Ericsson(ERIC) - 2022 Q4 - Annual Report

PART I Identity of Directors, Senior Management and Advisers This section is not applicable as per the report Offer Statistics and Expected Timetable This section is not applicable as per the report Key Information This section primarily incorporates risk factors by reference from the Swedish Annual Report, with other subsections being not applicable Risk Factors - The company's risk factors are incorporated by reference from the 'Financial report – Risk factors' section of the 2022 Swedish Annual Report (adjusted version)[27] Information on the Company This section provides an overview of Ericsson's history, business operations, organizational structure, and physical assets, detailing the company's origins, current business portfolio across Networks, Cloud Software and Services, and Enterprise segments, along with information on global subsidiaries and manufacturing facilities History and Development of the Company - The parent company, Telefonaktiebolaget LM Ericsson, was incorporated in Sweden in 1918. Its origins trace back to a workshop opened by Lars Magnus Ericsson in 1876[29][33] - Ericsson's business portfolio is structured into three main segments: Networks, Cloud Software and Services, and Enterprise. The Enterprise segment includes Enterprise Wireless Solutions, Global Communications Platform, and Technologies and New Businesses[34] Business Overview - In 2022, Ericsson recorded gross revenues of SEK 106 million from sales to MTN Irancell in Iran, with an estimated operating income of SEK 29 million. The company plans an orderly wind-down of its business in Iran[37][39] - Ericsson has significantly reduced its business engagement in Iran since 2018 but continues to provide critical services. The company is planning for an orderly wind-down due to increasing operational complexity[39] Organizational Structure - The parent company, Telefonaktiebolaget LM Ericsson, directly and indirectly holds shares in numerous subsidiaries globally. A complete list is filed with the Swedish Companies Registration Office[40] | Company | Domicile | Percentage of ownership | | :--- | :--- | :--- | | Ericsson AB | Sweden | 100% | | Ericsson Holding International B.V. | The Netherlands | 100% | | Ericsson Holding II Inc. | United States | 100% | | Vonage Holdings Corp. | United States | 100% | | Cradlepoint Inc. | United States | 100% | | Ericsson (China) Communications Co. Ltd. | China | 100% | Property, Plants and Equipment - In 2022, the company's overall production capacity utilization was 53%[44] | Location | Total Floor Space (Thousands of sq meters) | | :--- | :--- | | Sweden | 5 | | China | 13.9 | | Estonia | 9 | | Brazil | 6.5 | | United States | 6 | | Total | 40.4 | Unresolved Staff Comments There are no unresolved staff comments Operating and Financial Review and Prospects This section provides a detailed comparison of operating results for 2021 versus 2020, restated for the new segment structure, highlighting stable reported sales at SEK 232.3 billion with 4% organic growth driven by Networks despite a SEK 7.7 billion sales decline in Mainland China, improved gross margin to 43.4%, increased EBIT to SEK 31.8 billion, and significantly increased free cash flow before M&A to SEK 32.1 billion, while also covering liquidity, capital resources, R&D activities, and critical accounting estimates Operating Results | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | SEK 232.3B | SEK 232.4B | | Gross Margin | 43.4% | 40.3% | | EBIT | SEK 31.8B | SEK 27.8B | | EBIT Margin | 13.7% | 12.0% | | Net Income | SEK 23.0B | SEK 17.6B | | EPS Diluted | SEK 6.81 | SEK 5.26 | | Free Cash Flow (before M&A) | SEK 32.1B | SEK 22.3B | - Sales growth adjusted for comparable units and currency was 4% in 2021, mainly driven by a 7% growth in the Networks segment. However, sales in Mainland China declined by SEK -7.7 billion, negatively impacting the Group's organic growth rate by 3 percentage points[52][59] - Segment Performance in 2021: - Networks: Sales grew 1% to SEK 167.8B; EBIT margin improved to 22.2% - Cloud Software and Services: Sales decreased 6% to SEK 56.2B; EBIT was a loss of SEK -2.2B - Enterprise: Sales grew 30% to SEK 6.2B, driven by the Cradlepoint acquisition; EBIT was a loss of SEK -3.0B[97][100][102][104][106][108] Liquidity and Capital Resources - At the end of 2021, Gross Cash was SEK 97.6 billion and Net Cash was SEK 65.8 billion, up from SEK 41.9 billion in 2020[85] - In September 2021, Ericsson renewed its USD 2.0 billion revolving credit facility, which has a five-year tenure and remains undrawn[88] - The company's credit ratings are BBB- (Stable) from S&P and Fitch, and Ba1 (Stable) from Moody's[89] Research and Development, Patents and Licenses, etc. - Ericsson maintains a strong commitment to R&D, leading cellular technology development from 2G to 5G and beyond. Key focus areas include network APIs, automation, AI for network performance, and energy consumption reduction[117] | R&D and Patent Information | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | R&D employees | 29,304 | 27,379 | 26,169 | | R&D expenses (SEK bn) | 47.3 | 42.1 | 39.7 | | Patents | > 60,000 | > 60,000 | > 57,000 | Trend Information - The company's sales, income, and cash flow are seasonal, generally being lowest in the first quarter and highest in the fourth quarter due to telecom operators' purchasing patterns[92] Critical Accounting Estimates - Information regarding critical accounting estimates and judgments is incorporated by reference from Note A2 of the consolidated financial statements in the 2022 Swedish Annual Report[123] Directors, Senior Management and Employees This section details the composition of the Board of Directors and senior management, including a board diversity matrix and employee statistics showing a total of 105,529 employees at year-end 2022 with the largest concentration in Europe and Latin America, while incorporating information on compensation, board practices, and share ownership by reference Directors and Senior Management | Board Diversity Matrix (as of March 15, 2023) | Count | | :--- | :--- | | Total Number of Directors | 11 | | Female | 4 | | Male | 7 | Employees - The total number of employees increased to 105,529 at the end of 2022, up from 101,322 in 2021[130] | Number of employees by market area (2022) | Count | | :--- | :--- | | South East Asia, Oceania and India | 27,761 | | North East Asia | 13,207 | | North America | 11,993 | | Europe and Latin America | 48,023 | | Middle East and Africa | 4,545 | | Total | 105,529 | Major Shareholders and Related Party Transactions This section incorporates information regarding major shareholders and related party transactions by reference from the 2022 Swedish Annual Report Financial Information This section covers consolidated financial statements and significant post-reporting period changes, including proposals for new board members, a resolution with the U.S. Department of Justice (DOJ) regarding 2019 DPA breaches resulting in a guilty plea and a USD 207 million fine, and an appointment to the Executive Team Significant Changes - On March 2, 2023, Ericsson reached a resolution (DOJ Plea Agreement) with the U.S. Department of Justice regarding non-criminal breaches of its 2019 Deferred Prosecution Agreement (DPA)[141] - Under the DOJ Plea Agreement, Ericsson will plead guilty to previously deferred charges for conduct prior to 2017 and pay a fine of USD 206,728,848. A provision of SEK 2.3 billion was made in Q4 2022 for this[141] - The Nomination Committee proposed two new board members, Christy Wyatt and Jonas Synnergren, for election at the 2023 Annual General Meeting[136] The Offer and Listing This section incorporates details about the company's securities and their market listing by reference to Exhibit 2.3. Other subsections are not applicable Additional Information This section provides supplementary information, including details on material contracts like the acquisitions of Vonage for USD 6.2 billion and Cradlepoint for USD 1.1 billion, outlines Swedish and U.S. tax considerations for shareholders regarding dividends and capital gains for non-residents, and confirms no significant exchange controls affecting remittances Material Contracts - On July 21, 2022, Ericsson completed the acquisition of Vonage Holdings Corp. for approximately $6.2 billion USD in an all-cash transaction[153][155] - On November 2, 2020, Ericsson completed the acquisition of Cradlepoint Inc., a provider of wireless WAN Edge solutions, for a purchase price of approximately $1.1 billion USD[156][157] Exchange Controls - There is no Swedish legislation that affects the import or export of capital or the remittance of dividends, interest, or other payments to non-resident security holders, although dividends are subject to withholding tax[158] Taxation - A Swedish dividend withholding tax of 30% is imposed on dividends paid to non-residents. Under the U.S. Tax Treaty, this rate is reduced to 15% for eligible U.S. holders[165] - Generally, non-residents of Sweden are not liable for Swedish capital gains tax on the sale of ADSs or shares, with certain exceptions for individuals who were formerly residents of Sweden[163] - For U.S. federal income tax purposes, distributions are generally treated as ordinary income from foreign sources. The company believes it was not a Passive Foreign Investment Company (PFIC) in 2022[173][180] Quantitative and Qualitative Disclosures About Market Risk This section incorporates information regarding market risk by reference from the 'Risk management' and 'Note F1 – Financial risk management' sections of the 2022 Swedish Annual Report Description of Securities Other Than Equity Securities This section details fees associated with American Depositary Shares (ADSs), outlining service fees payable by ADS holders for issuance, cancellation, and administration, and discloses that Deutsche Bank paid Ericsson approximately USD 11.9 million in 2022 as part of a revenue-sharing agreement - ADS holders are charged fees for services such as issuance/cancellation (up to USD 5 per 100 ADSs), dividend processing (up to USD 3 per 100 ADSs), and annual administration (up to USD 3 per 100 ADSs)[199] - In 2022, the depositary, Deutsche Bank, paid Ericsson approximately USD 11.9 million based on a revenue-sharing agreement related to ADS fees[200] PART II Defaults, Dividend Arrearages and Delinquencies The company reports no defaults, dividend arrearages, or delinquencies Material Modifications to the Rights of Security Holders and Use of Proceeds The company reports no material modifications to the rights of security holders or use of proceeds Controls and Procedures This section incorporates by reference management's reports on disclosure controls and procedures and internal control over financial reporting, as well as the attestation report from the registered public accounting firm, all from the 2022 Swedish Annual Report Corporate Governance and Other Matters This section covers various governance topics, confirming the adoption of a Code of Business Ethics, detailing the Audit and Compliance Committee's pre-approval policies for auditor services, explaining exemptions from NASDAQ listing standards for audit committees, and highlighting key differences between Ericsson's Swedish corporate governance practices and NASDAQ requirements, such as Nomination Committee composition and employee representative appointments to the Board Code of Ethics - The company has adopted a Code of Business Ethics applicable to all executive officers, directors, and employees, which is available on its website[208] Principal Accountant Fees and Services - The Audit and Compliance Committee has established pre-approval policies for services provided by the external auditor. General pre-approval is granted for projects with fees up to SEK 1 million, while specific pre-approval is required for projects exceeding this amount[210][214] Exemptions from the Listing Standards for Audit Committees - The company relies on an SEC exemption (Rule 10A-3(b)(1)(iv)(C)) that allows non-executive employee representatives to serve on the Audit and Compliance Committee, as permitted by Swedish law[215] Corporate Governance - Ericsson follows its home country (Swedish) practices in lieu of certain NASDAQ corporate governance requirements. Key differences include: - Employee representatives on the Board and its committees. - The Nomination Committee includes representatives of the four largest shareholders, not just board members. - The external auditor is elected by shareholders, not appointed by the audit committee[220][221] PART III Financial Statements This section refers to the consolidated financial statements and accompanying notes contained within the 2022 Swedish Annual Report (adjusted version) - The full consolidated financial statements are provided, including the income statement, balance sheet, statement of cash flows, statement of changes in equity, and the reports of the independent registered public accounting firm[225][228] Financial Statements This section is not applicable Exhibits This section provides an index of all exhibits filed with the Form 20-F. Key documents listed include the Articles of Association, the Deposit Agreement for ADSs, material contracts, CEO/CFO certifications, and the adjusted 2022 Swedish Annual Report - Key exhibits filed include: - Exhibit 1: Articles of Association - Exhibit 2.1: Deposit Agreement for American Depositary Receipts - Exhibit 4.1: Vonage Merger Agreement - Exhibit 12.1 & 12.2: CEO and CFO Certifications (Section 302) - Exhibit 15.1: Swedish Annual Report for 2022 (adjusted version)[231]