

 

LOGO


8

 

 

Financial report 2020 | Business model

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

The four segments

 

LOGO


9

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Letter from the Chair of the Board

 

LOGO

Ronnie Leten

Chair of the Board

Dear shareholders,

The Board’s highest priority during the global pandemic has been the health, safety and well-being of Ericsson’s employees, customers and other stakeholders. The global challenges brought by the pandemic have required a lot from the organization. But, being a communication technology company, Ericsson was able to transition rapidly to a new reality and to adapt to new ways of working and collaboration, and by the end of 2020 about 90,000 employees were working remotely. The Board too has adjusted to the ‘new normal’, and has shifted from meeting face-to-face to virtual meetings, while remaining focused on its assignments.

I am truly impressed by all the efforts and accomplishments that Ericsson’s employees have made during this challenging year. We have increased our revenues organically by 5% and delivered a solid operating margin of 12.0%, which is the strongest since 2007. Free cash flow (before M&A) amounted to an impressive SEK 22.3 billion. We have also increased our market share in important countries and regions like for example the US, China, Japan and Europe. The organization’s relentless focus on innovation and its speed in execution is clearly reflected in our performance during 2020. I therefore want to take the opportunity, early on in this letter, to say thank you to all our employees for a job well done in 2020. Your efforts have not gone unnoticed.

One of the top priorities for the Board is to oversee the Company’s continued strengthening of its Ethics and Compliance program to ensure that the Company lives up to high standards, with our Code of Business Ethics providing an important framework. The Board views the Company’s ongoing initiatives to continuously foster a ‘speak-up’ culture as critical to succeeding with this work and supports the Company’s ongoing cultural transformation program, Ericsson on the Move, aimed at fostering a culture based on integrity and fact-based decision making. It is a key priority for the Board that Ericsson can retain, motivate and attract talented employees. For this purpose, Ericsson also has a long-term variable compensation program focused on value creation.

During the year, a three-year independent compliance monitorship started as part of the Deferred Prosecution Agreement with the U.S. Department of Justice (DOJ). The independent compliance monitor reviews Ericsson’s compliance with the terms of the settlement, evaluates Ericsson’s progress in implementing and operating its enhanced compliance program and will submit periodic reports. The Board has met with the monitor on several occasions and has been impressed by the level of expertise and the constructive approach.

Ericsson’s strategy is based on the needs of its customers, the telecom operators. The Board concludes that innovation and investments in technology and R&D have been fundamental in reaching the Company’s targets for 2020 and allowing Ericsson to build a stronger company long term. The Company’s continued investments have strengthened Ericsson’s position as a leader in 5G and its ability to gain 5G footprint through its customer-centric competitive offering. There are still several growth opportunities for Ericsson to address, including in the area of new enterprise applications that will leverage the speed, latency and security characteristics of 5G. These applications are expected to provide many new opportunities for Ericsson’s customers to capture growth.

The key to our successful business performance is linked to the achievement of our ambitious sustainability targets and programs. A strong focus on responsible business and sustainability delivers value to both Ericsson, our customers and society. For example, the

Company takes a full value chain approach to its climate action efforts, which include founding the 1.5°C Supply Chain Leaders initiative to help suppliers halve their emissions before 2030. We have set a target to be carbon neutral in our own operations by 2030 and to deliver a portfolio and solutions that help our customers break the energy curve. We also deliver digital solutions to transform industries and help reduce global emissions by 15%.

The Board is confident that Ericsson is well positioned to deliver long-term value through a combination of R&D investments and innovation, a continuous focus on responsible business, talent management and leadership. Furthermore, it is important for the Board that Ericsson continues its high focus in creating value for our customers. The Board monitors Ericsson’s capital structure with the aim of retaining a strong balance sheet and a positive free cash flow. The Board will propose a dividend for 2020 of SEK 2.00 (1.50) per share to the Annual General Meeting.

When we start to adjust to a life after the pandemic, it will become even more evident that mobile networks have become a large part of a nation’s critical infrastructure, and that high-quality connectivity is essential for everyday life. The Board remains positive to the long-term outlook for the industry and is confident that Ericsson is well positioned to execute its strategy of building a stronger Company long term.

Finally, on behalf of all members of the Board, I want to thank Börje Ekholm, and all employees at Ericsson, for your efforts in 2020. We are looking forward to working with you all in 2021.

Ronnie Leten

Chair of the Board

 


10

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Board of Directors’ report

Contents

 

10   

Business in 2020

11   

Financial highlights

14   

Business results – Segments

16   

Business results – Market Areas

17   

Corporate Governance

17   

Material contracts

17   

Risk management

17   

Sourcing and supply

18   

Sustainability and Corporate Responsibility

18   

Information security

18   

US FCPA settlement

18   

Legal proceedings

19   

Parent Company

19   

Share information

19   

Proposed disposition of earnings

20    Guidelines for Remuneration to Group Management
25   

Board assurance

 

LOGO

 

 

LOGO

2020 highlights

 

  Sales adjusted for comparable units and currency grew by 5%, with Networks growing by 10%. Reported sales increased by 2% to SEK 232.4 billion.

 

  Reported gross margin was 40.3% (37.3%), with improvements in all segments.

 

  Reported operating income improved to SEK 27.8 (10.6) billion.

 

  Reported net income was SEK 17.6 (1.8) billion.

 

  Free cash flow before M&A amounted to SEK 22.3 (7.6) billion. 2019 included a payment of SEK –10.1 billion related to the resolution of the US SEC and DOJ investigations.

 

  The Board of Directors will propose a dividend for 2020 of SEK 2.00 (1.50) per share to the AGM.

 

Business in 2020

In 2020, sales increased by 2% driven by sales growth in Networks, where sales increased by 7%, primarily driven by increased hardware deliveries following the increased market footprint. From a geographical perspective growth was primarily driven by increased sales in North East Asia, North America and Europe.

Sales decreased in Digital Services by –6% mainly due to a decline in sales in the legacy portfolio, primarily in hardware. Managed Services sales declined by –12%, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators, and transfer of a contract to an associated company. Exits of non-strategic contracts also contributed to the sales decline.

A stronger Swedish krona (SEK) had a negative impact on reported sales in all segments. Sales growth adjusted for comparable units and currency was 5%.

IPR licensing revenues increased to SEK 10.0 (9.6) billion as lower volumes with one licensee were offset by new contracts.

Gross margin improved to 40.3% (37.3%) with improved gross margins in all segments. A lower share of services sales had a positive impact on the gross margin. The improved Networks margin was supported by operational leverage. Digital Services margin improved due to increased share of software as well as limited impact from the critical contracts in 2020. Managed Services gross margin improved mainly as an effect of efficiency gains.

Operating expenses increased to SEK –66.3 (–64.2) billion. Research and

 

development (R&D) expenses increased in segment Networks through increased investments in a broader portfolio of antenna and site solutions and in 5G. Selling and administrative (SG&A) expenses increased mainly due to the acquired Cradlepoint business as well as continued investments in compliance and digital transformation. Provision release from from impairment losses on trade receivables was lower than previous year, impacing the year negatively SEK 0.1 (0.7) billion.

Restructuring charges increased to SEK –1.3 (–0.8) billion. The restructuring charges were mainly related to restructuring of the acquired antenna and filter business in segment Networks and to organizational changes as a consequence of the operator merger in North America.

Operating income was SEK 27.8 (10.6) billion. Operating income in 2019 was impacted by costs of SEK –10.7 billion related to a resolution regarding the investigations by the US SEC and DOJ.

The number of employees increased to 100,824 (99,417) mainly due to the acquisition of Cradlepoint.

Free cash flow before M&A amounted to SEK 22.3 (7.6) billion. 2019 was impacted by payments of SEK –10.1 billion related to the resolution of the US SEC and DOJ investigations.

The improvement in cash flow was driven by improved profitability. Net cash at December 31 was SEK 41.9 (34.5) billion.

 
 


11

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

LOGO

 

LOGO

 

LOGO

Financial highlights

Net sales

Reported sales increased by SEK 5.2 billion or 2% to SEK 232.4 (227.2) billion. Networks sales increased by SEK 11.0 billion or 7%, Digital Services sales decreased by SEK –2.5 billion or –6%, Managed Services sales decreased by SEK –3.0 billion or –12% and Emerging Business and Other sales decreased by SEK –0.3 billion or –4%. Sales adjusted for comparable units and currency increased by 5%.

IPR licensing revenues increased to SEK 10.0 (9.6) billion as lower volumes with one licensee were offset by new contracts.

Sales growth in Networks was primarily driven by higher hardware deliveries following increased footprint. In the geographical dimension, sales growth was primarily driven by North East Asia, North America and Europe. Sales growth adjusted for comparable units and currency increased by 10%.

Digital Services sales declined mainly due to lower sales in the legacy portfolio, primarily in hardware. Sales grew in South East Asia, Oceania and India and in North East Asia. Sales adjusted for comparable units and currency declined by –3%.

Sales declined in Managed Services, mainly due to lower variable sales in a managed services contract in North America post the merger between two large operators, and transfer of a managed services contract to an associated company. Sales adjusted for comparable units and currency decreased by –10%.

Sales in Emerging Business and Other declined due to reduced sales in the media businesses. Sales adjusted for comparable units and currency decreased by –4%.

In the market area dimension, sales growth in North East Asia, North America as well as in South East Asia, Oceania and India offset a decline in the two remaining market areas.

The sales mix by commodity was: software 22% (21%), hardware 41% (38%) and services 37% (41%).

Gross margin

Reported gross margin was 40.3% (37.3%). Gross margin excluding restructuring charges improved to 40.6% (37.5%) with strong margin improvements in all segments. A lower share of services sales had a positive impact on the gross margin. Networks margin was supported by operational leverage. Digital Services margin improved due to increased share of software as well as limited impact from the critical contracts in 2020. Managed Services gross margin improved mainly as an

 

effect of efficiency gains. The gross margin in Emerging Business and Other increased driven by Emerging Business (IoT Platforms, Edge Gravity exit and Cradlepoint).

Restructuring charges included in the gross margin increased to SEK –0.7 (–0.3) billion.

Operating expenses

Operating expenses increased to SEK –66.3 (–64.2) billion with increases in research and development expenses, selling and administrative expenses and reduced provision release from impairment losses on trade receivables.

Research and development (R&D) expenses

R&D expenses increased to SEK –39.7 (–38.8) billion. Higher R&D expenses in segment Networks driven by investments in a broader portfolio of antenna and site solutions and in 5G, while R&D investments in Digital Services decreased.

Restructuring charges impacted R&D expenses by SEK –0.4 (–0.3) billion.

Selling and administrative (SG&A) expenses

SG&A expenses increased to SEK –26.7 (–26.1) billion mainly due to the acquired Cradlepoint business as well as continued investments in compliance and digital transformation. Revaluation of customer financing was SEK –0.3 (–0.7) billion. Restructuring charges impacted SG&A expenses by SEK –0.2 (–0.1) billion.

Impairment losses on trade receivables

Impairment losses on trade receivables were SEK 0.1 (0.7) billion.

Other operating income and expenses

Other operating income and expenses was SEK 0.7 (–9.7) billion. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations impacted 2019 negatively.

Share in earnings of JVs and associated companies was SEK –0.3 (–0.3) billion.

Restructuring charges

Restructuring charges increased to SEK –1.3 (–0.8) billion. The restructuring charges were mainly related to restructuring of the acquired antenna and filter business in segment Networks and to organizational changes as a consequence of the operator merger in North America.

 


12

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

LOGO

 

LOGO

 

 

LOGO

Operating income and margin

Reported operating income improved to SEK 27.8 (10.6) billion. Operating margin in 2019 was impacted by costs of SEK –10.7 billion related to the resolution of the investigations by US SEC and DOJ. Operating income, excluding restructuring charges and the SEC and DOJ resolution regarding the investigations costs in 2019, improved to SEK 29.1 (22.1) billion, with an operating margin excluding restructuring charges of 12.5% (9.7%). The improvement was primarily driven by hardware sales in segment Networks.

Financial income and expenses, net

The financial net improved to SEK –0.6 (–1.8) billion, mainly due to positive currency hedge effects. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK 1.0 (–0.3) billion. The SEK strengthened against the USD between December 31, 2019 (SEK/USD rate 9.32) and December 31, 2020 (SEK/USD rate 8.19).

Taxes

Taxes were SEK –9.6 (–6.9) billion impacted by the increased income. The tax rate in 2020 was 35%. Costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations were handled as non-tax-deductible in 2019. Excluding these costs, the 2019 tax rate was approximately 35%.

Net income and EPS

Net income improved to SEK 17.6 (1.8) billion driven by stronger operating income. EPS diluted was SEK 5.26 (0.67) and adjusted EPS was SEK 5.83 (1.07).

Employees

The number of employees on December 31, 2020, was 100,824, an increase of 1,407 employees compared with December 31, 2019. The increase is mainly to be found in the employee categories of R&D, product management and sales. 709 employees joined through the acquired Cradlepoint business.

Cash flow

Cash flow from operating activities

Reported cash flow from operating activities improved to SEK 28.9 (16.9) billion, as a result of improved income. The impact from changes in net operating assets and liabilities was SEK –3.6 (2.8) billion and SEK –0.5 billion when adjusted for a capital injection of SEK –3.0 billion made into the Ericsson Swedish Pension Trust, affecting cash flow negatively, as described under “Financial position”. Working capital efficiency has improved as a result of a strong focus on cash flow. Accounts receivables days of sales outstanding improved to 69 (75) days and

adjusted working capital days improved to 65 (75) days. The increased business momentum has led to an increasing demand for customer financing solutions. Most of such financing has been successfully transferred to banks and the amount of customer finance credits on the balance sheet remains low. Provisions of SEK 4.0 (7.6) billion were utilized, of which SEK 0.8 (1.8) billion related to restructuring charges.

Free cash flow

The improved profitability, in combination with continued focus on cash flow, resulted in Free cash flow before M&A of SEK 22.3 (7.6) billion.

Cash flow from investing activities

Reported cash flow from investing activities was SEK –15.2 (–3.5) billion. Acquisitions/ divestments of subsidiaries was SEK –9.6 (–1.5) billion of which SEK –9.5 billion was related to the acquisition of Cradlepoint. Investments in interest-bearing securities amounted to SEK –1.3 (4.2) billion. Investments in property, plant and equipment were SEK –4.5 (–5.1) billion, including investments in the US production plant. In addition, product development decreased to SEK –0.8 (–1.5) billion due to reduced capitalization of development expenses.

Cash flow from financing activities

Reported cash flow from financing activities was SEK –12.5 (–6.9) billion. Dividends were SEK –6.0 (–4.5) billion of which SEK –5.0 billion was related to dividends to shareholders and SEK –1.0 billion to dividends to minority shareholders in Ericsson’s subsidiaries. Borrowings declined mainly due to repayment of a bilateral loan with the European Investment Bank (EIB). The impact of lease liabilities was SEK –2.4 (–3.0) billion.

Financial position

Gross cash was SEK 72.0 (72.2) billion, while net cash increased to SEK 41.9 (34.5) billion as a result of the strong free cash flow despite cash payments for Cradlepoint of SEK –9.5 billion and repayment of the bilateral loan with the European Investment Bank (EIB) of SEK –5.8 billion.

Liabilities for post-employment benefits increased to SEK 37.4 (35.8) billion, due to lower interest rates despite a capital injection of SEK –3.0 billion into the Swedish Pension Trust. The Swedish defined benefit obligation (DBO) was calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 11.8 billion lower (SEK 25.6 billion) as of December 31, 2020.

 


13

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

LOGO

 

LOGO

 

LOGO

During 2020 there was a funding need for approximately SEK 4 billion for the Swedish pension plan of which SEK 3 billion was covered by payments in second and third quarter into the Swedish Pension Trust and SEK 1 billion by providing a pledged business mortgage to PRI Pensionsgaranti. Details regarding Ericsson’s pension plans can be found in note G1 “Post-employment benefits” of the Annual Report.

The average maturity of long-term borrowings was 2.7 years as of December 31, 2020, unchanged from 12 months earlier.

Ericsson has an unutilized revolving credit facility of USD 2.0 billion.

Ericsson has an undrawn credit facility agreement of EUR 250 million with the European Investment Bank (EIB).

Ericsson refinanced a loan of USD 170 million with the Swedish Export Credit Corporation (SEK) with a new bond loan of USD 200 million, resulting in a net increase in funding of USD 30 million. The new facility is set to mature in December 2030.

The Company’s primary liquidity requirements are to fund research and development activities to strengthen the product portfolio, additional capital expenditures (e.g. investing in production- and test facilities), investment in working capital, regular dividends and debt repayment schedules.

At December 31 2020, gross cash amounted to SEK 72.0 billion, comprising SEK 43.6 billion of cash and cash equivalents and SEK 28.4 billion of interest-bearing securities. Ericsson expects that gross cash together with cash flow generated by the operations, will provide sufficient liquidity to fund the requirements for the next twelve months and thereafter for the foreseeable future. The Company continues to review the short-term and long-term cash needs on a regular basis, factoring in any changes to the strategic plan, the competitive landscape and overall market terms, as and when required.

The capital turnover remained at 1.4 (1.4) times, while Return on Capital Employed (ROCE) improved to 17.0% (6.7%) driven by improved operating income.

In June 2020, Moody’s upgraded Ericsson’s rating to Ba1 (“investment grade”) with stable outlook and in November Standard & Poor’s upgraded Ericsson’s rating to BBB- (“investment grade”) with stable outlook. Both Standard & Poor’s and Fitch have a long-term BBB- (“investment grade”) rating on Ericsson with stable outlook.

Research and development, patents and licensing

In 2020, R&D expenses amounted to SEK –39.7 (–38.8) billion. R&D expenses increased by SEK 0.8 billion when excluding

restructuring charges of SEK –0.4 (–0.3) billion and the net effect of capitalized and amortized development expenses of SEK 0.2 (0.3) billion. The number of R&D resources increased to 26,169 (25,100) and the number of patents continued to increase and amounted to more than 57,000 (54,000) granted patents by end of 2020.

Seasonality

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

Most recent three-year average seasonality

 

     First
quarter
    Second
quarter
    Third
quarter
    Fourth
quarter
 

Sequential change, sales

     –24     13     5     19

Share of annual sales

     21     24     25     30

Off-balance sheet arrangements

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

Capital expenditures

For 2020, capital expenditure was SEK 4.5 (5.1) billion, representing 1.9% of sales. Expenditures are largely related to test sites and equipment for R&D, network operation centers and manufacturing and repair operations.

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, 2020, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.

Capital expenditures 2018–2020

 

SEK billion

   2020     2019     2018  

Capital expenditures

     4.5       5.1       4.0  

Of which in Sweden

     1.9       2.0       1.3  

Share of annual sales

     1.9     2.3     1.9

Capitalized development expenses

Capitalized development expenses reduced to SEK –0.8 (–1.5) billion due to 5G development projects. The net effect on operating income of capitalized and amortized development expenses was SEK 0.2 (0.3) billion.

 


14

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

LOGO

 

LOGO

 

LOGO

Business results – Segments

 

 

Networks

Networks represented 71% (68%) of Group net sales in 2020. The segment offers a multi-technology capable Radio Access Network (RAN) solution for all spectrum network bands, including integrated high-performing hardware and software. The offering also includes a transport portfolio through own solutions and partnering, an integrated antenna solution and a complete service portfolio covering network deployment and support.

Net sales

Reported sales increased by 7% in 2020 to SEK 166.0 (155.0) billion. Growth was primarily due to increased hardware deliveries following the increased market footprint. Sales adjusted for comparable units and currency increased by 10%. From a geographical perspective growth was primarily driven by increased sales in North East Asia, North America and Europe. Sales declined in Latin America and Africa, due to the macroeconomic situation on the back of COVID–19.

The Networks share of IPR licensing revenues was SEK 8.2 (7.9) billion.

Gross margin

Reported gross margin increased to 43.6% (41.8%). Gross margin excluding restructuring charges increased to 43.8% (41.8%) as a result of the continued strengthening of operational leverage.

Operating income and margin

Reported operating income increased to SEK 30.9 (24.8) billion, with an increase in operating margin to 18.6% (16.0%). Operating margin excluding restructuring charges increased to 19.0% (16.0%) driven by sales growth and improved gross margin. Operating expenses increased by SEK –1.7 billion to SEK –41.9 billion due to higher R&D investments in 5G and in a broader portfolio of antenna and site solutions as well as an increase in restructuring charges.

Impairment losses on trade receivables impacted operating expenses by SEK 0.2 (–0.1) billion. Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK 0.3 (1.1) billion.

 

 

Digital Services

Digital Services represented 16% (18%) of Group net sales in 2020. The segment provides software-based solutions for business support (BSS), operational support (OSS), communication services, core networks, and cloud infrastructure. The focus is on cloud native and automation solutions supporting our customers’ 4G and growing 5G consumer and enterprise business.

Net sales

Reported sales decreased by –6% in 2020 to SEK 37.3 (39.9) billion. Sales adjusted for comparable units and currency decreased by –3%, mainly impacted by a sales decline in the legacy portfolio, primarily in hardware. Sales grew in South East Asia, Oceania and India and in North East Asia, while sales in the remaining three market areas declined.

The growth portfolio had good business momentum and sales grew by 6% in 2020. Important 5G Core contracts have been signed with several tier–1 operators and are expected to generate revenues in 2021 and beyond.

The Digital Services share of IPR licensing revenues was SEK 1.8 (1.7) billion.

Gross margin

Reported gross margin increased to 41.9% (37.2%) supported by an increased share of software sales. The impact of critical contracts was limited in 2020.

Operating income (loss)

Reported operating income (loss) was SEK –2.2 (–4.0) billion. Operating income (loss) excluding restructuring charges was SEK –2.2 (–3.4) billion. The improvement was driven by higher gross margin and lower operating expenses. Operating expenses declined by SEK 1.1 billion of which SEK 0.4 billion was related to lower restructuring charges. The net impact of capitalized and amortized development expenses was SEK –0.1 (–0.9) billion. R&D expenses remained at the same level as in 2019, with a shift of investments towards the cloud-native 5G portfolio.

 


15

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

LOGO

 

 

LOGO

Breakdown of operating income in segment

Emerging Business and Other

 

SEK billion

   Full year
2020
     Full year
2019
 

Segment operating income

     –2.4        –12.5  

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

     –2.6        –2.4  

of which SEC and DOJ settlement costs

     0.3        –10.7  

of which costs for ST- Ericsson wind- down

     –0.1        –0.3  

of which a refund of social security costs in Sweden

     0.0        0.9  

Business results – Segments, cont.

 

 

Managed Services

Managed Services represented 10% (11%) of Group net sales in 2020. The segment provides Networks and IT Managed Services, Network Design and Optimization, and Application Development and Maintenance to telecom operators.

These are delivered through the AI-driven Ericsson Operations Engine, a set of capabilities that transform operations to enhance customer experience, drive agile service creation and optimize costs in multi-vendor environments.

Net sales

Reported sales declined by –12% in 2020 to SEK 22.6 (25.6) billion. Sales adjusted for comparable units and currency decreased by –10%, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators, and transfer of a contract to an associated company. Exits of non-strategic contracts also contributed to the sales decline. Sales in Managed Services IT showed growth.

Gross margin

Reported gross margin increased to 17.8% (15.6%). Gross margin excluding restructuring charges increased to 18.9% (15.8%), mainly as a result of efficiency gains and higher variable sales, partly offset by lower sales.

Operating income

Reported operating income was SEK 1.6 (2.3) billion. Operating income excluding restructuring charges was SEK 1.8 (2.4) billion. In 2019 there was a positive effect of a reversal of a provision for impairment of trade receivables of SEK 0.7 billion. Despite the decline in sales, operating income excluding restructuring charges and the above mentioned provision reversal, increased by SEK 0.2 billion compared to previous year.

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

 

 

Emerging Business and Other

Segment Emerging Business and Other represented 3% (3%) of Group net sales in 2020. Ericsson supports enterprises by providing reliable and secure cellular solutions that are easy to use, adopt and scale for global and local needs.

The segment includes:

 

    Emerging Business, including IoT, iconectiv, Cradlepoint and New businesses

 

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

Net sales

Reported sales decreased by –4% in 2020 to SEK 6.5 (6.8) billion. Sales in Emerging Business grew driven by the acquired Cradlepoint business and by IoT platforms. Sales adjusted for comparable units and currency decreased by –4%.

Gross margin

Reported gross margin increased to 25.6% (18.9%). Gross margin excluding restructuring charges increased to 28.0% (19.6%). The increase was driven by Emerging Business (IoT Platforms, Edge Gravity exit and Cradlepoint).

Operating income (loss)

In 2020 operating income was positively impacted by SEK 0.3 billion related to a provision release related to costs for the compliance monitor.

In 2019 operating income was impacted by costs of SEK –10.7 billion related to the resolution of the US SEC and DOJ investigations, a refund of earlier paid social security costs in Sweden of SEK 0.9 billion and by a cost of SEK –0.3 billion related to the wind-down of the ST-Ericsson legal structure.

Reported operating income (loss) was SEK –2.4 (–12.5) billion. Operating income (loss) excluding restructuring charges and above mentioned one-off items of SEK 0.3 (–10.1) billion was SEK –2.1 (–2.3) billion.

Media Solutions operating income (loss) excluding restructuring charges and the above mentioned provision release related to the compliance monitor was SEK –0.3 (–0.3) billion including Ericsson’s 49% share in earnings of MediaKind.

Red Bee Media’s operating income improved, despite lower sales due to COVID–19.

The exit of the Edge Gravity business in the second quarter positively contributed to profitability.

Restructuring charges amounted to SEK –0.3 (–0.1) billion.

 


16

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

LOGO

Business results – Market areas

North America

Sales increased driven by 5G network deployments across all major customers. Managed Services sales decreased after the merger between two operators. In Digital Services the sales increase in the growth portfolio did not fully compensate for the decline in legacy products.

Europe and Latin America

Sales decreased due to earlier decisions on Managed Services contract exits and reduced sales in Latin America due to macroeconomic conditions following COVID-19. Networks sales increased in Europe as a result of market share gains, partly offsetting the sales decline in Latin America.

Middle East and Africa

Sales decreased primarily due to macroeconomic conditions and delayed investments in Networks and Digital Services. Continued 5G deployments in the Middle East contributed positively. Managed Services sales were stable.

 

South East Asia, Oceania and India

Network sales remained flat. Growth in Managed Services was driven mainly by a new contract. Digital Services sales increased due to continued LTE investments and 5G momentum.

North East Asia

Sales increased. Strong Networks sales growth was driven by 5G deployment in Mainland China and increased business volumes in Japan, Taiwan and Hong Kong. Digital Services sales grew through 5G core network deployments.

Other

IPR licensing revenues increased to SEK 10.0 (9.6) billion, as lower volumes with one licensee were offset by new contracts.

 

 

LOGO


17

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

        

Corporate Governance

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

Continued compliance with the Swedish Corporate Governance Code

Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2020, Ericsson does not report any deviations from the Code.

Business integrity

Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity. Upon recruitment, new employees are asked to acknowledge the code. The Company reviews and updates the Code of Business Ethics’ content on a regular basis and periodically runs an acknowledgment process to ensure that everyone performing work for Ericsson has read and understood it.

Board of Directors

At the Annual General Meeting, held on March 31, 2020, Ronnie Leten was re-elected Chair of the Board, and Jon Fredrik Baksaas, Jan Carlson, Nora Denzel, Börje Ekholm, Eric A. Elzvik, Kurt Jofs, Kristin S. Rinne, Helena Stjernholm and Jacob Wallenberg were re-elected members of the Board. As of March 31, 2020, Torbjörn Nyman, Kjell-Åke Soting and Roger Svensson were appointed employee representatives by the unions, with Anders Ripa, Loredana Roslund and Per Holmberg as deputies.

Management

Since 2017 Börje Ekholm is the President and CEO of the Group. The President and CEO is supported by the Group management, consisting of the Executive Team.

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

Remuneration

Remuneration to the members of the Board of Directors and to Group management are reported in note G2, “Information regarding

members of the Board of Directors and the Group management.” Further information about remuneration to the President and CEO and the Executive Vice Presidents is included in the “Remuneration report” appended to this Annual Report.

Guidelines for remuneration to Group management

The Board of Directors does not propose any changes to the Guidelines for remuneration to Group management resolved by the Annual General Meeting 2020, which are intended to remain in place for four years until the Annual General Meeting of shareholders 2024. The current Guidelines are included on pages 20–24.

Long-Term Variable Compensation Program 2020 (LTV 2020) for the Executive Team

Ericsson has share-based Long-Term Variable Compensation Programs in place for the Executive Team. LTV 2020 for the Executive Team was approved by the Annual General Meeting 2020. Details of LTV 2020 are explained in note G3, “Share-based compensation.”

 

 

Material contracts

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

The Company is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. Such provisions are not unusual for certain types of agreements, such as for example financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, the Company believes that none of the agreements currently in effect would in and of itself entail any material consequence for Ericsson due to a change in control of the Company.

 

 

Risk management

Ericsson’s Enterprise Risk Management (ERM) framework is an integrated part of the Ericsson Group Management System. The aim of the ERM framework is to strengthen the Group’s governance by integrating risk management with strategy-setting and execution. The ERM framework is designed to establish an adequate and effective management of risk, i.e. the uncertainty in achieving the strategic

objectives of the Company. The framework provides methods to identify, assess and treat the risks, and to agree on the Company’s risk appetite and risk tolerance.

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

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

 

 

Sourcing and supply

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

The Company negotiates global supply agreements with its primary suppliers. In general, Ericsson endeavours to have alternative supply sources and seeks to avoid single source supply situations.

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

The Company requires suppliers to comply with The Ericsson Code of Conduct for Business Partners. All partners and suppliers are required to develop, implement and maintain environmentally responsible business practices, considering their identified environmental aspects and risks.

Business Partners are required to have an environmental management system and

 


18

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

        

 

to be aware of and comply with applicable environmental legislation, permits and reporting requirement. Where the requirements in the Ericsson Code of Conduct for Business Partners are higher than local standards and laws, the requirements of the Code should be applied.

Ericsson works to reduce environmental impacts and emissions in product portfolio and supply chain. The circular economy encapsulates Ericsson’s approach to environmental sustainability, where the Company continuously strives to minimize the negative impacts of its operations, and to improve the environmental and energy performance of its products to reduce societal environmental impact. Minimizing waste is key to a circular economy and high reuse and recycling rates form part of the standard requirements for the Company´s smart product design.

Ericsson has set a target for high emitting and strategic suppliers to set their own 1.5°C aligned climate targets.

 

 

Sustainability and Corporate Responsibility

Ericsson’s approach to sustainability and corporate responsibility is an integral part of the Company’s strategy and culture and is embedded across its operations to drive business transformation and create value for stakeholders.

Ericsson is committed to creating positive sustainability impacts and reducing risks to the Company and its stakeholders through its technology, solutions, operations, and the expertise of its employees.

 

 

Information security

Information security, focused on preserving the confidentiality, integrity and availability of information, is a key element in Ericsson’s operational resilience. Information security is a highly prioritized area in Ericsson supporting a changing regulatory environment, stakeholder requirements and increased government oversight. As both the value of information and the capabilities of threat actors increase, information security has become a matter of national importance globally and a key consideration in the Information and Communication Technology (ICT) sector.

Policies and directives establish the security requirements across Ericsson. Ericsson’s Product Security framework includes a

mandatory area specifically addressing regulatory requirements for security, which is applicable to all products while the Enterprise Security Framework is the applicable internal regulation for protecting the company and ensuring that security is considered throughout the entire product life cycle.

Ericsson’s Information Security Management System is globally certified to ISO/ IEC 27001. Information security is governed through Ericsson’s Group Enterprise Security Board while the Product and Technology Security Board oversees product and portfolio security. The Audit and Compliance Committee of the Board of Directors receives regular updates on cyber security.

The security frameworks address secure development, business continuity, sales and delivery of products and services, while ensuring protection of the company’s and customers’ data.

Specific security training is mandatory for all employees, with in depth training developed to build Ericsson specific security competence.

Ericsson has a Group Crisis Management Council which is responsible for the handling of major incidents or crises.

 

 

US FCPA settlement

In December 2019, Ericsson reached the resolution of the investigations conducted by the US Department of Justice (DOJ) and by the Securities and Exchange Commission (SEC) since 2015 and 2013 respectively, regarding the Company’s compliance with the US Foreign Corrupt Practices Act (FCPA).

As a result, Ericsson agreed to enter into a Deferred Prosecution Agreement (DPA) with the DOJ to resolve criminal charges and agreed with the SEC to the entry of a judgment to resolve civil claims related to allegations of violations of the FCPA.

As part of this resolution, Ericsson agreed to engage an independent compliance monitor for a period of three years.

In June 2020, Ericsson announced that Dr. Andreas Pohlmann of the firm Pohlmann & Company – Compliance and Governance Advisory LLP had been appointed as Ericsson’s monitor. The appointment marked the start of the three-year term of the monitorship. The monitor’s main responsibilities include reviewing Ericsson’s compliance with the terms of the settlement and evaluating the Company’s progress in implementing and operating its enhanced compliance program and accompanying controls as well as providing recommendations for improvements.

Legal proceedings

Ericsson and Samsung were not able to renew the now expired patent license agreement between the parties in a timely manner.

On December 11, 2020, Ericsson filed a lawsuit in the US District Court for the Eastern District of Texas, against Samsung, for violating contractual commitments to negotiate in good faith and to license patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions. In addition, Ericsson also sought to obtain a ruling by the court that it had complied with its own FRAND commitments. The lawsuit was later amended to include claims of patent infringement against Samsung.

On December 17, 2020, Samsung informed Ericsson that it had filed suit in Wuhan, China, on December 7, 2020, seeking rate setting for Ericsson’s 4G & 5G standard essential patents.

On January 1, 2021 Ericsson filed a patent infringement case in the US District Court for the Eastern District of Texas against Samsung.

On January 4, 2021, Ericsson filed a complaint at the US International Trade Commission (ITC) as well as in Dusseldorf, Mannheim, and Munich Regional Courts in Germany, the District Court of the Hague in The Netherlands, and the Enterprise Court of Brussels in Belgium asserting infringement of patents by Samsung.

On January 7, 2021, Samsung asserted patent infringement claims against Ericsson in a complaint at the US ITC as well as in counterclaims the US District Court for the Eastern District of Texas.

On January 15, 2021, Ericsson filed an additional US ITC Action and a case in the US District Court for the Eastern District of Texas against Samsung for patent infringement.

On February 4, 2021, Samsung filed additional complaints at the ITC and in the U.S. District Court for the Eastern District of Texas against Ericsson for patent infringement.

On February 15, 2021, Ericsson filed additional complaints asserting claims of patent infringement against Samsung in the Mannheim and Munich Regional Court in Germany, the District Court of the Hague in The Netherlands, the Enterprise Court of Brussels in Belgium, and the Patents Court of the United Kingdom.

On February 19, 2021, Samsung asserted patent infringement claims against Ericsson in complaints filed in the Paris First Instance Court in France, the District Court of the Hague in The Netherlands, and the Enterprise Court of Brussels in Belgium.

In the context of the various court proceedings, the parties are involved in filing and contesting various pre-trial motions and related court awards, including as to venue.

 


19

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

The filing of multiple lawsuits, complaints and other proceedings, when parties take legal action over a patent license agreement renewal, is standard and consequently additional lawsuits, complaints and other proceedings, may follow.

As part of its defense to a now settled patent infringement lawsuit filed by Ericsson in 2013 in the Delhi High Court against Indian handset company Micromax, Micromax filed a complaint against Ericsson with the Competition Commission of India (CCI). The CCI decided to refer the case to the Director General’s Office for an in-depth investigation. In January 2014, the CCI opened similar investigations against Ericsson based on claims made by Intex Technologies (India) Limited and, in 2015, based on a now settled claim from iBall. Ericsson has challenged CCI’s jurisdiction in these cases before the Delhi High Court and is awaiting final appellate decision by the Supreme Court of India.

In April 2019, Ericsson was informed by China’s State Administration for Market Regulation (SAMR) Anti-monopoly bureau that SAMR has initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson is cooperating with the investigation, which is still in a fact-finding phase. The next steps include continued fact finding and meetings with SAMR in order to facilitate the authority’s assessments and conclusions.

In April 2018, Telefonaktiebolaget LM Ericsson, the present President and CEO and the Chief Financial Officer of Ericsson as well as three former executives were named defendants in a putative class action filed in the United States District Court for the Southern District of New York. The complaint alleged violations of United States securities laws, principally in connection with service revenues and recognition of expenses on long-term service projects. Ericsson filed motion to dismiss the complaint. On January 11, 2020 the court granted Ericsson’s motion to dismiss. The decision became final and binding on April 15, 2020.

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

 

 

Parent Company

Telefonaktiebolaget LM Ericsson (the Parent Company) business consists mainly of corporate management, holding company functions and internal banking activities. It also handles

customer credit management, performed on a commission basis by Ericsson Credit AB.

As of 31 December 2020 (2019) the Parent Company had 3 (3) branch offices. In total, the Group has 77 (77) branch and representative offices.

Financial information

Income after financial items was SEK 8.3 (–3.1) billion. The Parent Company had no sales in 2020 or 2019 to subsidiaries, while 36% (35%) of total purchases of goods and services were from such companies.

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

 

    Increased current and non-current receivables from subsidiaries of SEK 8.9 billion.

 

    Increased current and non-current liabilities to subsidiaries of SEK 12.5 billion.

 

    Increased dividend from subsidiaries of SEK 3.9 billion.

 

    Increased impairment of investments in subsidiaries of SEK 2.5 billion.

At the end of the year, gross cash: cash, cash equivalents, short-term investments, and interest-bearing securities non-current amounted to SEK 57.0 (56.5) billion.

At the end of the year, non-restricted equity amounted to SEK 33.9 (32.2) billion and total equity amounted to SEK 82.1 (80.4) billion.

 

 

Share information

As of December 31, 2020, the total number of shares in issue was 3,334,151,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,072,395,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The largest shareholders of the Parent Company at year-end were Investor AB with approximately 22.81% of the votes (7.68% of the shares), AB Industrivärden with 15.14% of the votes (2.61% of the shares), Svenska Handelbankens Pensionsstiftelse with 4.12% of the votes (0.7% of the shares) and Cevian Capital with 3.25% of the votes (5.45% of the shares).

In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 13,809,287 treasury shares were distributed to employees or sold in 2020. The quotient value of these shares was SEK 5.00 per share, totaling SEK 69 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 163.5 million.

The holding of treasury stock at December 31, 2020 was 6,043,960 Class B shares. The

quotient value of these shares is SEK 5.00, totaling SEK 30 million, representing 0.2% of capital stock, and the purchase price amounts to SEK 43.9 million.

 

 

Proposed disposition of earnings

The Board of Directors proposes a dividend SEK 2.00 (1.50) per share, and that the Parent Company shall retain the remaining part of non-restricted equity. The dividend is proposed to be paid in two equal installments, SEK 1.00 per share with the record date April 1, 2021, and SEK 1.00 per share with the record date October 1, 2021.

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

 

Amount to be paid to the shareholders

     SEK 6,668,303,470  

Amount to be retained by the Parent Company

     SEK 27,246,946,648  

Total non-restricted equity of the Parent Company

     SEK 33,915,250,118  

As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 31.4% (29.6%) and a net cash amount of SEK 41.9 (34.5) billion.

The Parent Company’s equity would have been SEK 0.3 billion higher if assets and liabilities had not been valued at fair value pursuant to Chapter 4, Section 14a of the Swedish Annual Accounts Act.

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

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

 


20

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

 

        

Guidelines for Remuneration to Group Management approved by the Annual General Meeting of shareholders 2020

Guidelines for Remuneration to Group Management

Introduction

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

Objective

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

 

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

 

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

 

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

 

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

 

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

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

A successful implementation of the Company’s strategy and sustainable long-term interests requires that the Company can attract, retain and motivate the right talent and can offer them competitive remuneration. These Guidelines aim to allow the Company to offer the members of the Group Management attractive and competitive total remuneration. Variable

compensation covered by these guidelines shall be awarded against specific pre-defined and measurable business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either Group, Business Area or Market Area level, strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

The Company operates long-term variable compensation programs for the Group Management. These have been approved by the Annual General Meeting (“AGM”) and as a result are not covered by these Guidelines. Details of Ericsson’s current remuneration policy and how we deliver on our policy and guidelines and information on previously decided long-term variable compensation programs that have not yet become due for payment, including applicable performance criteria, can be found in the Remuneration Report and in note G2, “Information regarding members of the Board of Directors, the Group management” and note G3, “Share-based compensation” in the annual report 2019.1)

Governance of remuneration to Group Management

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

The Committee is authorized to review and prepare for resolution by the Board salary and other remuneration for the President and CEO. Further, the Committee shall prepare for resolution by the Board proposals to the AGM on Guidelines for Remuneration to Group Management at least every fourth year and on LTV and similar equity arrangements.

The Committee has the mandate to resolve salary and other remuneration for the other members of Group Management except for the President and CEO, including targets for short-term variable compensation (“STV”), and payout of STV based on achievements and performance.

In order to conduct its responsibilities, the Committee considers trends in remuneration, legislative changes, disclosure rules and the general global executive remuneration environment. It reviews salary survey data, Company results and individual performance before preparing salary adjustment recommendations for the President and CEO for resolution by the Board and before approving any salary adjustments for the other members of Group

Management. In order to avoid conflict of interests, no employee is present at the Committee’s meetings when issues relating to their own remuneration are being discussed. The President and CEO is not present at Board meetings when issues relating to the President and CEO’s own remuneration are being discussed. The Committee may appoint independent expert advisors to assist and advise in its work.

The Chair of the Remuneration Committee along with the Chair of the Board work together with Ericsson’s Investor Relations team, striving to ensure that healthy contact is maintained as necessary and appropriate with shareholders regarding remuneration to Group Management.

Overview of remuneration package covered by these Guidelines

For Group Management the remuneration package may consist of fixed salary, short-term and long-term variable compensation (STV and LTV), pension and other benefits.

The table below sets out the key components of remuneration of Group Management covered by these Guidelines, including why they are used, their operation, opportunity levels and the related performance measures. In addition, the AGM has resolved and may in the future decide to implement LTV for Group Management. The ongoing share-based LTV programs resolved by the AGM have been designed to provide long-term incentives for the members of Group Management and to incentivize the Company’s performance creating long-term value. The aim is to attract, retain and motivate executives in a competitive market through performance- based share related incentives and to encourage the build-up of significant equity holdings to align the interests of the members of Group Management with those of shareholders. The vesting period under the ongoing share-based LTV programs resolved by the shareholders is three years and vesting is subject to the satisfaction of identified performance criteria. Although LTV is an important component of the remuneration of Group Management, it is not covered by these Guidelines, because these programs are separately resolved by the AGM.

 

1) 

Information for 2020 can be found in the Remuneration report and in note G2, “Information regarding members of the Board of Directors and Group management” and note G3, “Share-based compensation” in the Financial report.

 


21

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Element and purpose    Operation    Opportunity    Performance measures

Fixed salary

 

Fixed compensation paid at set times.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  deliver part of the annual compensation in a predictable format.

  

Salaries shall normally be reviewed annually in January.

Salaries shall be set taking into account:

 

•  Ericsson’s overall business performance,

 

•  business performance of the Unit that the individual leads,

 

•  year-on-year performance of the individual,

 

•  external economic environment,

 

•  size and complexity of the position,

 

•  external market data,

 

•  pay and conditions for other employees based in locations considered to be relevant to the role.

 

When setting fixed salaries, the impact on total remuneration, including pensions and associated costs, shall be taken into consideration.

  

There is no maximum salary level; however, salary increases (as a % of existing salary) for most Group Management members would normally be in line with the external market practices, employees in relevant locations and performance of the individual.

 

There are circumstances where higher salary increases could be awarded. For example, where:

 

•  a new Group Management member has been appointed at a below-market salary, in which case larger increases may be awarded in following years, subject to strong individual performance,

 

•  the Group Management member has been promoted or has had an increase in responsibilities,

 

•  an individual’s salary has fallen significantly behind market practice.

  

This element of the package does not require achievement of any specific performance targets.

 

However, individual performance and capability shall be taken into account along with business performance when determining fixed salary levels and any salary increases.

Short-term variable

compensation (STV)

 

STV is a variable compensation plan that shall be measured and paid over a single year.

 

Purpose:

 

•  align members of Group Management with clear and relevant targets to Ericsson’s strategy and sustainable long-term interests,

 

•  provide individuals an earning opportunity for performance at flexible cost to the Company.

  

The STV shall be paid in cash every year after the Committee and, as applicable, the Board have reviewed and approved performance against targets which are normally determined at the start of each year for each member of Group Management.

 

The Board and the Committee reserve the right to:

 

•  revise any or all of the STV targets at any time,

 

•  adjust the STV targets retroactively under extraordinary circumstances,

 

•  reduce or cancel STV if Ericsson faces severe economic difficulties, for instance in circumstances as serious as no dividend being paid,

 

•  adjust STV in the event that the results of the STV targets are not a true reflection of business performance,

 

•  reduce or cancel STV for individuals either whose performance evaluation or whose documented performance feedback is below an acceptable level or who are on performance counselling.

  

Target pay-out opportunity for any financial year may be up to 150% of annual fixed salary of the individual. This shall normally be determined in line with the external market practices of the country of employment.

 

Maximum pay-out shall be up to two times the target pay-out opportunity (i.e. 300% of annual fixed salary).1) 2)

  

The STV shall be based on measures linked to the annual business plan which in itself is linked to Ericsson’s long-term strategy and sustainability.

 

Measures shall include financial targets at Group, Business Area or Market Area level (for relevant members of Group Management). Other potential measures may include strategic targets, operational targets, employee engagement targets, customer satisfaction targets, sustainability and corporate responsibility targets or other lead indicator targets.

 

A maximum of four STV targets shall be assigned to an individual in total for a financial year. Financial targets shall comprise at least 75% of the target bonus opportunity with a minimum of 40% being defined at Group level. The minimum weighting for an STV target shall be 20%.

 

Performance of all STV targets shall be tested over a one-year performance period (financial year).

 

The STV measures and targets shall be determined by the Committee for the members of Group Management other than the President and CEO.

  

Malus and clawback

 

The Board and the Committee shall have the right in their discretion to:

 

•  deny, in whole or in part, the entitlement of an individual to the STV payout in case an individual has acted in breach of Ericsson’s Code of Business Ethics,

 

•  claim repayment in whole or in part the STV paid in case an individual has acted in breach of Ericsson’s Code of Business Ethics.

 

•  to reclaim STV paid to an individual on incorrect grounds such as restatement of financial results due to incorrect financial reporting, noncompliance with a financial reporting requirement etc.

     

 

The Board has the mandate to define STV measures and targets for the President and CEO, should STV be introduced for the President and CEO.

        


22

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Element and purpose    Operation    Opportunity    Performance measures

Pension

 

Contributions paid towards retirement fund.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  facilitate planning for retirement by way of providing competitive retirement arrangements in line with local market practices.

  

The operation of the pension plan shall follow competitive practice in the individual’s home country and may contain various supplementary plans in addition to any national system for social security.

 

Pension plans should be defined contribution plans unless the individual concerned is subject to defined benefit pension plan under mandatory collective agreement provisions or mandatory local regulations.

 

In some special circumstances where individuals cannot participate in the local pension plans of their home countries of employment:

 

•  cash equivalent to pension may be provided as a taxable benefit, or

 

•  contributions may be made to an international pension fund on behalf of the individual on a cost-neutral basis.

  

Since 2011, members of Group Management in Sweden participate in the defined contribution plan (ITP1) which applies for the wider workforce in Sweden. The pension contribution for ITP1 is capped at 30% of pensionable salary which includes fixed salary and STV paid in cash.

 

According to the local collective bargaining agreement in Sweden, the members of Group Management are also entitled to an additional pension contribution for part-time retirement for which the cap is determined during the union negotiations for all the local employees.

 

Members of Group Management employed outside of Sweden may participate in the local market competitive pension arrangements that apply in their home countries in line with what is offered to other employees in the same country.

 

In all cases the annual pension contributions shall be capped at 70% of annual fixed salary.3)

   None

Other benefits

 

Additional tangible or intangible compensation paid annually which do not fall under fixed salary, short-term and long-term variable compensation or pension.

 

Purpose:

 

•  attract and retain the executive talent required to implement Ericsson’s strategy,

 

•  deliver part of the annual compensation in a predictable format.

  

Benefits offered shall take into account the competitive practices in the individual’s country of employment and should be in line with what is offered to other senior employees in the same country and may evolve year on year.

 

Benefits may for example include company phones, company cars, medical and other insurance benefits, tax support, travel, Company gifts and any international relocation and/or commuting benefits if the individual is required to relocate and/or commute internationally to execute the requirements of the role.

  

Benefit opportunities shall be set in line with competitive market practices and shall reflect what is offered to other senior employees in the individual’s country of employment.

 

The levels of benefits provided may vary year on year depending on the cost of the provision of benefits to the Company.

 

Other benefits shall be capped at 10% of annual fixed salary for members of Group Management located in Sweden.

 

Additional benefits and allowances for members of Group Management who are commuters into Sweden or who are on long-term assignment (“LTA”) in countries other than their home countries of employment, shall be determined in line with the Company’s international mobility policy which may include (but is not limited to) commuting or relocation costs; cost of living adjustment, housing, home travel or education allowance; tax and social security equalization assistance.

   None

 

1)

For most of the current members of Group Management, the current STV target opportunity is below 50% of the annual fixed salary.

2)

At present the President & CEO does not participate in STV. The Board has the mandate to decide to include the President and CEO in STV in the future. In doing so the Board shall:

 

   

determine the STV opportunity for the President and CEO within the ranges mentioned above and in line with the external market practices of the country of employment, keeping the STV opportunity of the other members of Group Management under consideration,

 

   

reduce the LTV opportunity in relation to the STV opportunity, keeping the total target cash compensation consisting of fixed salary, STV and LTV unchanged.

Should the Board decide to introduce STV for the President and CEO, the details will be disclosed in the Remuneration Report for the relevant year.

 

3)

Since most of the current members of Group Management are currently under ITP1 coverage, their pension contributions are currently capped at 30% of pensionable salary and the additional pension contribution for part-time retirement mandated by the local collective bargaining agreement in Sweden.


23

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Alignment of short-term variable compensation with the Company’s strategy and criteria for payment

These Guidelines for Remuneration to Group Management have been developed to support alignment of Ericsson’s business strategy and long-term interests of members of Group Management with that of shareholders, in particular:

 

    The targets for the STV shall be set each year either by the Board or the Committee as appropriate for the members of the Group Management. In determining the targets, the Board and the Committee shall take into account Ericsson’s focused business strategy, which is built on technology leadership, product-led solutions and global scale, along with internal annual and long-term business plans. Therefore, all members of Group Management shall have one or more Group financial targets derived from the long-term financial targets which amount to at least 40% of the target STV opportunity. At least 75% of the target STV opportunity shall be linked to financial measures. The Board and the Committee, as applicable, may also choose to include other operational, strategic, employee engagement, customer satisfaction or sustainability and corporate responsibility or other lead indicator measures to support the delivery of the business plan. For certain roles such targets may be supplemented by targets for the relevant Business Area, Market Area or Group Function.

 

    Maximum pay-out shall be achievable for truly outstanding performance and exceptional value creation.

 

    At the end of the performance period for each STV cycle, the Board and the Committee shall assess performance versus the measures and determine the formula-based outcome using the financial information made public by the Company for the financial targets. The Board has the discretion to adjust targets and the subsequent outcome in the event that they cease to be relevant or stretching or to enhance shareholder value. Adjustments shall normally only occur in the event of a major change (e.g. an acquisition or divestment) and shall be on the basis that the new target shall be no more or less difficult to achieve.

Consideration of remuneration offered to the Company’s employees

When developing these Guidelines, the Board and the Committee have considered the total remuneration and employment conditions of the Company’s employees by reviewing the application of Ericsson’s remuneration policy for the wider employee population to ensure consistency.

There is clear alignment in the remuneration components for the members of Group Management and the Company’s employees

in the way that remuneration policy is applied as well as the methods followed in determining fixed salaries, short-term and long-term variable compensation, pension and benefits, which are to be applied broadly and consistently throughout the Company. The targets under short-term variable compensation are similar and the performance measures under long-term variable compensation program are the same for the members of Group Management and other eligible employees of the Company. However, the proportion of pay that is linked to performance is typically higher for Group Management in line with market practice.

Employment contracts and termination of employment

The members of Group Management are employed on permanent rolling contracts. The maximum mutual notice period is no more than 12 months. In case of termination by the employee, the employee has no right to severance pay.

In any case, the fixed salary paid during the notice period plus any severance pay payable will not together exceed an amount equivalent to the individual’s 24 months fixed salary.

The employee may be entitled to severance pay up until the agreed retirement age or, if a retirement age has not been agreed, until the month when the employee turns 65. In a case where the employee is entitled to severance pay from a date later than 12 months prior to retirement, the severance pay shall be reduced in proportion to the time remaining and calculated only for the time as of the date when the employee’s employment ceases (i.e. the end of the period of notice) and until the time of retirement.

Severance pay shall be reduced by 50% of the remuneration or equivalent compensation the employee receives, or has become entitled to, from any other employer or from his/her own or other activities during the period that severance is paid to the employee by the Company.

The Company shall have the right to terminate the employment contract and dismiss the employee with immediate effect, without giving any advance notice and entitlement to severance pay, if the employee commits a serious breach of his/her obligations towards the Company.

Normally disputes regarding employment agreements or any other agreements concerning the employment of the members of Group Management, the way such agreements have been arrived at, interpreted or applied, as well as any other litigation proceedings from legal relations based on such agreements, shall be settled by arbitration by three arbitrators in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. Irrespective of the outcome of any arbitral award, the Company may, in the relation between the parties, carry all fees and expenses charged by

the arbitrators and all of its own litigation costs (including attorney’s fees), except in the event the arbitration proceedings were initiated by the employee without reasonable cause.

Recruitment policy for new members of Group Management

In determining the remuneration of a new member of Group Management, the Board and the Committee shall take into consideration all relevant factors to ensure that arrangements are in the best interests of the Company and its shareholders. These factors include:

 

    The role being taken on.

 

    The level and type of remuneration opportunity received at a previous employer.

 

    The geography in which the candidate is being recruited from and whether any relocation allowance is required.

 

    The skills, experience and caliber of the candidate.

 

    The circumstances of the candidate.

 

    The current external market and salary practice.

 

    Internal relativities.

Additional arrangements

By way of exception, additional arrangements can be made when deemed appropriate and necessary to recruit or retain an individual. Such arrangement could be in the form of short-term or long-term variable compensation or fixed component and can be renewed, but each such arrangement shall be limited in time and shall not exceed a period of 36 months and twice the annual fixed salary that the individual would have received if no additional arrangements were made. In addition, if appropriate, different measures and targets may be applied to the new appointment’s incentives in the first year.

In addition, it may on a case by case basis be decided by the Board and the Committee respectively to compensate an individual for remuneration forfeited from a previous employer during recruitment. The Board and the Committee will consider on a case by case basis if all or some of the remuneration including incentives forfeited need to be ’bought-out’. If there is a buy-out of forfeited incentives, this will take into account relevant factors including the form they were granted (cash vs. shares), performance conditions attached to these awards and the time they would have vested/ paid. Generally, buy-out awards will be made on a comparable basis to those forfeited.

In the event of an internal candidate being promoted to Group Management, legacy terms and conditions may be honored, including pension and benefit entitlements and any outstanding incentive awards. If a Group Management member is appointed following a merger or acquisition with/of another company, legacy terms and conditions may also be honored for a maximum period of 36 months.

 


24

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Board of Directors’ discretions

The Board upon recommendation from the Committee may in a specific case decide to temporarily deviate from these Guidelines in whole or in part based on its full discretion in unusual circumstances such as:

 

    upon change of the President and CEO in accordance with recruitment policy for new members of Group Management,

 

    upon material changes in the Company structure, organization, ownership and business (for example takeover, acquisition, merger, demerger etc.) which may require adjustments in STV and LTV or other elements to ensure continuity of Group Management, and

 

    in any other circumstances, provided that the deviation is required to serve the long-term interests and sustainability of the Company or to assure its financial viability.

The Committee is responsible for preparing matters for resolution by the Board, and this includes matters relating to deviations from these Guidelines. Any such deviation will be disclosed in the Remuneration Report for the relevant year.

 


25

 

 

Financial report 2020 | Board of Directors’ report

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

        

 

Board assurance

The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB and adopted by the EU, and give a fair view of the Group’s financial position and results of operations.

 

The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations. The Board of Directors’ Report for the Ericsson Group and the Parent Company

 

provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

 

 


26

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Report of independent

registered public accounting firm

To the shareholders of Telefonaktiebolaget

LM Ericsson (publ):

 

 

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Telefonaktiebolaget LM Ericsson (publ) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 25, 2021, expressed an unqualified opinion on those financial statements.

 

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting. Our responsibility

is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes

in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte AB

Stockholm, Sweden

March 25, 2021

 


27

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Report of independent

registered public accounting firm

To the shareholders of Telefonaktiebolaget

LM Ericsson (publ):

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Telefonaktiebolaget LM Ericsson (publ) and subsidiaries (the “Company”) as of December 31, 2020, the related consolidated income statement, statement of comprehensive income (loss), statement of cash flows, and statement of changes in equity, for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue recognition of significant and complex contracts - Refer to Notes B1 and B2 to the financial statements

Critical Audit Matter Description

Ericsson generates revenues from sales of hardware, software and services to its customers. Total revenue for 2020 amounted to SEK 232.4 billion. The majority of these revenues are related to multi-year framework agreements with large customers which often include discounts and incentives arrangements. The customers issue purchase orders under these framework agreements that in combination constitute the firm agreement with the customer. These arrangements may give rise to a risk of material misstatement due to the incorrect identification of performance

obligations and timing of revenue recognition for each obligation, in particular for the significant contracts that could have a material impact on the financial statements.

Ericsson conducts an assessment at contract inception to determine which promised goods and services in a customer contract are distinct and accordingly identified as performance obligations. The Company considers there to be a distinct performance obligation if the customer can benefit from the good or service either on its own or together with other resources readily available, and if the Company’s obligation to transfer the good or service is separately identifiable from other obligations in the contract.

The amount and timing of revenue recognized is determined in relation to the individual elements of the contract. Transaction prices including variable considerations, discounts and incentive agreements, are estimated at the commencement of the contract (and periodically thereafter). Judgment is used in the estimation process based on historical experience with the type of business and customer and in allocating revenue to each performance obligation by reference to their standalone selling prices.

We identified revenue recognition of significant complex contracts as a critical audit matter due to that the application of revenue recognition accounting standards is complex and it requires management to make judgements and estimates in determining the amount and timing of revenue recognized in relation to individual elements of the contracts.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of the company’s controls over revenue recognition with particular focus on the controls related to the identification of performance obligations within revenue contracts and determination of the timing of recognition for each revenue obligation including the reviews performed by the company’s central board for material and complex deals.
 

 


28

 

 

  Financial report 2020 | Report of independent registered public accounting firm

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

    We tested a sample of significant and complex contracts to assess management’s judgements and estimates related to the identification of performance obligations based on the contract terms and determination of the timing of recognition for each revenue obligation.

 

    We tested a sample of revenue transactions recorded during the year by tracing them to supporting evidence of delivery and acceptance and assessed the judgements and estimates for revenue recorded in the period by comparing it to contractual terms such as, delivery terms, transaction prices including variable considerations, discounts and incentive agreements.

Valuation of Goodwill – Refer to Note C1 to the financial statements

Critical Audit Matter Description

Goodwill is a significant asset in the consolidated balance sheet and amounts to SEK 34.9 billion as of December 31, 2020. The Company’s evaluation of the carrying value of goodwill involves the comparison of the recoverable amount of each cash generating unit to their carrying values. Ericsson’s assessment is based on a discounted cash flow using a business plan covering 5 years, which requires management to make significant estimates and assumptions regarding forecasts of future sales growth, operating income, working capital and capital expenditure requirements, as well as assumptions on discount rates. Changes in these assumptions could have a significant impact on either the recoverable amount, the amount of any impairment charge, or both.

We identified goodwill as a critical audit matter because of the significant judgments made by management to estimate the recoverable amount. The assessment of management’s assumptions regarding recoverable amount requires a high degree of auditor judgment, including an increased extent of complexity and the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of management’s controls over goodwill impairment evaluation and determination of the recoverable amount with particular focus on the controls over management’s preparation and review of assumptions for future sales growth, operating income, working capital, capital expenditure requirements and method for determining the discount rate used.

 

    We evaluated management’s ability to accurately forecast future sales growth and operating income by comparing actual results to management’s historical forecasts, the company’s historical results, external analyst reports and internal communications to management and the Board of Directors.

 

    With the assistance of our fair value specialists, we evaluated the discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.

Realization of Deferred Tax Assets — Refer to Note H1 to the financial statements

Critical Audit Matter Description

Deferred tax assets are significant to the consolidated accounts and amounts to SEK 26.3 billion as of December 31, 2020. Ericsson recognizes deferred income taxes for tax attributes and for differences between the financial statement and tax basis of assets and liabilities at enacted (or substantively enacted) statutory tax rates in effect for the years in which the deferred tax liability or asset is expected to be settled or realized. The Company only recognizes deferred tax assets in countries where they expect to be able to generate corresponding taxable income in the future to benefit from tax reductions. Future realization of deferred tax assets depends on the existence of sufficient taxable income. Sources of taxable income include future

reversals of deferred tax assets and liabilities, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its recorded deferred tax assets.

We identified management’s determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets as a critical audit matter because of the significant judgments and estimates management makes related to taxable income. This required a high degree of auditor judgment, including an increased extent of complexity and the need to involve our income tax specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures included, but were not limited to the following:

 

    We tested the effectiveness of controls over deferred tax assets with particular focus on management’s preparation and review over the estimates of taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.

 

    We evaluated management’s ability to accurately estimate taxable income by comparing actual results to management’s historical estimates, historical taxable income, external analyst reports and internal communications to management and the Board of Directors.

 

    With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law in the different tax jurisdictions.

/s/ Deloitte AB

Stockholm, Sweden

March 25, 2021

We have served as the Company’s auditor since 2020.

 


29

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated financial statement

Consolidated income statement

 

January–December, SEK million

   Notes      2020      2019      2018  

Net sales

     B1, B2        232,390        227,216        210,838  

Cost of sales

        –138,666        –142,392        –142,638  
     

 

 

    

 

 

    

 

 

 

Gross income

        93,724        84,824        68,200  

Research and development expenses

        –39,714        –38,815        –38,909  

Selling and administrative expenses

        –26,684        –26,137        –27,519  

Impairment losses on trade receivables

     F1        118        737        –420  
     

 

 

    

 

 

    

 

 

 

Operating expenses

        –66,280        –64,215        –66,848  

Other operating income

     B4        1,161        2,350        497  

Other operating expenses

     B4        –499        –12,060        –665  

Share in earnings of joint ventures and associated companies

     B1, E3        –298        –335        58  
     

 

 

    

 

 

    

 

 

 

Operating income

     B1        27,808        10,564        1,242  

Financial income and expenses, net

     F2        –596        –1,802        –2,705  
     

 

 

    

 

 

    

 

 

 

Income after financial items (loss)

        27,212        8,762        –1,463  

Income tax

     H1        –9,589        –6,922        –4,813  
     

 

 

    

 

 

    

 

 

 

Net income (loss)

        17,623        1,840        –6,276  
     

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to:

           

Owners of the Parent Company

        17,483        2,223        –6,530  

Non-controlling interests

        140        –383        254  

Other information

           

Average number of shares, basic (million)

     H2        3,323        3,306        3,291  

Earnings (loss) per share attributable to owners of the Parent Company, basic (SEK)1)

     H2        5.26        0.67        –1.98  

Earnings (loss) per share attributable to owners of the Parent Company, diluted (SEK)1)

     H2        5.26        0.67        –1.98  

 

1)

Based on Net income (loss) attributable to owners of the Parent Company.

Consolidated statement of comprehensive income (loss)

 

January–December, SEK million

   2020      2019      2018  

Net income (loss)

     17,623        1,840        –6,276  

Other comprehensive income (loss)

        

Items that will not be reclassified to profit or loss

        

Remeasurements of defined benefits pension plans including asset ceiling

     –4,618        –6,182        –2,453  

Revaluation of borrowings due to change in credit risk

     99        –651        207  

Tax on items that will not be reclassified to profit or loss

     880        1,363        285  

Items that have been or may be reclassified to profit or loss

        

Cash flow hedge reserve

        

Gains/losses arising during the period

     136        –290        —    

Reclassification adjustments on gains/losses included in profit or loss

     281        —          —    

Translation reserves

        

Changes in translation reserves

     –5,376        1,925        2,011  

Reclassification to profit and loss

     124        54        36  

Share of other comprehensive income of JV and associated companies

     –81        131        14  

Tax on items that have been or may be reclassified to profit or loss

     –86        60        —    
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     –8,641        –3,590        100  
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     8,982        –1,750        –6,176  
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss) attributable to:

        

Owners of the Parent Company

     8,787        –1,403        –6,470  

Non-controlling interests

     195        –347        294  


30

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated balance sheet

 

SEK million

   Notes      Dec 31
2020
     Dec 31
2019
     Dec 31
2018
 

Assets

           

Non-current assets

           

Intangible assets

     C1           

Capitalized development expenses

        3,857        4,040        4,237  

Goodwill

        34,945        31,200        30,035  

Intellectual property rights, brands and other intangible assets

        4,805        2,491        3,474  

Property, plant and equipment

     C2        13,383        13,850        12,849  

Right-of-use assets

     C3        7,980        8,487        —    

Financial assets

           

Equity in joint ventures and associated companies

     E3        1,274        1,565        611  

Other investments in shares and participations

     F3        1,519        1,432        1,515  

Customer finance, non-current

     B6, F1        1,221        2,262        1,180  

Interest-bearing securities, non-current

     F1, F3        21,613        20,354        23,982  

Other financial assets, non-current

     F3        4,842        5,614        6,559  

Deferred tax assets

     H1        26,296        31,174        23,152  
     

 

 

    

 

 

    

 

 

 
            121,735      122,469      107,594  

Current assets

           

Inventories

     B5        28,097        30,863        29,255  

Contract assets

     B6, F1        11,273        12,171        13,178  

Trade receivables

     B6, F1        42,063        43,069        51,172  

Customer finance, current

     B6, F1        1,916        1,494        1,704  

Other current receivables

     B7        16,014        14,479        20,844  

Interest-bearing securities, current

     F1        6,820        6,759        6,625  

Cash and cash equivalents

     H3        43,612        45,079        38,389  
     

 

 

    

 

 

    

 

 

 
            149,795      153,914      161,167  
     

 

 

    

 

 

    

 

 

 

Total assets

        271,530        276,383        268,761  
     

 

 

    

 

 

    

 

 

 

Equity and liabilities

           

Equity

           

Capital stock

     E1        16,672        16,672        16,672  

Additional paid in capital

     E1        24,731        24,731        24,731  

Other reserves

     E1        –2,689        2,292        965  

Retained earnings

     E1        47,960        38,864        44,610  

Equity attributable to owners of the Parent Company

     E1        86,674        82,559        86,978  

Non-controlling interests

     E1        –1,497        –681        792  
     

 

 

    

 

 

    

 

 

 
            85,177      81,878      87,770  

Non-current liabilities

           

Post-employment benefits

     G1        37,353        35,817        28,720  

Provisions, non-current

     D1        2,886        2,679        5,471  

Deferred tax liabilities

     H1        1,089        1,224        670  

Borrowings, non-current

     F4        22,218        28,257        30,870  

Lease liabilities, non-current

     C3        7,104        7,595        —    

Other non-current liabilities

        1,383        2,114        4,346  
     

 

 

    

 

 

    

 

 

 
            72,033      77,686      70,077  

Current liabilities

           

Provisions, current

     D1        7,580        8,244        10,537  

Borrowings, current

     F4        7,942        9,439        2,255  

Lease liabilities, current

     C3        2,196        2,287        —    

Contract liabilities

     B6        26,440        29,041        29,348  

Trade payables

     B8        31,988        30,403        29,883  

Other current liabilities

     B9        38,174        37,405        38,891  
     

 

 

    

 

 

    

 

 

 
        114,320        116,819        110,914  
     

 

 

    

 

 

    

 

 

 

Total equity and liabilities

        271,530        276,383        268,761  
     

 

 

    

 

 

    

 

 

 


31

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated statement of cash flows

 

January–December, SEK million

   Notes      2020      2019      2018  

Operating activities

           

Net income (loss)

        17,623        1,840        –6,276  

Adjustments to reconcile net income to cash

     H3        14,915        12,226        7,830  
     

 

 

    

 

 

    

 

 

 
            32,538      14,066      1,554  

Changes in operating net assets

           

Inventories

        384        261        –4,807  

Customer finance, current and non-current

        370        –858        1,085  

Trade receivables and contract assets

        –3,185        10,995        –2,047  

Trade payables

        4,303        –372        2,436  

Provisions and post-employment benefits

        –2,669        –3,729        6,696  

Contract liabilities

        –560        –1,579        –808  

Other operating assets and liabilities, net

        –2,248        –1,911        5,233  
     

 

 

    

 

 

    

 

 

 
        –3,605        2,807        7,788  
     

 

 

    

 

 

    

 

 

 

Cash flow from operating activities

        28,933        16,873        9,342  

Investing activities

           

Investments in property, plant and equipment

     C2        –4,493        –5,118        –3,975  

Sales of property, plant and equipment

        254        744        334  

Acquisitions of subsidiaries and other operations

     H3, E2        –9,657        –1,753        –1,618  

Divestments of subsidiaries and other operations

     H3, E2        59        248        333  

Product development

     C1        –817        –1,545        –925  

Other investing activities

        801        –331        –523  

Interest-bearing securities

        –1,348        4,214        2,242  
     

 

 

    

 

 

    

 

 

 

Cash flow from investing activities

        –15,201        –3,541        –4,132  

Financing activities

           

Proceeds from issuance of borrowings

     F4        4,400        4,851        911  

Repayment of borrowings

     F4        –8,643        –4,476        –1,748  

Sale of own shares

        163        197        107  

Dividends paid

        –5,996        –4,450        –3,425  

Repayment of lease liabilities

     F4        –2,417        –2,990        —    

Other financing activities

        1        –32        78  
     

 

 

    

 

 

    

 

 

 

Cash flow from financing activities

        –12,492        –6,900        –4,077  

Effect of exchange rate changes on cash

        –2,707        258        1,372  
     

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

        –1,467        6,690        2,505  

Cash and cash equivalents, beginning of period

        45,079        38,389        35,884  
     

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     H3        43,612        45,079        38,389  
     

 

 

    

 

 

    

 

 

 


32

 

 

Financial report 2020 | Consolidated financial statements with notes

 

 

Ericsson Annual Report on Form 20-F 2020

 

 

Consolidated statement of changes in equity

Equity and Other comprehensive income (loss) 2020

 

SEK million

   Capital
stock
     Additional
paid in
capital
     Other
reserves
     Retained
earnings
     Stockholders’
equity
     Non-controlling
interests
     Total
equity
 

January 1, 2020

     16,672        24,731        2,292        38,864        82,559        –681        81,878  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     —          —          —          17,483        17,483        140        17,623  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

                    

Items that will not be reclassified to profit or loss

                    

Remeasurements related to post-employment benefits

     —          —          —          –4,614        –4,614        –4        –4,618  

Revaluation of borrowings due to change in credit risk

     —          —          99        —          99        —          99  

Tax on items that will not be reclassified to profit or loss

     —          —          –20        899        879        1        880  

Items that have been or may be reclassified to profit or loss

                    

Cash flow hedge reserve

                    

Gains/losses arising during the period

     —          —          136        —          136        —          136  

Reclassification to profit and loss

     —          —          281        —          281        —          281  

Translation reserves 1)

                    

Changes in translation reserves

     —          —          –5,434        —          –5,434        58        –5,376  

Reclassification to profit and loss

     —          —          124        —          124        —          124  

Share of other comprehensive income of JV and associated companies

     —          —          –81        —          –81        —          –81  

Tax on items that have been or may be reclassified to profit or loss

     —          —          –86        —          –86        —          –86