Notes to the Consolidated Financial Statements Enabling a mobile world Annual Report 2012 4 Nokia Siemens Networks Overview Business review Governance Financial Statements 1 2 12 Chief Executive Officer’s strategic review 16 Our senior management team 18 Our strategy and transformation 21 A word from our customer: SK Telecom 22 Industry trends 24 How we operate 26 Where we operate 28 A word from our customer: KDDI 29 Operating and Financial Review 47 A word from our customer: TeliaSonera 48 Corporate responsibility 50 Risk factors 52 A word from our customer: Safaricom 54 Corporate Governance Consolidated Financial Statements 2012 Enabling a mobile world A word from our customer: U.S. Cellular 4 Who we are and what we do 6 2012 highlights 8 A letter from our Chairman 9 Our Board of Directors 10 A word from our customer: SoftBank 62 Consolidated Income Statement 63 Consolidated Statement of Comprehensive Income 64 Consolidated Statement of Financial Position 65 Consolidated Statement of Cash Flows 66 Consolidated Statement of Changes in Shareholders’ Equity 67 Notes to the Consolidated Financial Statements Company Financial Statements 2012 118 Company Statement of Financial Position 119 Company Income Statement 120 Notes to the Company Financial Statements Other Information 127 Proposed profit appropriation 127 Proposed appropriation of result 127 Subsequent events 128 Independent auditor’s report 129Glossary Visit our Annual Report online nokiasiemensnetworks.com/annualreport Enabling a mobile world We’ve focused our business on mobile broadband. This is our speciality. We help mobile operators grow profitable businesses that realize the extraordinary potential of mobile broadband. The work that we do powers some of the most exciting opportunities for our generation and will do so for generations to come. Within these pages you will find out more about who we are, our turnaround, how we are building the infrastructure for the next generation of mobile networks, and how delighted our customers are in their relationship with us. We welcome you to an exploration of how we are enabling the mobile world. Nokia Siemens Networks for a world in motion™ Annual Report 2012 1 A word from our customer Helping to build customer loyalty “A partner who helps us keep our promises to our customers – that’s the must for us.” Mary N. Dillon, President and Chief Executive Officer, U.S. Cellular Read more about our work with U.S. Cellular in our online Annual Report Country: United States Number of customers: 5.8 million Strategic focus: Customer satisfaction with state-of-the art network services 2 Nokia Siemens Networks Overview 1 2 4 6 8 9 10 Enabling a mobile world A word from our customer: U.S. Cellular Who we are and what we do 2012 highlights A letter from our Chairman Our Board of Directors A word from our customer: SoftBank Annual Report 2012 3 Overview – Who we are and what we do The world’s mobile broadband specialist Nokia Siemens Networks, a joint venture between Nokia and Siemens, is the world’s specialist in mobile broadband. We provide mobile operators with hardware, software and services to plan, design and build their networks; to operate and maintain those networks; and to enhance their customers’ experience. Across the world, the demand to be connected anywhere, anytime, using any device, is exploding. Addressing that challenge requires network infrastructure that only very few companies can provide – and Nokia Siemens Networks is one of those companies. Our focus is on the mobile broadband technology and services that help mobile operators to meet the challenges of today and tomorrow: from the radio equipment found on towers and rooftops around the world, to the sophisticated software systems that manage complex networks, to the services that make it all work together. Our customers include most of the world’s leading telecommunications companies, including América Móvil, China Mobile, Deutsche Telekom, SoftBank, Telefónica, T-Mobile USA, Verizon and Vodafone. Our organization is based on two businesses units: Mobile Broadband and Global Services. In 2013, we have customerfocused sales and delivery organizations grouped into three large geographical areas: North America, Europe and Latin America, and Asia, Middle East and Africa. Our business units Together, our Mobile Broadband and Global Services business units ensure that mobile operators can efficiently provide their customers with a superior experience. 4 Mobile Broadband Global Services Mobile Broadband Our Mobile Broadband business unit provides mobile operators with radio and core network software together with the hardware needed to deliver mobile voice and data services. The product portfolio includes ‘Liquid’ software, which allows unrivalled flexibility and adaptability including migration towards a cloud architecture; network management tools that provide a real-time view of the network performance and quality of service; and customer experience management software that monitors and adapts network and service experience. Global Services The Global Services business unit provides mobile operators with a broad range of services, including professional services, network implementation and customer care services. Within professional services are network planning and optimization, systems integration and managed services for network and service operations. Nokia Siemens Networks Key statistics Achievements An industry-leading 4G (LTE) portfolio with 77 commercial contracts at year-end 2012 58 400 employees Named number one in LTE innovation and implementation for the second year in a row by ABI Research Only company supplying LTE radio technologies to all major mobile operators in Japan and South Korea 3 million mobile base stations in service to date A powerful services player that has articulated a credible plan on how it intends to focus, according to Current Analysis Deployed networks that help people stay connected in over 150 countries Substantial improvements in all areas of product quality, including a 32% year-onyear reduction in open customer defects Annual Report 2012 5 Overview – 2012 highlights Execution, progress and momentum In 2012, Nokia Siemens Networks made significant progress in executing its strategy to focus on mobile broadband. The impact is visible in the vastly improved financial performance and operational achievements over the year. From a financial perspective, it was the best year in our history. Operationally, it was a milestone year as well. Our efforts to deploy our innovative technology into the high growth areas of the mobile broadband market showed strong momentum and, importantly, received strong endorsement from our customers and positive reactions from industry analysts. Financial highlights €13.4bn Full-year sales of €13 372m, down slightly from €13 645m in 2011 despite divestments and significant country and contract exits as part of our restructuring program. €822m 30.7% €1.3bn Operating profit before specific items* of €822m, up 145% from €335m in 2011. Significant improvement in gross margin before specific items* to 30.7%, up from 27.5% in 2011. Rigorous working capital management helped to drive positive cash flow in every quarter of the year, strengthening the Group’s cash position, with a net cash position of €1 285m in 2012, up from €8m in 2011. Key financials 2012 EURm Net sales Operating profit before specific items Operating profit % before specific items Operating loss after specific items Operating loss % after specific items Loss for the year EBITDA before specific items 6 Nokia Siemens Networks 13 372 822 6.1% (741) (5.5%) (1 445) 1 094 *T he before specific items financial measure excludes specific items for all periods: restructuring charges, country/contract exit charges, merger-related charges, purchase price accounting related charges and other one-time charges. t December 31, 2012, Optical Networks was classified as a disposal group A held for sale and is presented as discontinued operations on a separate income statement line, Loss for the year from discontinued operations. All comparative Optical Networks results for the years ended December 31, 2011 and 2010 have been re-presented as discontinued operations on the face of the income statement. Operational highlights Successful transition to a focused mobile broadband company: Achieved world record 4G mobile network throughput at 1.6 Gb per second in 2012. This was our fifth straight 4G speed record in 2012. “Flexi Zone is by far the most innovative approach taken by any of the tier one Original Equipment Manufacturers (OEMs).” – Michael Thelander, Chief Executive Officer and Founder, Signals Research Group “Through selectively exiting non-core lines of business, NSN has also moved to transform its corporate culture to achieve a flatter, more responsive structure. When combined with efforts to establish quality as a differentiator, NSN is creating a nimble and effective competitive force.” – Ken Rehbehn, Principal Analyst, Yankee Group Demonstrated our commitment to staying at the forefront of mobile broadband innovation with the opening of a mobile broadband testing and development facility at Silicon Valley in the USA. Introduced industry award winning CEM on Demand solution, a userfriendly online portal for managing customer experience: “NSN’s early championing of CEM, as early as a year ahead of rivals, is likely responsible for the company’s positive recognition among operators.” – Jason Marcheck, Service Director, Current Analysis Unveiled industry award-winning Flexi Zone solution for deploying a small cell overlay for fast and flexible 4G network coverage in high-density areas: Launched the first vendor operated Service Management Capability Center for global delivery of service operations and management: Demonstrated the reliability of core virtualization and cloud management with a top global operator (part of the leading Liquid Core architecture). “We are delighted that Nokia Siemens Networks has come up with an end-to-end approach to manage the service lifecycle efficiently and thus enhance customer experience to a new level.” – Vishant Vora, Director Technology, Vodafone India Ltd, Vodafone India Developed the groundbreaking Liquid Applications which redefines the role of the base station by turning them into local hubs for service creation and delivery, and transforming the mobile broadband customer experience. Maintained the lead and strong performance in packet core: “Nokia Siemens Networks’ mobile packet core solution is very threatening in the market, because it was one of the early EPC solutions and has maintained market momentum with major mobile operators based on functionality and quality of experience, and now with class leading performance.” – Glen Hunt, Principal Analyst, Current Analysis Annual Report 2012 7 Overview – A letter from our Chairman A year of significant progress In this letter – my first as Chairman of Nokia Siemens Networks – I am pleased to report a year of significant progress. Towards the end of 2011, we announced a new strategic direction, along with a substantial, two-year restructuring program designed to give us a strong foundation for the future. Those efforts are already showing results. We delivered the best financial performance in our six-year history, with operating profit before specific items up 145% to EUR 822 million. After specific items, we reported a full-year operating loss of EUR 741 million, reflecting the ongoing costs of our investment into restructuring. Over the course of 2012, deep structural changes were made to Nokia Siemens Networks that will enable it to better compete in coming years. Non-core businesses were divested; headcount was significantly reduced; poorly performing contracts and countries were exited; non-personnel costs were reduced; pricing discipline was improved through centralization; leadership was upgraded; quality was enhanced; roadmaps were stabilized; and overall governance was strengthened. Given this progress, we were able to raise our cost savings target in early 2013. “The longer term view of Nokia Siemens Networks is that our new strategy, combined with excellence in execution, enables us to target on a longer term an operating margin of between 5% and 10%*.” To be clear, however, our work is not yet done, and significant opportunities for further improvement remain. Product quality can be further improved, and roadmaps better aligned to customer needs. Productivity and efficiency can be strengthened. Employee morale and engagement can be boosted. In short, while we have made considerable progress, the speed and momentum of our change must continue in 2013. Maintaining this progress is essential as we do not expect a significant change in market conditions in 2013. Despite strong underlying fundamentals, particularly continued data traffic growth, we expect the mobile broadband market to be relatively flat, as operators maintain tight control of both capital and operating expenses and macro-economic conditions remain uncertain. As a result, of this market environment, we expect competition to remain challenging. Looking forward, I remain confident that our new strategy and underlying structural changes put Nokia Siemens Networks on the right path to become a sustainably profitable business. Our longer term view is that the new strategy, combined with excellence in execution, enables us to target on a longer term an operating margin of between 5% and 10%*. The publication of this report – in which we are sharing details about the performance of our business at a more granular level than ever before – is a step forward in greater transparency and engagement with stakeholders both externally and internally. In introducing it, I would like to thank our shareholders – Nokia and Siemens – for their support of Nokia Siemens Networks, and to take this opportunity to thank all our employees for their dedication and commitment to the business. Their actions have helped us to deliver a game-changing year for Nokia Siemens Networks and have made a real difference in positioning the Group for the future. Jesper Ovesen Chairman * Excluding specific items. 8 Nokia Siemens Networks Overview – Our Board of Directors Drawing on our expertise Left to right: Jesper Ovesen Chairman of the Board of Nokia Siemens Networks Juha Äkräs Executive Vice President Human Resources of Nokia 55 To find out more about our Board of Directors see p55 Timo Ihamuotila Executive Vice President Chief Financial Officer of Nokia Louise Pentland Executive Vice President Chief Legal Officer of Nokia Joe Kaeser Member of the Managing Board and Chief Financial Officer of Siemens Peter Y. Solmssen Member of the Managing Board and General Counsel of Siemens Barbara Kux Member of the Managing Board and Chief Sustainability Officer of Siemens Outgoing Niklas Savander Riikka Tieaho Siegfried Russwurm Annual Report 2012 9 A word from our customer Readying the network for iPhone 5 “We are committed to offering the very best mobile broadband experience to our customers. That requires quick thinking, a flexible approach and extremely innovative problem-solving.” Junichi Miyakawa Executive VP, Director & CTO, SoftBank Mobile Read more about our work with SoftBank in our online Annual Report Country: Japan Number of subscribers: 31 million Strategic focus: Information Revolution – Happiness for everyone 10 Nokia Siemens Networks Overview Business review 12 16 18 21 22 24 26 28 29 47 48 50 52 Chief Executive Officer’s strategic review Our senior management team Our strategy and transformation A word from our customer: SK Telecom Industry trends How we operate Where we operate A word from our customer: KDDI Operating and Financial Review A word from our customer: TeliaSonera Corporate responsibility Risk factors A word from our customer: Safaricom Annual Report 2012 11 Business review – Chief Executive Officer’s strategic review Delivering on a promise Key achievements in 2012 Delivering against our mobile broadband strategy including divestment of five non-core businesses € Excellent progress made in delivering cost savings Operating profit before specific items increased by 145% Positive cash generation led to a net cash position at the end of the year of €1.3 billion Areas for focus for 2013 Building on our progress in quality and innovation in mobile broadband products and supporting services Strong performance in all key geographical markets Strong cash generation Rajeev Suri Chief Executive Officer 12 Nokia Siemens Networks A little over a year ago, Nokia Siemens Networks announced a bold new direction. We said that we would become the world’s leading mobile broadband specialist by focusing on this specific market, dedicating ourselves to world-class innovation to meet our customers’ needs, and achieving quality of such an exceptionally high level that it would become a key differentiator for us. At the same time, we launched a substantial two-year restructuring and transformation program, designed to build a business that can succeed in today’s market and take advantage of future industry dynamics. Improving financial performance Nokia Siemens Networks’ 2012 financial results are testament both to the strength of our vision and the effectiveness of our restructuring. The benefits of our strategy became apparent in the second half of the year, when we set new quarterly records with our highest ever gross margins and operating margins. “Nokia Siemens Networks’ 2012 financial results are testament both to the strength of our vision and the effectiveness of our restructuring.” On a full-year basis, operating profits before specific items increased 145% to EUR 822 million, making 2012 the best year in our six-year history. Gross margin before specific items rose year-on-year from 27.5% to 30.7%. We significantly improved our cash management, ending 2012 with EUR 1.3 billion in net cash. Net sales – at EUR 13 372 million – were virtually the same as in 2011, even after our portfolio streamlining, divestments and exits from less-profitable contracts and countries. Based on the strength of this performance, we managed to improve the maturity profile of our EUR 600 million term loan, extending it to March 2014. Net sales EUR million 14 000 13 645 13 372 13 500 13 000 12 500 12 206 12 000 2010 2011 2012 Operating profit before specific items EUR million 900 822 700 500 335 300 166 100 2010 2011 2012 Gross margin before specific items % 30.7% 31 30 29 28.2% 28 27.5% 27 2010 2011 2012 Annual Report 2012 13 Business review – Chief Executive Officer’s strategic review continued An effective restructuring At the heart of this story lies a well-designed and effectively executed restructuring. In connection with outlining our strategy in November 2011, we had set ourselves the goal of delivering EUR 1 billion in cost savings. We were able to raise that target in early 2013, whereby Nokia Siemens Networks targets to reduce annualized operating expenses and production overheads, excluding specific items by more than EUR 1 billion by the end of 2013, compared to the end of 2011. During 2012, we decreased indirect spending by a fifth. We have reduced our real estate footprint by approximately 408 000 square meters. Internal headcount is down by approximately 20%. Five businesses have been divested, with two more divestments ongoing. We have exited multiple poorly performing contracts and ceased from active business in several countries. IT outsourcing agreements have been signed with ATOS and Wipro. The restructuring is not just about cost savings, however, but also about making deep structural changes that will bring us benefits well into the future. For example, we have brought new rigour to contract management, limiting the impact of ongoing price erosion; simplified our organization in order to clarify decision-making and accountability; and moved forward to renew many of our end-to-end processes. Delivering against our strategy To meet our aim of becoming a mobile broadband powerhouse, we have focused, both in terms of technology and geography. We have also put a strong emphasis on quality and innovation as important differentiators. In 2012, we showed that we are already delivering against that strategy. Focus Our focus on mobile broadband has enabled us to increase our strengths in this segment. For example, industry analysts put our market share of 4G (LTE) at about 20%, confirming us as a strong number two player in this important, fast-growing mobile technology. Our strong position extends well beyond radio into areas such as professional services, 4G IMS core, Customer Experience Management (CEM), Subscriber Data Management (SDM) and beyond. We have refocused our attention geographically, categorizing our regional business according to market conditions. In 2012, this approach led to successful contracts in the advanced markets of Japan, South Korea and the USA; significant improvements in the previously weak Middle East and Africa; and solid performance across the rest of the markets in which we operate. Services remain an important part of our business, sharply focused on those activities that enable our customers to fully exploit the value of their mobile broadband investments. Our Global Services business unit showed improved profitability during 2012, partly due to a refocused portfolio. We are fully committed to taking the unit’s profitability higher in the future. 14 Nokia Siemens Networks Quality Our goal is to ensure that mobile operators can provide their customers with the best experience. Achieving this requires an unwavering commitment to quality – and we have made that commitment. We believe that we can differentiate on quality by concentrating on the aspects that are most important to mobile operators and their customers. While we monitor many quality metrics, we have identified six key ones which are regularly monitored at Board level. These indicators contribute the most significantly to ensuring the best experience for mobile operators’ customers – and all showed significant improvement in 2012. To take just one example, 24 out of 28 programs met their ‘path to virtual zero’ software quality targets. This is a sophisticated quality improvement technique in which product development projects are measured against very strict quality goals. This is just one of the world-class processes that we are proud to have adopted from Motorola, a recognized leader in quality. To support our focus on quality, we made the hard decision in 2012 to reset our product roadmaps. This action was not taken lightly, but we believe that it was necessary to provide our customers with the quality and predictability that they require. Since this reset, we have seen a dramatic improvement in the on-time delivery of new products and features. Innovation Our commitment to Research and Development (R&D) is as strong as ever. We have increased R&D spend in our key businesses and reduced R&D spend overall to align with our refocused portfolio. For example, R&D investment for next generation radio and core increased by 18% between the start of 2011 and the end of 2012. Our goal is to help fix the ‘real world’ problems that mobile operators face and to provide the advanced technology that will give them a leading edge in competitive markets. Innovations such as our Liquid Radio – which enables the network to adapt to changes in demand, or in our CEM solutions – which help operators maximize the business returns from network investments – demonstrate that our newly-focused approach to R&D is already paying off. Recent projects include Dense RAN which is an innovative way to improve the user experience for mass events – like rock concerts, sporting events and so on – at which ‘upload’ traffic is much higher than download (as people take and send photos and videos to friends). This usage is contrary to the usual usage pattern, in which download demand is higher than upload. Strong intellectual property development is also a key part of our customer-focused innovation strategy. In the fourth quarter, we generated over EUR 35 million in intellectual property revenue and we will continue to consider licensing or selling patents where doing so makes sense for our future. Looking forward 2013 will continue to be a year of change at Nokia Siemens Networks as we shift our focus from restructuring to transformation. While we have made remarkable progress, we also recognize that there is more to do. 2012 also saw the opening of our mobile broadband testing and development facility in Silicon Valley. Our products and solutions continue to collect honors from industry peers. These include the Global Telecoms Business Innovation Award 2012 for our CEM on Demand products, which are helping mobile operators like Telkomsel gain deeper insight into their customers’ experience. We also launched our Flexi Zone approach for small cell coverage, which won in its category at the Best of 4G Awards, 4G World and the Small Cell Forum Industry Awards 2012. Our priorities in 2013 include completing our restructuring, consolidating our progress in quality, and accelerating our innovation. We will continue to develop our customer relationships and ensure that we remain a strong, global player in mobile broadband and supporting services. Our people 2012 was a challenging year for everyone at Nokia Siemens Networks. The significant headcount reduction program that we started last year was naturally a difficult exercise. Nevertheless, we saw a nine percentage point increase in the proportion of employees expressing support for our direction. We will make efforts during 2013 to continue increasing our employee engagement, satisfaction and motivation. Maintaining a strong financial position and liquidity profile is another key focus area. We will continue to work towards our long-term financial goals which include longer term financing as a way to diversify our funding sources. We have become a far more efficient business in 2012 and will continue those efforts until we become the leanest, most productive company in our sector. We have reason to be pleased with our 2012 performance, but we are not yet satisfied. Our work continues and we expect to end 2013 in an even stronger position than we are in today. Rajeev Suri Chief Executive Officer Over the course of the year, we made Nokia Siemens Networks a safer place to work, with a priority placed on employee health and safety. This effort has resulted in a 29% reduction in the number of health and safety recordable incidents. “2013 will continue to be a year of change at Nokia Siemens Networks as we shift our focus from restructuring to transformation. While we have made remarkable progress, we also recognize that there is more to do.” Annual Report 2012 15 Business review – Our senior management team The leadership we need to deliver our strategy Rajeev Suri Chief Executive Officer (CEO) Samih Elhage Chief Financial Officer (CFO) Rajeev has more than 23 years of international management experience. He is a leader who cherishes the opportunity of transformational and turnaround assignments. Rajeev has worked in roles comprising strategy and M&A, product marketing, business intelligence, sales, major account leadership, regional and business unit leadership and has lived in the Middle East, Asia, Africa and Europe. Rajeev joined Nokia in 1995, headed the Asia Pacific region in Nokia and Nokia Siemens Networks, then transformed and grew the Global services business unit. Rajeev has been CEO since October 2009 presiding over consistently improving results and a fundamental reshaping of the strategy leading to the successful turnaround and restructuring of Nokia Siemens Networks. Rajeev is based in Espoo, Finland. Samih has 23 years experience in the telecoms industry. He has deep experience in financial and operational management. He has substantial experience in building high performing organizations, leading business transformations, and establishing operational excellence in various global markets. Before joining Nokia Siemens Networks in March 2012, Samih served as a senior advisor to leading private equity and global management consulting firms, and as a senior operating executive at Nortel. He is based in Munich, Germany. 16 Nokia Siemens Networks Deepti Arora Vice President, Quality Deepti is responsible for Nokia Siemens Networks’ quality strategy and related execution. She joined Nokia Siemens Networks in 2011 from Motorola Wireless Networks, where she held the role of Head of Global Quality. Before this, Deepti was responsible for platform quality and product performance at Motorola Mobility, and led business operations at Motorola Software Group. She is based in Chicago, Illinois, in the USA. Kathrin Buvac Vice President, Corporate Strategy and CEO Office Kathrin has 12 years of international management experience in the telecoms industry, having held positions in financial management, auditing, integration planning and synergy execution. Kathrin has been instrumental in building Nokia Siemens Networks’ current strategy. Her responsibilities cover corporate strategy, Secretary to the Executive Board and Chief of Staff to the CEO. She is located in Munich, Germany. Hans-Jürgen Bill Executive Vice President, Human Resources Hans-Jürgen has a long history of developing new opportunities in the telecoms market and has worked with many of the world’s largest global operators. He brings his diverse and extensive business leadership skills to the development of Nokia Siemens Networks’ workforce strategy. He is based in Munich, Germany. Ashish Chowdhary Executive Vice President/ President, Asia, Middle East and Africa With Nokia and Nokia Siemens Networks since 2003, Ashish has held numerous global general management roles in technology and telecoms, most recently serving as our Head of Global Services. Ashish is a hands-on, results-driven executive, with a track record in building high-performing international teams. In September 2010, he was named one of the ‘Top Ten Movers and Shakers’ in the global telecommunications sector by Light Reading. He lives in New Delhi, India. Barry French Executive Vice President, Marketing, Communications and Corporate Affairs Barry has been a member of the senior management team since Nokia Siemens Networks was created. His responsibilities include marketing, communications, government relations, and occupational health and security. He has a wide range of experience in Fortune 500 companies across many sectors. He lives and works in London, UK. Alexander Matuschka Chief Restructuring Officer Alexander has gained extensive experience in various positions in the automotive and machining industry including restructuring, re-organization, procurement, logistics, supply chain management, and lean manufacturing and assembly. He was an industrial advisor for private equity companies before joining us in 2011. He is based in Munich, Germany. Hossein Moiin Executive Vice President, Technology and Innovation Hossein joined Nokia Siemens Networks in 2010, having held senior technology positions at BT, T-Mobile and Sun Microsystems. As well as guiding our technology and innovation direction by providing long-term views on network architecture and its evolution, he is responsible for our research and IPR. He is based in Espoo, Finland. Marc Rouanne Executive Vice President, Mobile Broadband Marc has 20 years of international management experience in the telecoms industry, having held positions in R&D, customer operations, and product management. He was responsible for ensuring that Nokia Siemens Networks was the first in the world to ship 4G (LTE) compatible hardware to customers in 2008. He is based in Espoo, Finland. René Svendsen-Tune Executive Vice President/ President, Europe and Latin America Prior to joining Nokia Siemens Networks in 2012, René was chief executive of Teleca, a supplier of software services to the mobile, consumer electronics and automotive industries. Before that he spent 13 years with Nokia, where he served in a range of positions, including Senior Vice President of Global Customer and Market Operations. He is based in Munich, Germany. Annual Report 2012 17 Business review – Our strategy and transformation Creating value In November 2011, Nokia Siemens Networks announced a new strategy founded upon three key pillars: 1 Focus 2 Innovation 3 Quality While we intend to continue to adjust our strategy as the market evolves, our commitment to these pillars is fundamental to how we create value. The progress that we made in 2012, and our significantly improved financial performance, are both early validation of the strategic choices we have made. 18 Nokia Siemens Networks 1 Focus Our focus is exclusively on the mobile broadband market, a market that is essential to the future of the telecommunications industry and in which we have scale, technological leadership, and a broad installed customer base. With this in mind, we intend to put our radio, core network and Customer Experience Management (CEM) products at the forefront of our business. We will focus our investments in the areas where we either are today, or have a clear path to become, a market leader. These areas include radio (3G and 4G including small cells and linking these to Wi-Fi), core networks, IP Multimedia Subsystems (IMS), Operations Support Systems (OSS), CEM, and Subscriber Data Management (SDM). We will innovate in areas that helps make our portfolio unique, going above and beyond the standards in order to bring the greatest possible value to our customers. And, we will leverage our more mature technologies, such as 2G radio, that still have demand and give us the opportunity to maintain customer relationships that will move on to more advanced technologies at a later date. Our Global Services organization is designed to ensure that we deliver and maintain these products, while helping our customers maximize efficiency and provide a superior experience to their customers. 2 Innovation 3 Quality We have adopted a customer-focused approach to innovation, which aims to deliver a better return on investment than traditional standards-based R&D. In 2011, we took the decision to make quality a strategic priority and a differentiator for us against our competitors. Our resources and attention are squarely focused on the ‘real life’ challenges faced by operators. An example of how we innovate together with our customers is the advanced Dense RAN solution which has the potential to avoid network traffic overloads at big events. We also work to drive the evolution of the mobile broadband ecosystem. We do this through collaboration with publicly funded projects such as METIS, Comora and SEMAFOUR; partnership with innovative companies to optimize our R&D investments and target new market opportunities in areas such as Telco Cloud and Security; and deep engagement with world leading research institutes on topics such as big data analytics. Ultimately, we use insight in from all these areas and more to provide extremely strong contributions to the development of industry standards. The Nokia Siemens Networks-owned portfolio of around 3 800 patent families (comprising 12 000 individual patents and patent applications) is a testament to our R&D commitment. This patent portfolio, which is primarily focused on mobile communications, has resulted in a stream of continuous technology breakthroughs and industry awards. Consequently, Nokia Siemens Networks is a significant holder of Intellectual Property Rights (IPR) and is looking into more ways to make use of this asset. To deliver against that goal, we have devoted time, resources, and significant management attention. Over the course of 2012, we created dozens of cross-functional, end-to-end quality teams to drive improvements, deployed more than 15 new best practices, established an outage reduction forum, expanded quality training, launched collaborative quality efforts with multiple customers, and took many other concrete steps. Those steps delivered significant improvements in 2012, including a 32% year-on-year reduction in open product defects, confirmed outages cut by almost one-third, virtual zero software quality targets on track for a vast majority of business lines, thousands of employees trained on new quality techniques, and a meaningful increase in how customers perceived the value of our products and services. In 2013 our focus will be on expanding our quality efforts to new areas, as well as institutionalizing the changes we have already made so quality becomes permanently embedded in Nokia Siemens Networks’ culture. Annual Report 2012 19 Business review – Our strategy and transformation Transformation In November 2011, we announced a new strategy, including changes to our organizational structure and an extensive restructuring program, aimed at developing our position as a leader in mobile broadband and improving our competitiveness and profitability. Our restructuring activities required a significant investment in our business in the form of restructuring charges of over EUR 1 billion in 2012. These charges had a significant effect on our profitability for the year but have enabled us to create a much lower cost base for the future. 2012 Achievements € 20 Business re-focused on mobile broadband We have invested in the growth mobile broadband technologies such as 4G and, at the end of 2012, were ranked as the second largest LTE vendor by industry analysts. We also divested a number of businesses which were not in line with this strategy and delivered improved Mobile Broadband profitability in the year. Evolving our services business We focused our service offerings on the services that contribute the most to enabling mobile broadband and that have the most value for our customers. We also chose not to renew contracts that were not in line with this strategy and at the same time improved our global delivery model. Combined, these measures have improved our Global Services operating margins. Optimized real estate footprint During 2012, we enacted a number of planned measures including the transfer of activities to global delivery centers, consolidation of certain central functions, and efficiencies in service operations. Together these actions enabled us to dramatically reduce our real estate requirements by 408 000 square meters; closing 175 sites. Improved R&D efficiency In addition to increasing our investments in the most important technologies we have increased our overall R&D efficiency. This has been achieved by improvements in quality, improved processes, a flatter organisation, a better geographical balance and an increased focus on delivering to immediate customer-specific requirements. This will remain a priority area in 2013. Targeting other costs We have reduced other costs such as travel expenses dramatically by bringing in new policies but also by creating awareness of the issue. Other areas addressed included information technology, product and service procurement costs, overall general and administrative expenses, and a significant reduction of suppliers to further lower costs and improve quality. Improved working capital In 2012, we significantly improved our cash position despite restructuring related outflows. By reducing our overdues and inventories we improved our working capital by approximately EUR 1 billion over the course of the year. This contributed to positive free cash flow generation in every quarter. Nokia Siemens Networks A word from our customer Getting ready for the future “We, SKT and NSN have already prepared for the evolution of the LTE system.” Jong-Bong Lee – Senior Vice President, Head of Network Strategy Office Read more about our work with SK Telecom in our online Annual Report Country: South Korea Number of subscribers: 26 million Strategic focus: Differentiation through innovation Annual Report 2012 21 Business review – Industry trends For a world that wants more and more The future of the telecommunications industry will be increasingly powered by mobile broadband. Today, of the 6.5* billion global mobile subscriptions, already 1.65* billion are using mobile broadband. Consumers use the internet through a variety of devices and expect reliable connectivity and access to services everywhere. They also demand the highest possible standard of excellence from their mobile operators. Yet, according to our Acquisition and Retention Study 2012, overall satisfaction is decreasing globally, and 47% of customers with mobile internet bundles in mature markets are prepared to switch operators within 12 months if they do not get the experience they demand. The impact of network and service quality on churn has grown significantly, messaging and internet quality now being the most important retention criteria in advanced mobile broadband markets. Demand for mobile broadband, coupled with the rise of smart devices, represents the greatest opportunity for revenue growth and the greatest challenge in terms of network congestion for mobile operators in the years ahead. However, industry analysts predict that over the next eight years, the rise in mobile data traffic will accelerate much faster than operator revenues. Despite increases in network capacity, data usage offerings such as flat-rate pricing are creating only a limited revenue opportunity for mobile operators, putting pressure on their margins. Mobile operators are faced with the challenge of delivering mobile broadband profitably while simultaneously providing good quality of service to their customers. The market today* To support the rise in data usage, mobile operators are investing in wireless infrastructure (like base stations and network software) for additional coverage and capacity. They are primarily growing the capacity of their networks by optimizing the networks and the different radio technologies they use, and upgrading to latest generation wireless networks. These next generation technologies provide increased bandwidth and capacity, but require mobile operators to invest in new equipment, infrastructure and software for existing and new base stations. The growing challenge faced by mobile operators is also the ability to add intelligence into their network to handle traffic flows and complex application and quality-of-service requirements. “49% of customers agree that their mobile operator must offer excellent network quality, even if it costs a bit more.”† To reduce cost and technology complexity, mobile operators are simplifying their operations and investing in new, more agile operations support systems. Some mobile operators are also outsourcing key network and service management tasks mostly through long-term partnership agreements. To improve customer loyalty and profitability, operators are looking into customer experience management and business analytics tools, providing insight into their customers’ service and network experience. Mobile operators are also exploring ways to establish a valuable role for themselves in content and capabilities beyond connectivity. Over-the-top players are actively creating new business models that can be both opportunities and threats for operators. Responding to the challenge, operators are giving increased attention to new innovative business models and new kinds of service offers to monetize their networks and to change the game in content delivery. 1.65 billion Mobile broadband subscriptions globally 670 million Smartphones sold in 2012 More than 55 million Apps downloaded every day 22 Nokia Siemens Networks * Source: Informa. † Source: Nokia Siemens Networks Acquisition and Retention study 2012. Our technology vision 2020 We at Nokia Siemens Networks believe that, by 2020, mobile networks will need to be ready to deliver one gigabyte per user per day, downloaded at speeds of more than 10 times the current level. One gigabyte per day equates to a 60-fold increase, or roughly a doubling of traffic per user every 18 months, compared to the average 500 megabytes per user per month some mobile networks in mature markets are seeing today. As demand moves towards one gigabyte per day, operators need to get the most out of their network resources, shift capacity and content where these are most needed, and provide a superior customer experience for a steadily growing mobile broadband customer base. To make this happen, Nokia Siemens Networks is exploring and developing vital capabilities and technologies in the following areas: Key area “1 GB of personalized data per user per day profitably by 2020.” How we are developing our capabilities Supporting up to 1 000x more capacity where needed To prepare for future traffic growth and 10 times more endpoints attached to networks than today, the capacity and data rates of mobile networks must be radically pushed into new dimensions by looking at ways to increase the amount of spectrum available, and at how to make the most efficient use of that, and also by increasing the number of sites. Reducing latency to milliseconds To support a good user-experience for the increasing number of real-time apps, end-to-end latency imposed by the network has to be significantly reduced. Bandwidth, traffic control and proximity will solve the latency challenge. Teaching networks to be self-aware To ensure mobile broadband remains affordable, the network Total Cost of Ownership (TCO) per gigabyte of traffic needs to be radically decreased. One important lever is to automate all tasks of network and service operations by making networks intelligent: self-aware, self-adapting and agile. Reinventing the telcos To further reduce cost per gigabyte, the utilization of all network resources through for cloud sharing in all dimensions must be maximized. Cloudification of telco networks and ultimately software defined networking is the way forward, as it will also make networks more agile while opening up new business opportunities for operators. Flattening energy consumption To achieve the lowest production cost level per gigabyte, the energy efficiency of networks needs to be increased. The focal point for improving network energy efficiency will be the radio access, which accounts for around 80% of all mobile network energy consumption. Apart from energy efficiency innovations in the base station, network modernization and higher utilization through sharing of resources will be key for flattening energy consumption. Annual Report 2012 23 Business review – How we operate Focus in action: business units We have modified our structure to align with our strategy to focus exclusively on mobile broadband, and now report across two business units: Mobile Broadband and Global Services. Business units The Mobile Broadband business unit provides radio and core network software, network hardware as well as the underlying Operations Support Systems (OSS) and Customer Experience Management (CEM) software to mobile operators serving billions of mobile subscribers across the globe. The mobile operator customers of the Mobile Broadband unit are supported by the Global Services unit, providing them with a broad range of services, including network planning and optimization, network implementation, managed services for network and service operations, and care and maintenance services. Consistent with our strategy, in 2011 we identified certain product lines that have either been divested or are being managed for value. For these, we support existing customer contracts and customer commitments including currently contracted feature capabilities, as well as limited new feature developments. Mobile Broadband Our Mobile Broadband product portfolio includes our innovative and award-winning Flexi Multiradio Single RAN base station, a high capacity software-defined base station supporting 2G (GSM), 3G (WCDMA) and 4G (LTE) radio technologies, as well as packet core products. To date, we have three million base stations in service, with a customer list that includes América Móvil, China Mobile, Deutsche Telekom, SoftBank, Telefónica, T-Mobile USA, Verizon and Vodafone. Our Mobile Broadband portfolio also incorporates value-adding software products including OSS and Subscriber Data Management (SDM), as well as CEM. These products give mobile operators a comprehensive and real-time insight into their customers’ service experience, and the tools that help them drive new revenue and improve operational efficiency. Throughout 2012, the Mobile Broadband business unit has further developed business in advanced markets and continues to perform well, delivering strong growth in 4G sales and a sustained 2G and 3G business, particularly in the USA, South Korea, Japan and Latin America, as well as in many other countries around the world. At December 31, 2012, Nokia Siemens Networks had a total of 77 commercial 4G (LTE) deals, including major agreements modernizing network infrastructure with both SoftBank and KDDI in Japan, and T-Mobile in the USA. For the year ended December 31, 2012, Mobile Broadband generated net sales of EUR 6 043 million, which represented 45% of our total net sales, and non-IFRS operating profit of EUR 488 million. To maximize the value for our customers, we are able to combine different radio technologies together seamlessly, incorporate small cells which increase the capacity of the networks, provide and integrate Wi-Fi and we have unique software which increases the utilization of all available spectrum and increases the amount of data which it can carry. Within Mobile Broadband, we are already working on enhancements as well as the next generation of technology, even as the latest 4G networks are being rolled out across the world. €6 043 million Net sales generated by Mobile Broadband 45% Of our total net sales 3 million Base stations delivered to over 450 mobile operators 24 Nokia Siemens Networks Global Services Our Global Services business comprises three business lines, each closely supporting the Mobile Broadband portfolio: Customer Care includes software and hardware maintenance, and competence development services Network Implementation includes services needed to build, expand or modernize a communications network efficiently. On average, over 330 000 sites are installed per year, over 40% of which are implemented remotely, in 2012 we brought one site on air every 96 seconds. Professional Services provide the end-to-end capability to deliver and manage mobile broadband infrastructure and customer experience. Our system integration capabilities ensure that all the elements of a new mobile broadband solution seamlessly bring together new and legacy technologies. Network Planning and Optimization teams offer assessment, capacity and configuration planning, site count, and IP design. Within our Managed Services business we take the responsibility for running a range of services for operators, from network operations management to enabling them to offer new services to their customers. Non-core During 2012, our Non-core business unit included WiMAX, Broadband Access and IPTV, which were divested during the year. By the year-end, the only business that remained in the Non-core business unit was Business Support Systems (BSS), which we plan to divest in the first half of 2013. For the year ended December 31, 2012, Non-core generated net sales of EUR 365 million representing 3% of total net sales and a non-IFRS operating loss of EUR 33 million. Discontinued operations Towards the end of 2012, Nokia Siemens Networks announced its intention to divest its Optical Networks business. As Optical Networks represented a separate business segment in the past, it is presented as a discontinued operation. The transaction is expected to close in the first half of 2013. Over the course of 2012, a growing percentage of our global services began to be delivered through our network of delivery centers, which consolidate a range of service solutions into one location to provide greater efficiency for customers. At the end of 2012, 21% of services were provided from our global delivery hubs. For the year ended December 31, 2012, Global Services generated net sales of EUR 6 929 million, which represented 52% of our total net sales, and non-IFRS operating profit of EUR 332 million. €6 929 million Net sales generated by Global Services 52% Of our total net sales 77 To see more on our segment information please see p77. Annual Report 2012 25 Business review – Where we operate Focus in action: markets In 2012, Nokia Siemens Networks’ country operations were grouped into broad geographical groups: the Americas; Asia and Middle East; and Europe and Africa. Americas These three markets further divide into regions containing our sales and delivery teams which benefit from a very close relationship with mobile operators in their countries. We tailor our operating approach in the different regions and countries according to the macro-economic environment and the maturity of their telecommunications industry. The Americas comprises operations in the USA and Canada in North America, and 11 countries in Latin America. Teams across the region work with eight of the top 10 North American mobile operators, as well as local operators, key cable and convergence companies, and government entities. We also have the ‘Innovation Lab’, our flagship mobile broadband testing and development facility, in the heart of Silicon Valley. The North America region was our fastest growing region in 2012 and delivered strong net sales during the latter part of 2012 both in products and services. In Latin America we see the opportunity for emerging economies to ‘leap-frog’ a traditional 2G… 3G… 4G development pattern and invest in the most modern technologies. Smartphones and tablets are already transforming the face of the Latin American markets. The Latin America region delivered a solid financial performance over the course of the year. Latin America will be part of our Europe market in 2013. Net sales by geographic area (EURm) Key highlights – Selected as a vendor to support T-Mobile USA’s $4 billion 4G network evolution plan, modernizing the operator’s GSM and HSPA+ core and radio access infrastructure and deploying LTE 33% 21% Europe and Africa €4 378m Americas €2 849m – Establishing our global small cell center of excellence in the USA to drive small cell innovation with leading operators from around the world – Launching wireless broadband services using 4G technology for SKY, the largest cable and satellite television operator in Brazil – Launching LTE with Claro in Chile, the first 4G in this key and well-developed economy in Latin America Asia and Middle East €6 145m – Being selected by Oi and TIM for 4G roll-out in Brazil; secured 3G expansion with Oi and Claro across the country 46% 26 Nokia Siemens Networks Asia and Middle East Europe and Africa Asia and Middle East spans a huge geographical and economic scope consisting of operations in 17 countries in Asia and 16 countries in the Middle East. We operate in 52 countries across Europe, Russia and a further 20 countries in Africa. We have a strong presence across Asia, from mature markets to fast-emerging economies, including two of our focus countries, Japan and South Korea. We have close relationships with all the major operators, including SoftBank, KDDI, SK Telecom, China Mobile, China Unicom, Bharti Airtel, Optus, Vodafone and Indosat. The region delivered an outstanding year in 2012, with several key contracts, particularly in our focus countries, and excellent financial performance. We have technology centers in multiple locations in Asia, with our flagship mobile broadband center in Hangzhou, China, and our largest software center in Bangalore, India. In the Middle East we are focused on a select number of countries and customers, including Qtel Group, Zain Group, Saudi Telecom Company, Etisalat and du, and we see strong demand for mobile broadband including 4G (LTE). The European region, including Russia and some central Asia countries, is our heartland and home to our headquarters in Finland and to our global delivery center in Portugal. In Europe, we work with all the region’s major operators, including Vodafone, Deutsche Telekom, Telefónica, France Telecom, Sistema, MegaFon, TeliaSonera and WIND, serving hundreds of millions of demanding and sophisticated customers. Facing challenging macro-economic conditions across the European continent, we nevertheless maintained strong customer relationships throughout the region and achieved some notable wins. We have extensive R&D expertise in Europe, including some of our largest technology centers working on future mobile broadband technologies. In Africa, we are focused on both multi-national and regional operators, including Zain Group, Vodacom, Bharti Airtel and Mobinil. Africa will be part of our Asia and Middle East market in 2013. Key highlights Key highlights – Working with SoftBank to upgrade its mobile broadband capability across Japan and to supply, deploy and integrate the operator’s 4G network – Working with leading Polish operator, Polkomtel, to expand their HSPA+ and 4G (LTE) networks – Deploying the world’s first self-operating 3G and 4G mobile network for KDDI in Japan – Supporting leading Australian operator Optus in network modernization and 4G implementation – Telkomsel Indonesia takes control of customers’ experience with Nokia Siemens Networks technology – KT selects Nokia Siemens Networks for 4G deployment – Supporting Bharti Airtel to deploy and manage 4G (TD-LTE) network in Maharashtra – Chosen by Indosat, Indonesia’s leading mobile operator, as its mobile broadband vendor – Selection by China Mobile to conduct a large 4G (TD-LTE) deployment across three cities – Bringing 4G (TD-LTE) to Spain in a deal with COTA – a new player in Spanish telecoms – Preparing O2’s network in the UK for 4G – Launching Russia’s first 4G (TD-LTE) network, for MTS in Moscow and the city’s environs – Implementing a GSM-R upgrade to enhance security and speed on the Eskisehir-Ankara high-speed train line in Turkey – Working with Tele2 to enhance mobile broadband across three Baltic countries – Enabling MegaFon customers to enjoy enhanced mobile services in Russia – Working with Vodacom to introduce voice and SMS over 4G in South Africa – Upgrading Saudi Telecom Company’s GSM and 3G networks and expanding its 4G network Annual Report 2012 27 A word from our customer The world’s first multi-vendor, multitechnology self-organizing network (SON) ‘‘As a leader in SON technology, Nokia Siemens Networks was the obvious choice to help consolidate and optimize our networks.’’ Toshihiko Yumoto, Vice President and General Manager, Network Technical Development Division, Technology Sector, KDDI Read more about our work with KDDI in our online Annual Report Country: Japan Number of subscribers: 37 million Strategic focus area: Customer Satisfaction by realizing 3M strategy – Multi-Network, Multi-Device and Multi-Use 28 Nokia Siemens Networks Business review – Operating and Financial Review A year of transformation and restructuring Overview For a summary description of ‘who we are’ and ‘what we do’ see page 4. A review of our principal activities and performance for the year is contained in the 2012 highlights on pages 6 and 7, A letter from our Chairman on page 8, the Chief Executive Officer’s strategic review on pages 12 to 15, Our strategy and transformation on pages 18 to 20, How we operate and Where we operate on pages 24 to 27. Principal factors and trends affecting our results of operations Our net sales depend on various developments in the global mobile broadband infrastructure and related services market, such as network operator investments, the pricing environment and product and services mix. Over recent years, the telecommunications infrastructure industry has entered a more mature phase characterized by the completion of the greenfield roll-outs of mobile and fixed network infrastructure across many markets, although this is further advanced in developed markets. Notwithstanding, there is still a significant market for traditional network infrastructure products to meet coverage and capacity requirements, as older technologies such as 2G are supplanted by 3G and 4G (LTE). As growth in traditional network products sales slows, there is an emphasis on the provision of network upgrades, often through software, such as customer experience management software and subscriber management, and services, particularly the outsourcing of non-core activities to companies that provide extensive telecommunications expertise and strong managed service offerings. In emerging markets, the principal factors influencing investments by mobile operators are the continued growth in customer demand for telecommunications services, including data, as well as new subscriber growth. In many emerging markets, this growth in demand and subscribers continues to drive growth in network coverage and capacity requirements. In developed markets, investments by operators are primarily driven by capacity and coverage upgrades, which, in turn, are driven by greater usage of the networks primarily through the rapid growth in data usage. Increasingly, mobile operators are targeting investments in technology and services that allow them to provide their customers with fast and faultless network performance in the most efficient manner possible, which optimizes their investment. Such developments are facilitated by the evolution of network technologies that promote greater efficiency and flexibility, such as the current shift from 2G and 3G networks to 4G (LTE) technologies. In addition, mobile operators are investing in software and services that provide them with the means to better manage customers on their network and also allow them additional access to the value of the large amounts of subscriber data under their control. The telecommunications infrastructure market is characterized by strong competition and price erosion caused in part by the successful entry into the market of vendors from China, such as Huawei Technologies Co. Ltd. (‘Huawei’) and ZTE Corporation (‘ZTE’), both of which have gained market share by leveraging their low cost advantage in tenders for customer contracts. In particular, the wave of network modernization that has taken place, particularly in Europe but increasingly in other regions including Asia Pacific, has led to aggressive pricing as all vendors fight for market share. In 2012, we witnessed further competition emerging from Samsung Electronics, which has expanded its network infrastructure business out of the South Korean market with limited gains in Europe and the USA. The pricing environment remained challenging in 2012. Our net sales are impacted by these pricing developments, which show some regional variation, and in particular by the balance between sales in developed and emerging markets. While price erosion is evident across most geographical markets, it continues to be particularly intense in a number of emerging markets where many mobile operators have been subject to financial pressure, both from lack of financing as well as profound pricing pressure in their domestic markets. Pricing pressure is evident in the standards-based products markets, in particular, where competitors have products with similar technological capabilities, leading to commoditization in some areas. Our ability to compete in those markets is determined by our ability to remain price competitive with our industry peers. To remain competitive and differentiate us from our competitors, it is therefore essential that we constantly improve our technology while continuously reducing product costs to keep pace with price erosion. We have continued to make progress in reducing product and procurement costs in 2012 and will need to continue to do so in order to provide our mobile operator customers with high quality products at competitive prices. In the following sections we describe the factors and trends that we believe are currently driving our net sales and profitability. For a better understanding of the industry trends in terms of mobility and data usage please see pages 22 and 23. Transformation and restructuring program In November 2011, we announced a strategic shift to focus on the mobile broadband market. As part of this strategic shift, we decided to focus our portfolio on our core businesses and sell or ramp down non-core activities. At the same time, we started a restructuring program to reduce our global workforce by 17 000 people by the end of 2013. These reductions are being driven by aligning our workforce with our new strategy as well as through a range of productivity and efficiency measures. These measures include elimination of our matrix organizational structure, site consolidation, transfer of activities to global delivery centers, consolidation of certain central functions, cost synergies from the integration of the Acquired Motorola Assets, efficiencies in service operations and company-wide process simplification. Overall the transformation and restructuring have had a substantial effect on both gross margins and operating expenses. Annual Report 2012 29 Business review – Operating and Financial Review continued Gross margin before specific items Our gross margin before specific items improved substantially in the three-month periods ended September 30, 2012 and December 31, 2012 to 32.4% and 36.0%, respectively, as compared to 26.9% and 29.5% in the corresponding periods of 2011. This improvement was driven principally by sales of a significant proportion of higher margin software and products in our priority markets. Significant contributors to the reduction in operating expenses before specific items include: Other significant contributors to the improvement in gross margin include: – We have established strong processes and governance procedures to reduce indirect costs such as travel, training and external services. – We improved our pricing discipline to ensure that we were capturing the appropriate value for our products and services. We are pricing our products based on their value to the mobile operators rather than based on our costs in delivering the contract. All major contracts now pass through specialist pricing teams. – Our more focused portfolio has led to a decrease in our cost of goods as we have fewer product lines and are adhering to a much higher quality benchmark, which has resulted in fewer returns. – We have improved the operational efficiency of our supply chain, decreasing logistics costs and improving delivery reliability. Our increased operational efficiency has resulted, for example, in a significant reduction in the need for expensive air freight and the lowest levels of supply shortages in Nokia Siemens Networks’ history. – We increased the proportion of sales in markets with above average gross margins, such as Japan. Operating expenses before specific items We have reduced our operating expenses before specific items by 11.8% and 7.7% in the three-month periods ended September 30, 2012 and December 31, 2012, respectively, as compared to the same periods in 2011. This has been driven mainly by reductions in headcount which at 58 411, as of December 31, 2012 was at its lowest level since our formation in 2007. 30 Nokia Siemens Networks – We have closed and vacated 175 real estate sites, optimized site usage and relocated to less costly premises. We have reduced our total space by 408 000 square meters, and further space reductions are expected in 2013 as leases come up for renewal. – Despite increasing Research and Development (R&D) investment in strategic areas such as 4G (LTE) radio technologies, we have maintained the overall spend by decreasing investment in previous generation radio technologies and non-core portfolio areas. A focus on higher quality products and divestments of non-core businesses has also resulted in a more efficient use of our R&D expenses. We continue to target a reduction in our annualized operating expenses and production overheads, excluding specific items by more than EUR 1 billion by the end of 2013, compared to the end of 2011. While these savings are expected to come largely from organizational streamlining, we have also targeted areas such as real estate, information technology, product and service procurement costs, overall general and administrative expenses and a significant reduction of suppliers in order to further lower costs and improve quality. During 2012, we recognized restructuring charges and other associated items of EUR 1.3 billion related to our ongoing restructuring program. By the end of 2012, we had cumulative cash outflows relating to restructuring and other specific items of EUR 645 million. We expect restructuring-related cash outflows to be approximately EUR 450 million for the full year 2013, and approximately EUR 200 million for the full year 2014 related to our transformation and restructuring program. The following table sets forth the summary unaudited, condensed, consolidated quarterly financial information for each of the quarters in the years ended December 31, 2011 and 2012 from continuing operations. This data has been derived from our unaudited quarterly financial information, which are not included in this Annual Report, and should be read in conjunction with our Consolidated Financial Statements and the related notes. Business review – Operating and Financial Review continued For the three month period ended (unaudited) From continuing operations EURm, except percentage data Net sales Gross profit Gross margin Specific items therein Adjusted gross profit1 Adjusted gross margin1 Operating expenses Specific items therein Adjusted operating expenses2 Operating profit/loss (EBIT) Adjusted EBIT3 Depreciation and amortization (excluding PPA) Adjusted EBITDA4 Adjusted EBITDA margin4 Restructuring PPA related amortization Other PPA related charges Country/contract exit and merger-related charges Other one-time charges Total specific items Working capital5,8 Change in net working capital6,8 Free cash flow7,8 March 31, 2011 June 30, 2011 September 30, December 31, 2011 2011 March 31, 2012 June 30, 2012 September 30, December 31, 2012 2012 3 084 826 26.8% 7 833 27.0% (942) 141 (801) (116) 32 3 524 910 25.8% 26 936 26.6% (1 007) 131 (876) (97) 60 3 327 876 26.3% 20 896 26.9% (971) 105 (866) (95) 30 3 710 1 096 29.5% (2) 1 094 29.5% (997) 116 (881) 99 213 2 862 414 14.5% 348 762 26.6% (1 403) 515 (888) (989) (126) 3 233 780 24.1% 68 848 26.2% (1 006) 185 (821) (226) 27 3 408 1 064 31.2% 41 1 105 32.4% (845) 81 (764) 219 341 3 869 1 197 30.9% 196 1 393 36.0% (942) 129 (813) 255 580 73 105 3.4% 14 120 – 75 135 3.8% 57 84 5 80 110 3.3% 17 91 8 78 291 7.9% 16 91 – 76 (50) (1.7)% 748 91 8 68 95 2.9% 95 71 (4) 67 408 12.0% 22 71 – 61 641 16.6% 191 71 – 14 – 148 2 370 (111) (158) 11 – 157 1 527 (243) (923) 9 – 125 2 277 49 (30) 7 – 114 2 311 321 446 – 16 863 1 384 554 291 70 21 253 1 145 94 61 3 26 122 1 144 82 282 34 29 325 1 999 255 733 1 References to Adjusted gross profit and Adjusted gross margin are to gross profit and gross margin as adjusted for specific items. Specific items include restructuring charges, country/contract exit and merger-related charges, PPA related charges and other one-time charges. 2 References to Adjusted operating expenses are to operating expenses as adjusted for specific items. 3 References to Adjusted EBIT are to EBIT as adjusted for specific items. 4 References to EBITDA are to loss for the period before income tax expense from continuing operations, financial income and expenses, depreciation, amortization and share of results of associates. Accordingly, EBITDA can be extracted from the Consolidated Financial Statements by taking loss for the period and adding back income tax expense, financial income and expenses, depreciation, amortization and share of results of associates. References to Adjusted EBITDA represent EBITDA as adjusted for specific items. Specific items include restructuring charges, country/contract exit charges, PPA related charges and other one-time charges. References to Adjusted EBITDA margin represent Adjusted EBITDA divided by net sales. We are not presenting EBITDA or Adjusted EBITDA-based measures as measures of our results of operations. EBITDA and Adjusted EBITDA-based measures have important limitations as an analytical tool, and they should not be considered in isolation or as substitutes for analysis of our results of operations. 5 Working capital is defined as current assets less current liabilities. 6 Change in net working capital is defined as the period-over-period change in current receivables plus the change in inventories, less the change in interest-free short-term liabilities. 7 Free cash flow is defined as the sum of net cash flows from operating activities and net cash flows from investing activities. 8 Working capital, change in net working capital and free cash flows include continuing and discontinued operations. Annual Report 2012 31 Business review – Operating and Financial Review continued Motorola Solutions acquisition Assets acquired from Motorola Solutions (the ‘Acquired Motorola Assets’) contributed eight months of sales in the year ended December 31, 2011, which impacts the comparability of our results of operations for all periods presented. The delay to the completion of the acquisition caused a negative impact on business in the CDMA and WiMAX units (the latter of which has been divested). As part of our transformation restructuring program, we restructured the Acquired Motorola Assets. The acquisition has given us a global footprint in CDMA. The recent network infrastructure investment activity evident in the USA market and elsewhere, however, is beginning to slow, which has had a negative impact on sales in the CDMA unit. The acquisition has also strengthened our relationships with customers globally, particularly in Japan and the USA. From the date of acquisition on April 30, 2011, we had net sales of EUR 894 million contributed by, and a net loss of EUR 4 million in respect of the Acquired Motorola Assets for the year ended December 31, 2011. After the incurrence of EUR 39 million related to restructuring charges and EUR 48 million related to the amortization of acquired intangible assets and other purchase price accounting related charges, we had a net loss of EUR 4 million. Disposals not treated as discontinued operations As part of our strategy to focus on our Mobile Broadband business and on our higher margin businesses, we continually assess whether our operating companies are core to our overall business strategy or performing at acceptable levels. As a result, we may sell a business if it is deemed to be non-essential or underperforming. Such disposals may affect our results of operations and the period-to-period comparability of our financial statements. In the ordinary course of business, we may sell other parts of our business and not treat them as discontinued operations (and are therefore included in continuing operations) for the periods under review as the businesses sold are not considered to represent a separate major line of business or geographical area of our operations. In connection with the strategy, seven divestments were announced in 2012 and five of these deals were closed in the course of the year. The divestments concluded during 2012 were: – A deal to transfer the microwave transport business, including its associated operational support systems and related support functions, to Dragonwave Inc. – The sale of former Motorola Solutions’ WiMAX business to NewNet Communications Technologies. – The divestment of fixed line broadband access business and associated professional services and network management solutions to Adtran. 32 Nokia Siemens Networks – The sale of Belgacom-related IPTV assets to Belgacom and other IPTV assets to Accenture. – A deal to transfer the Nokia Siemens Networks’ proprietary broadband business, Expedience, to CN Tetragen. In 2012, the total net consideration paid in connection with these disposals amounted to EUR 124 million in cash. Additionally, shares with fair market value of EUR 5 million were received. A loss, net of gains, of EUR 50 million arising from the sale of these businesses is included in other expenses in the consolidated income statement. On December 5, 2012, we signed a formal agreement with Redknee Solutions Inc., for the sale of our Business Support Systems Business, comprising the billing and charging software products and solutions and related services (together, the ‘BSS Business’). The transaction is anticipated to close in the first half of 2013. The assets and liabilities of the BSS Business were classified as held for sale in the consolidated statement of financial position at December 31, 2012. In 2011, impairment charges totaled EUR 19 million and these charges were recognized as a result of measuring these disposal groups at their fair value, less costs to sell. Certain of these transactions included contractual provisions that required cash payment on closing to the buyer and possible additional payments subsequent to the sale which will be made based on potential employee redundancies within the disposal group. These dispositions in 2011 were not classified as discontinued operations. Certain other factors Cost of components and raw materials There are several factors that drive our profitability. Scale, operational efficiency and cost control have been and will continue to be important factors affecting our profitability and competitiveness. Our product costs are comprised of the cost of components, manufacturing, labor and overhead, the depreciation of product machinery, logistics costs as well as warranty and other quality costs. In the year ended December 31, 2012, components and other raw materials comprise approximately 85% of our cost of goods sold. Overall since 2010 we have reduced component costs as a result of annual purchase price negotiations. During that period we have also experienced some wage inflation, particularly in China, where the rising cost of prices for goods such as food has driven inflationary pressure in salaries. Similar pressures are evident in India, although from lower income levels. Product mix and regional mix Our profitability is also impacted by the pricing environment, product mix, including higher margin software sales, and regional mix. Our products, solutions and services, have varying profitability profiles. Our Mobile Broadband business offers a combination of hardware and software. These products, in particular software products, have higher gross margins; however, the products require much higher R&D investments. Our Global Services offerings are typically labor intensive while carrying low R&D cost and have relatively low gross margins compared to our hardware and software products. Many of our product service offerings combine elements from all business units, and several factors can influence relative gross margin. In the year ended December 31, 2012, Global Services and Mobile Broadband accounted for 51.8% and 45.2%, respectively, of our total net sales in the year ended December 31, 2012. In the second half of 2012, we benefited from sales of an unusually large proportion of higher margin software and products in our priority markets. We have also benefited from being more selective about the services contracts we enter into and reducing our exposure to lower profitability areas such as field maintenance. Overall profitability for certain regions should only be seen as indicative, as profitability can vary from country to country, within a particular region and even from customer to customer within a particular country. During 2011 and 2012, we have pursued a policy of prioritizing markets such as Japan, South Korea and the USA, as these markets typically offer vendors more value than other markets. In general, developed markets provide relatively high margins while emerging markets, where mobile operators’ customers, and therefore mobile operators, are often more financially constrained, provide lower margins. Regulatory issues We sell products and services that are regarded as sensitive from a security point of view by many governments around the world and therefore conform to certain regulations which are subject to change, which can occasionally cause disruption to sales. An extreme example of this was evident in the first half of 2011 when changes to Indian security clearance regulations caused significant disruption to sales of products. We work closely with authorities to understand concerns and to minimize the impact of such issues. Exchange rates Our business and results of operations are from time to time affected by changes in exchange rates, particularly between the euro, our reporting currency, and other currencies such as the US dollar and the Japanese yen. Foreign currency denominated assets and liabilities, together with sale and purchase commitments, give rise to foreign exchange exposure. The magnitude of foreign exchange exposure changes over time as a function of our presence in different markets and the prevalent currencies used for transactions in those markets. The majority of our non euro-based sales are denominated in US dollars and in Japanese yen. In general, depreciation of another currency relative to the euro has an adverse effect on our sales and operating profit, while appreciation of another currency relative to the euro has a positive effect. In addition to foreign exchange risk of our sales and costs, our overall risk depends on the competitive environment in our industry and the foreign exchange exposures of our competitors. During 2012, both the US dollar and the Japanese yen were relatively volatile against the euro. During the first half of 2012, both the US dollar and the Japanese yen appreciated against the euro, but subsequently depreciated. By the end of the year 2012, both currencies had depreciated against the euro compared to the rate at the beginning of the year. In the year ended December 31, 2012, approximately 43% (approximately 36% in 2011) of our net sales were generated in US dollars and Japanese yen. During the same period, approximately 32% (approximately 28% in 2011) of our cost base was in US dollars and in Japanese yen. Due to our currency mix, a depreciation of US dollar and Japanese yen had an adverse effect on our sales and operating profit. The majority of the impact of the US dollar and Japanese yen depreciation or appreciation against the euro on our operating results is however mitigated through currency hedging. Significant changes in exchange rates may however impact our competitive position and result in price pressure through their impact on our competitors and customers. Overall hedging costs for the main exposure currencies have remained relatively low in 2011 and 2012 due to the low interest rate environment. Annual Report 2012 33 Business review – Operating and Financial Review continued To mitigate the impact of changes in exchange rates, we hedge material transaction exposures. For the majority of the hedges for forecasted future transactions, hedge accounting is applied to reduce profit and loss volatility. The main principle is that all major foreign exchange exposures are identified, analyzed and hedged by our treasury function. Specifically: – Statement of financial position risks from foreign exchange positions in currencies other than the functional currency of the respective Group entity are identified and hedged on an ongoing basis. – Cash flow risks arising from highly probable forecasted sales and purchases of the Group are identified on a monthly basis and hedged mainly under hedge accounting for a period of up to 15 months. These forecasted sales and purchases are typically realized within an equivalent period. We have some exposure due to unhedged risks which consists of exposures in currencies that either cannot be hedged or which are considered immaterial. In 2012, these currencies represent approximately 2% of our net sales (less than 2% of net sales in 2011). We have entities in Venezuela and Belarus where the functional currency is the currency of a hyperinflationary economy. Hyperinflationary accounting did not have a material impact on the statement of financial position in 2012 or 2011. Trading in hyperinflationary economies carries a risk of future devaluation of monetary assets and liabilities. This risk cannot be hedged. We have foreign exchange exposure in Iran that cannot be hedged. Iran does not have a hyperinflationary economy but it is impacted by international sanctions, foreign currency access is limited, and several exchange rates are available. We recognized a foreign exchange loss of EUR 109 million due to the depreciation of the Iranian rial in 2012. Seasonality Our net sales are affected by seasonality. Historically, net sales in the first quarter of the year have been the lowest and net sales in the fourth quarter of the year have been the strongest. Our net sales fluctuate with our mobile operators’ planning, budgeting and spending cycle. For example, our net sales in the first quarter of 2012 were EUR 2 862 million compared with EUR 3 869 million in the fourth quarter of 2012, and our net sales in the first quarter of 2011 were EUR 3 084 million compared with net sales in the fourth quarter of 2011 of EUR 3 710 million. 34 Nokia Siemens Networks Disposals treated as discontinued operations On December 1, 2012, we reached a formal agreement with Marlin Equity Partners, for the sale of our Optical Networks Business comprising the complete Optical Networks product portfolio, services offering and existing customer contracts (together, the ‘Optical Networks Business’). Completion of the transaction is anticipated during the first half of 2013 and, according to management’s fees estimates, a loss of at least EUR 130 million is expected to be recognized following the de-recognition of assets and liabilities to be transferred. In accordance with IFRS, we have presented the Optical Networks Business as discontinued operations in the consolidated financial statements for the year ended December 31, 2012, and have re-presented the comparative results for years ended December 31, 2011 and 2010 included in those statements. Segment information Our results of operations include certain financial information by product segment. We report across two business units: Mobile Broadband and Global Services. Other major lines of business previously were our Optical Networks and Non-core business units. At December 31, 2012, Optical Networks was classified as a disposal group held for sale and, as it has represented a separate major business line in the past, is presented as discontinued operations. As such, it has been excluded from the segment reporting. During 2012, our Non-core business unit included the microwave transport business, WiMAX, broadband access, IPTV and Expedience, which were divested during the year, and BSS. By year-end, the only business that remained in our Non-core business unit was BSS, which will be divested in the first half of 2013. We have aggregated the results of these separate businesses for reporting purposes, under All other segments, as they did not represent separate reportable business segments. We assess the performance of the operating segments based on a measure of operating profit that excludes certain items, referred to as specific items (for an analysis of specific items, please see Note 2 to our Consolidated Financial Statements). The costs of central functions and our worldwide sales and marketing organization have been allocated to the segments based on the utilization of the respective resources. Taxes, interest income and expenses are not allocated to the segments. There are no transactions between the segments. The segment revenue is measured largely in a manner consistent with revenue as reported in the consolidated income statement. Group level adjustments related to customer projects accounted for under the percentage of completion accounting method have been allocated to the segments. Results of operations Year ended December 31, 2012 compared to year ended December 31, 2011 Our operating results for the year ended December 31, 2011 include eight months of the results of the Acquired Motorola Assets. Accordingly, our results for that period are not directly comparable to our results for the year ended December 31, 2012. The following table sets forth selective line items from our consolidated income statement and the percentage of net sales that they represent for Nokia Siemens Networks for the year ended December 31, 2012 and 2011. For the year ended December 31 2011 2012 From continuing operations Percentage of net sales Before specific items Specific items 13 645 (9 886) – (51) EURm, except percentage data Before specific items Net sales Cost of sales 13 372 (9 264) – (653) 13 372 100.0% (9 917) 74.2% Gross profit R&D expenses Selling and marketing expenses Administrative and general expenses Other income and expenses, net 4 108 (1 908) (885) (453) (40) (653) (208) (382) (242) (78) 3 455 (2 116) (1 267) (695) (118) 25.8% 15.8% 9.5% 5.2% 0.9% 3 759 (1 969) (990) (497) 32 (51) (107) (330) (37) (19) 3 708 (2 076) (1 320) (534) 13 822 (1 563) (741) 8 5.5% 335 (544) (209) (17) Income statement information: Operating profit/(loss) Share of results of associates Financial income and expenses, net and other financial results Specific items Total Total Percentage of net sales 13 645 100.0% (9 937) 72.8% (307) (151) Loss before tax Income tax/(expense) (1 040) (342) (377) (234) Loss for the year from continuing operations (1 382) (611) (%) change (2.0)% (0.2)% 27.2% (6.8)% 15.2% 1.9% 9.7% (4.0)% 3.9% 30.1% 0.1% 1 007.7% 1.5% 254.5% The following table sets forth Nokia Siemens Networks’ net sales for the years ended December 31, 2012 and 2011 by segment and geographic area based on customer location. Nokia Siemens Networks selected segment data From continuing operations Mobile Broadband Global Services All other segments1 2012 Net sales Operating profit/(loss) before specific items Operating profit/(loss) % before specific items 6 043 488 8.1% 6 929 332 4.8% 365 (33) (9.0)% 2011 Net sales Operating profit/(loss) before specific items Operating profit/(loss) % before specific items 6 335 214 3.4% 6 737 229 3.4% 573 (108) 18.8% EURm, except percentage data 1 Other Total 35 35 – 13 372 822 6.1% – – – 13 645 335 2.5% All other segments represent the aggregated results of several businesses that were divested or that were planned to be divested during 2012, with such divestment expected to be completed during the first half of 2013. Annual Report 2012 35 Business review – Operating and Financial Review continued Nokia Siemens Networks net sales by geographic area For the year ended December 31 From continuing operations 2012 (audited) 2011 (audited) (%) change (unaudited) North East Europe West Europe South East Europe Africa 891 1 900 1 039 548 1 107 2 032 1 257 579 (19.5)% (6.5)% (17.3)% (5.4)% Europe and Africa 4 378 4 975 (12.0)% Middle East Greater China Japan India APAC 687 1 278 2 173 737 1 270 817 1 457 1 533 911 1 176 (15.9)% (12.3)% 41.7% (19.1)% 8.0% Asia and Middle East 6 145 5 894 4.3% North America Latin America 1 201 1 648 1 018 1 758 18.0% (6.3)% Americas 2 849 2 776 2.6% 13 372 13 645 (2.0)% EURm, except percentage data Total Net sales Year-on-year, our net sales decreased by 2.0% in the year ended December 31, 2012 compared to the year ended December 31, 2011. The 2.0% decrease in our net sales was primarily due to modifying our structure to align with our strategy to focus on mobile broadband as we streamlined our portfolios, divested non-core businesses and exited from loss-generating and poorly performing contracts and countries. The decrease in net sales due to the modification of our structure was partially offset by higher sales of infrastructure equipment and slightly higher sales of services in the second half of 2012. Of total net sales, Mobile Broadband contributed EUR 6.0 billion in the year ended December 31, 2012 (EUR 6.3 billion in the year ended December 31, 2011) and Global Services contributed EUR 6.9 billion in the year ended December 31, 2012 (EUR 6.7 billion in the year ended December 31, 2011). Net sales in Japan accounted for our largest concentration of net sales in the year ended December 31, 2012, representing 16.3% of net sales (11.2% in the year ended December 31, 2011). Other regions contributing significant percentages of net sales in the year ended December 31, 2012 include West Europe, representing 14.2% of net sales (14.9% in the year ended December 31, 2011), and Latin America representing 12.3% of net sales (12.9% in the year ended December 31, 2011). 36 Nokia Siemens Networks On a regional basis, net sales in the year ended December 31, 2012 were driven primarily by strength in our Asia and Middle East region, most notably Japan, which saw an increase in net sales of 41.7% due to strong growth in sales of both infrastructure equipment and services as a result of the 4G (LTE) roll-outs by mobile operators in Japan, which represented a combination of organic growth and the impact of the Acquired Motorola Assets. These positive developments were partially offset by decreases in net sales in India and Greater China as a result of reduced operator spending. Our net sales in the Americas region also increased 2.6%, led by an increase in net sales in North America of 18.0% driven by the 4G (LTE) network roll-out with our customer T-Mobile USA partially offset by a decrease in net sales in Latin America. Overall growth in net sales in these regions was offset by lower sales in our Europe and Africa region, which overall decreased by 12.0% in the year ended December 31, 2012 as compared to year ended December 31, 2011, due to the 19.5% and 17.3% decline in net sales in North East Europe and South East Europe, respectively, principally as a result of lower sales in services and infrastructure equipment. Profitability Our gross profit decreased to EUR 3 455 million in the year ended December 31, 2012, compared with EUR 3 708 million in the year ended December 31, 2011, with a gross margin of 25.8% (27.2% in the year ended December 31, 2011). The decrease in gross margin was primarily attributable to specific items recorded in cost of sales which increased to EUR 653 million in the year ended December 31, 2012 (EUR 51 million in the year ended December 31, 2011), due to the recording of personnel restructuring costs in connection with our restructuring program and additional costs incurred during the period as we realigned our customer contract and geographic market portfolio to terminate certain loss-generating and poorly performing contracts and to withdraw from certain countries in line with the transformation and restructuring program. Our gross profit before specific items increased to EUR 4 108 million in the year ended December 31, 2012, compared with EUR 3 759 million in the year ended December 31, 2011, with a gross margin before specific items of 30.7% (27.5% in the year ended December 31, 2011), as a result of our strategy to focus on mobile broadband and products and services with higher margins and to exit less profitable contracts and countries as well as, in the second half of the year, due to the sale of an unusually large proportion of higher margin products and software in our priority markets. Research and development expenses R&D expenses were EUR 2 116 million in the year ended December 31, 2012, compared with EUR 2 076 million in the year ended December 31, 2011. In the year ended December 31, 2012, R&D expenses included specific items relating to restructuring and other related charges of EUR 170 million (EUR 28 million in the year ended December 31, 2011) and purchase price accounting related items of EUR 38 million (EUR 79 million in the year ended December 31, 2011). In 2012, the restructuring and related charges related to expenses in connection with the reduction in our global workforce. In 2012 and 2011, purchase price accounting charges related to the amortization of finite lived intangible assets (customer relationships, developed technology and licenses to use tradenames and trademarks) recognized in the purchase price allocation stemming from the Group’s formation and the subsequent acquisition of the Acquired Motorola Assets. R&D expenses before specific items decreased in the year ended December 31, 2012 to EUR 1 908 million and 14.3% of net sales compared to EUR 1 969 million and 14.4% of net sales in the year ended December 31, 2011 due to the divestment of our non-core assets and the elimination of related R&D expenses and our cost control initiatives relating to the transformation and restructuring program that was implemented in 2012 whereby we decreased investment in previous-generation radio technologies and non-core portfolio areas. Selling and marketing expenses Selling and marketing expenses decreased by 4.0% to EUR 1 267 million, in the year ended December 31, 2012, compared with EUR 1 320 million in the year ended December 31, 2011. In the year ended December 31, 2012, selling and marketing expenses included specific items relating to restructuring and other charges of EUR 116 million (EUR 22 million in the year ended December 31, 2011) and purchase price accounting related items of EUR 266 million (EUR 308 million in the year ended December 31, 2011). In 2012, restructuring and related charges were largely driven by expenses in connection with the reduction in our global workforce. In both 2012 and 2011, purchase price accounting charges related to the amortization of finite lived intangible assets (customer relationships, developed technology and licenses to use tradenames and trademarks) recognized in the purchase price allocation stemming from the Group’s formation and the subsequent acquisition of the Acquired Motorola Assets. Selling and marketing expenses before specific items were EUR 885 million in the year ended December 31, 2012 compared to EUR 990 million in the year ended December 31, 2011, representing 6.6% and 7.3% of net sales, respectively. This decrease in selling and marketing expenses was primarily related to our implementing measures to reduce discretionary expenditure, and overall lower selling and marketing activities due to the impact of the transformation and restructuring program implemented in 2012. Administrative and general expenses Administrative and general expenses were EUR 695 million in the year ended December 31, 2012, compared with EUR 534 million in the same period of 2011. In the year ended December 31, 2012, administrative and general expenses included restructuring charges and other one-time charges of EUR 242 million (EUR 36 million in the same period of 2011) and purchace price accounting related items of EUR 0 million (EUR 1 million in the same period in 2011). In 2012, the restructuring and related charges related to expenses in connection with the reduction in our global workforce, exiting certain underperforming customer contracts and the withdrawal and closure of real estate sites as well as other charges consisting of consultancy fees in connection with the restructuring program. Administrative and general expenses before specific items decreased slightly in the year ended December 31, 2012 to EUR 453 million and 3.4% of net sales compared to EUR 497 million and 3.6% of net sales in the year ended December 31, 2011. This decrease in administrative and general expenses was primarily due to the restructuring efforts undertaken in connection with the transformation and restructuring program implemented in 2012. Annual Report 2012 37 Business review – Operating and Financial Review continued Other income and expenses, net Other income and expenses decreased to an expense of EUR 118 million in the year ended December 31, 2012 as compared to income of EUR 13 million in the year ended December 31, 2011 as we recorded a net loss of EUR 50 million from the sale of divested businesses, EUR 40 million in costs resulting from the sale of receivables transactions and EUR 28 million of additional expenses from the result of bad debt write-offs during 2012. Operating results We had an operating loss of EUR 741 million in the year ended December 31, 2012, compared with an operating loss of EUR 209 million in the year ended December 31, 2011, resulting in an operating margin of negative 5.5% and negative 1.5% in the years ended December 31, 2012 and 2011, respectively. Before specific items, we had operating profit of EUR 822 million in the year ended December 31, 2012 as compared to an operating profit of EUR 335 million in the year ended December 31, 2011. This increase in operating profit before specific items, year-on-year, was primarily attributable to our change in strategy and increased sales of higher margin products and to the reductions in expenses in connection with our cost control initiatives relating to the restructuring and transformation program implemented in 2012, as described above. Financial income and expenses, net, and other financial results We incurred a net expense in financial income and expenses, net, and other financial results of EUR 307 million in the year ended December 31, 2012, compared with a net expense of EUR 151 million in the year ended December 31, 2011. In the year ended December 31, 2012, our financial income and expenses, net, and other financial results consisted of financial income of EUR 15 million in the year ended December 31, 2012, offset by financial expenses relating to interest expense on loans and credit facilities of EUR 113 million and net foreign 38 Nokia Siemens Networks exchange losses of EUR 199 million. In the year ended December 31, 2011, our financial income and expenses, net, and other financial results consisted of financial income of EUR 15 million, offset by financial expenses relating to interest expense on our loans and credit facilities of EUR 95 million and net foreign exchange losses of EUR 58 million. The increase in net foreign exchange losses of EUR 141 million was primarily due to currency exposures that cannot be hedged. Income tax expense We had an income tax expense of EUR 342 million in the year ended December 31, 2012, compared with an income tax expense of EUR 234 million in the year ended December 31, 2011. Despite incurring losses before tax of EUR 1 040 million in the year ended December 31, 2012 and EUR 377 million in the year ended December 31, 2011, we recorded an expense during 2012 and 2011 primarily due to the increase in valuation allowance on deferred tax assets of EUR 640 million and EUR 265 million, respectively, related to Finnish and German tax losses and temporary differences in 2012 and Finnish tax losses and temporary differences in 2011 for which we are unable to recognize deferred tax benefits. Our effective income tax expense is also affected by the various tax laws in effect in the different jurisdictions in which we earn revenue. The increase in income tax expense also reflects changes in profit mix between jurisdictions from year to year. Year ended December 31, 2011 compared with year ended December 31, 2010 Our operating results for the year ended December 31, 2011 include eight months of the results of the Acquired Motorola Assets. Accordingly, our results for that period are not directly comparable to our results for the year ended December 31, 2010. The following table sets forth selective line items from our consolidated income statement and the percentage of net sales that they represent for the years ended December 31, 2011 and 2010. For the year ended December 31 2011 From continuing operations 2010 Percentage of net sales Before specific items Specific items 13 645 100.0% (9 937) 72.8% 12 206 (8 767) – (174) Percentage of net sales (%) change 12 206 100.0% (8 941) 73.3% 11.8% 11.1% EURm, except percentage data Before specific items Specific items Net sales Cost of sales 13 645 (9 886) – (51) 3 759 (1 969) (990) (497) 32 (51) (107) (330) (37) (19) 3 708 (2 076) (1 320) (534) 13 27.2% 15.2% 9.7% 3.9% 0.1% 3 439 (1 804) (992) (459) (18) (174) (212) (307) (76) (27) 3 265 (2 016) (1 299) (535) (45) 335 (544) (209) 1.5% 166 (796) (630) Gross profit R&D expenses Selling and marketing expenses Administrative and general expenses Other income and expenses, net Operating profit/(loss) Total Total Share of results of associates Financial income and expenses, net, and other financial results (17) 11 (151) (248) Loss before tax Income tax expense (377) (234) (867) (164) Loss for the year from continuing operations (611) (1 031) 26.7% 13.6% 16.5% 3.0% 10.6% 1.6% 4.4% (0.2)% 0.4% (128.9)% 5.2% (66.8)% The following table sets forth Nokia Siemens Networks’ net sales for the years ended December 31, 2011 and 2010 by segment and current geographic area based on customer location. Nokia Siemens Networks selected segment data From continuing operations EURm, except percentage data 1 Mobile Broadband Global Services All other segments1 Other Total 2011 Net sales Operating profit/(loss) before specific items Operating profit/(loss) % before specific items 6 335 214 3.4% 6 737 229 3.4% 573 (108) (18.8)% – – – 13 645 335 2.5% 2010 Net sales Operating profit/(loss) before specific items Operating profit/(loss) % before specific items 5 789 153 2.6% 5 889 84 1.4% 528 (71) (13.4)% – – – 12 206 166 1.4% ‘All other segments’ represents the aggregated results of several businesses that were divested or that were planned to be divested during the period. Annual Report 2012 39 Business review – Operating and Financial Review continued Nokia Siemens Networks net sales by geographic area From continuing operations EURm, except percentage data For the year ended December 31 2011 2010 North East Europe West Europe South East Europe Africa 1 107 2 032 1 257 579 1 086 2 115 1 378 514 (%) change 1.9% (3.9)% (8.8)% 12.6% Europe and Africa 4 975 5 093 (2.3)% Middle East Greater China Japan India APAC 817 1 457 1 533 911 1 176 876 1 448 704 885 1 110 (6.7)% 0.6% 117.8% 2.9% 5.9% Asia and Middle East 5 894 5 023 17.3% North America Latin America 1 018 1 758 649 1 441 56.9% 22.0% Americas 2 776 2 090 32.8% 13 645 12 206 11.8% Total Net sales Year-on-year, net sales growth was 11.8% for the year ended December 31, 2011 compared to the year ended December 31, 2010. The 11.8% increase in our net sales was driven primarily by the contribution from the Acquired Motorola Assets. The Acquired Motorola Assets contributed net sales of EUR 894 million in eight months of trading following the completion of the Motorola Solutions Acquisition on April 30, 2011. Excluding the Acquired Motorola Assets, net sales would have increased 4.5% year-on-year, primarily driven by growth in Global Services. Of total net sales, Mobile Broadband contributed EUR 6.3 billion in the year ended December 31, 2011 (EUR 5.8 billion in the year ended December 31, 2010) and Global Services contributed EUR 6.7 billion in the year ended December 31, 2011 (EUR 5.9 billion in the year ended December 31, 2010). In 2011, we continued to see growth in both the Mobile Broadband and Global Services business units. Growth in the Mobile Broadband business was primarily driven by sales of GSM and WCDMA technology as network upgrade, expansion and roll-out work continued across a number of regions. In Global services, managed services remained a strong trend in the industry, while the network implementation business, which is very closely linked to the Mobile Broadband business, also grew. 40 Nokia Siemens Networks Net sales in West Europe accounted for our largest concentration of net sales in the year ended December 31, 2011, representing 14.9% of our net sales (17.3% in the year ended December 31, 2010). Other regions contributing significant percentages of net sales in the year ended December 31, 2011 include Latin America 12.9% (11.8% in the year ended December 31, 2010), Japan 11.2% (5.8% in the year ended December 31, 2010) and Greater China 10.7% (11.9% in the year ended December 31, 2010). On a regional basis, net sales in the year ended December 31, 2011 were driven primarily by strength in the Americas region where North America and Latin America sales increased by 56.9% and 22.0% respectively, as compared to the year ended December 31, 2010, where sales were boosted by the acquisition of the Acquired Motorola Assets, primarily in the CDMA business with Verizon. Our net sales in Asia and the Middle East also increased by 17.3% in the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily driven by the increase in sales in Japan. In Japan, net sales increased by 117.8% as our existing business continued to be driven by the network roll-out with our customer SoftBank and with the Motorola Solutions Acquisition, we further strengthened our position in this key market by gaining KDDI as a new customer. Growth in net sales in these regions was offset by a decrease in net sales in our Europe and Africa region where net sales decreased 2.3% since the prior year due to difficult conditions in Europe. In particular, West and South Europe continued to be characterized by intense competition for market share around single Radio Access Network (RAN) projects resulting in an impact on our pricing. Profitability Our gross profit increased to EUR 3 708 million in the year ended December 31, 2011, compared with EUR 3 265 million for the year ended December 31, 2010, with a gross margin of 27.2% (26.7% in the year ended December 31, 2010). The increase in gross margin was influenced by a decrease in specific items recorded in cost of sales, which decreased to EUR 51 million in the year ended December 31, 2011 (EUR 174 million in the year ended December 31, 2010) due to the recording of additional personnel restructuring and structural restructuring for outsourcing and closing manufacturing sites and other real estate locations in 2010. Our gross profit before specific items increased to EUR 3 759 million in the year ended December 31, 2011, compared with EUR 3 439 million in the year ended December 31, 2010, with a gross margin before specific items of 27.5% (28.2% in the year ended December 31, 2010) due to the impact from the Acquired Motorola Assets which was partially offset by the growth in our Global Services business unit, which generally has lower gross margins than our other products. R&D expenses were EUR 2 076 million in the year ended December 31, 2011, compared with EUR 2 016 million for the year ended December 31, 2010. In the year ended December 31, 2011, R&D expenses included specific items relating to restructuring and other related charges of EUR 28 million (EUR 19 million in the year ended December 31, 2010) and purchase price accounting related items of EUR 79 million (EUR 193 million in the year ended December 31, 2010). In 2011 and 2010, purchase price accounting charges related to the amortization of finite lived intangible assets (customer relationships, developed technology and licenses to use tradenames and trademarks) recognized in the purchase price allocation stemming from the Group’s formation and the subsequent acquisition of the Acquired Motorola Assets. R&D expenses before specific items increased in the year ended December 31, 2011 to EUR 1 969 million and 14.4% of net sales compared to EUR 1 804 million and 14.8% of net sales in the year ended December 31, 2010, primarily due to additional R&D expenses due, to the consolidation of the Acquired Motorola Assets and related R&D activities in 2011. Selling and marketing expenses In the year ended December 31, 2011, our selling and marketing expenses increased slightly by 1.6% to EUR 1 320 million, compared with EUR 1 299 million in the year ended December 31, 2010. In the year ended December 31, 2011, selling and marketing expenses included specific items relating to restructuring and other charges of EUR 22 million (EUR 21 million in the year ended December 31, 2010) and purchase price accounting related items of EUR 308 million (EUR 286 million in the year ended December 31, 2010). In 2011 and 2012, purchase price accounting related items consist of the amortization of finite lived intangible assets related both to the Group’s formation and the subsequent Motorola Solutions Acquisition. Selling and marketing expenses before specific items were EUR 990 million in the year ended December 31, 2011 compared to EUR 992 million in the year ended December 31, 2010, representing 7.3% and 8.1% of net sales, respectively. Despite consolidation of eight months of the Acquired Motorola Assets and related selling and marketing activities in 2011, selling and marketing expenses before specific items remained relatively consistent year-on-year due to restructuring measures originally announced in November 2009. Administrative and general expenses In the year ended December 31, 2011, administrative and general expenses were EUR 534 million (EUR 535 million in the year ended December 31, 2010) representing 3.9% of our net sales (4.4% in the year ended December 31, 2010). Administrative and general expenses for the year ended December 31, 2011 included restructuring charges and merger-related charges of EUR 36 million (EUR 76 million in the year ended December 31, 2010) and purchase price accounting related items of EUR 1 million (EUR 0 million in the year ended December 31, 2010). Restructuring charges in 2011 consisted primarily of personnel restructuring charges. Mergerrelated charges related to additional costs incurred for the realignment of the product portfolio. Administrative and general expenses before specific items were EUR 497 million and 3.6% of net sales in the year ended December 31, 2011 compared to EUR 459 million and 3.8% of net sales in the year ended December 31, 2010. This decrease in our administrative and general expenses as a percentage of net sales was primarily due to restructuring efforts subsequent to the acquisition of the Motorola Acquired Assets. Annual Report 2012 41 Business review – Operating and Financial Review continued Other income and expenses, net Other income and expenses, net increased to income of EUR 13 million in the year ended December 31, 2011 as compared to an expense of EUR 45 million in the year ended December 31, 2010 as we recorded other income of EUR 92 million and other expenses of EUR 79 million in the year ended December 31, 2011 as compared to other income of EUR 97 million and other expenses of EUR 142 million in the year ended December 31, 2010. The decrease in other expenses in the year ended December 31, 2011 was primarily attributable to our recording in 2010 other expenses of EUR 28 million in charges related to the transfer of the Group’s Italian Radio Access activities to an IT consulting and solutions company. Operating results We had an operating loss of EUR 209 million in the year ended December 31, 2011, compared with an operating loss of EUR 630 million in the year ended December 31, 2010, resulting in operating margins of negative 1.5% and negative 5.2% in the years ended December 31, 2011 and 2010, respectively. Before specific items, we had operating profit of EUR 335 million in the year ended December 31, 2011 as compared to an operating profit of EUR 166 million in the year ended December 31, 2010. This increase in operating profit before specific items, year-on-year, was primarily attributable to an increase in net sales from the Motorola Solutions Acquisition, additional growth in net sales from our other business units and lower operating expenses in connection with certain restructuring activities as originally announced in November 2009. Financial income and expenses, net, and other financial results We incurred a net expense in financial income and expenses, net, and other financial results of EUR 151 million in the year ended December 31, 2011, compared with a net expense of EUR 248 million in the year ended December 31, 2010. In the year ended December 31, 2011, our financial income and expenses, net, and other financial results consisted of financial income of EUR 15 million, offset by financial expenses relating to interest expense on interestbearing liabilities of EUR 95 million and net foreign exchange losses of EUR 58 million. In the year ended December 31, 2010, financial income was EUR 14 million, interest expense on interest-bearing liabilities and other financial expenses was EUR 157 million and net foreign exchange losses were EUR 105 million. The decrease in interest expense on interest-bearing liabilities of EUR 42 million was primarily due to the reduction in interest expense resulting from the shareholder loan conversions in 2010. The decrease in net foreign exchange losses of EUR 47 million was primarily due to decreased net foreign exchange losses primarily from currency exposures which cannot be hedged. 42 Nokia Siemens Networks Income tax expense We had an income tax expense of EUR 234 million in the year ended December 31, 2011, compared with an income tax expense of EUR 164 million in the year ended December 31, 2010. Despite incurring losses before tax of EUR 377 million in the year ended December 31, 2011 and EUR 867 million in the year ended December 31, 2010, we recorded an expense during 2011 and 2010 primarily due to the increase in valuation allowance on deferred tax assets of EUR 265 million and EUR 278 million, respectively, related to Finnish tax losses and temporary differences for which we are unable to recognize deferred tax benefits. Our income tax expense is also affected by the various tax laws in effect in the different jurisdictions in which we earn revenue. The increase in tax expense also reflects changes in profit mix between jurisdictions from year to year. Liquidity and capital resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service obligations, other commitments, contractual obligations and acquisitions. Our primary sources of liquidity are provided by our cash from operations, long and short-term financings and historical shareholder support. Our liquidity requirements arise primarily to fund our future working capital needs, capital expenditures, R&D expenditures and to meet our debt services obligations. Certain of our subsidiaries operate in jurisdictions highly regulated by local central banks or international regulations, such as Iran, Pakistan, Venezuela and Uzbekistan. In these countries, the ability of our subsidiaries to transfer funds to their parent companies or our Group treasury in the form of cash dividends, loans or advances is very limited. We estimate that the funds retained in these countries for relatively long periods of time have fluctuated between EUR 50 million to €150 million in the periods under review. We believe that these limitations have not had and are not expected to have a material impact on our ability to meet our cash obligations. Cash flows At December 31, 2012, our cash and cash equivalents were EUR 2 418 million compared to EUR 1 613 million at December 31, 2011. The table below sets forth information regarding our cash flows from continuing and discontinued operations for the years ended December 31, 2012, 2011 and 2010. For the year ended December 31 EURm Statement of cash flows information: Net cash from operating activities Net cash used in investing activities Net cash (used in)/from financing activities Net increase in cash and cash equivalents Capital expenditures1 Change in net working capital: Decrease in current receivables Decrease/(increase) in inventories Increase/(decrease) in interest-free liabilities2 Change in net working capital 1 2 2012 2011 2010 1 628 (261) 324 (989) 3 (244) (520) 1 155 641 805 (216) 415 (303) 438 (306) 776 198 528 (44) 852 (209) 11 985 (468) 16 (415) 228 Our net cash used in investing activities was EUR 261 million for the year ended December 31, 2012. This was primarily attributable to cash used for capital expenditures of EUR 216 million and payments in connection with the disposal of businesses and Group companies of EUR 125 million during the period. These cash outflows were partially offset by cash inflows of EUR 64 million primarily in connection with a purchase price adjustment relating to the Motorola Solutions Acquisition, net of acquired cash and proceeds from investments and other miscellaneous cash outflows and inflows. Our net cash used in financing activities was EUR 520 million for the year ended December 31, 2012. During the year we repaid EUR 264 million of long-term interest-bearing liabilities, primarily consisting of scheduled repayments of EUR 100 million of our EIB Facility and EUR 44 million scheduled repayments of our Finnish Pension Loan and the voluntary prepayment of EUR 118 million and termination of our SEB Loan. During 2012, we also repaid EUR 244 million of short-term borrowings, primarily consisting of partial repayment of our Term Loan, refinancing of our South African preference share subscription agreement and reduction of borrowings under the Commercial Paper Program and local borrowings on committed and uncommitted bases. Capital expenditures represent purchases of property, plant and equipment and intangible assets. Includes changes in the following line items in the statement of financial position: accounts payable, accrued expenses, provisions and other short-term liabilities. The cash outflows for restructuring and other specific items, excluding impairments and PPA related charges were EUR 645 million, EUR 188 million and EUR 510 million for the years ended December 31, 2012, 2011 and 2010, respectively. Year ended December 31, 2012 Our net cash from operating activities was EUR 1 628 million for the year ended December 31, 2012. Although we recorded a loss for the year of EUR 1 445 million, after adjusting for non-cash items, such as depreciation and amortization, which was EUR 587 million and restructuring and other specific items, which were EUR 1 162 million, we had cash flows from operating activities before changes in working capital of EUR 1 160 million. The change in our net working capital provided cash flows of EUR 985 million, which was a net reduction in working capital for the year. The reduction in net working capital resulted primarily from our management of accounts receivable which provided cash flow of EUR 776 million primarily due to improved cash collections and an increase in sales of receivables during the year which further enhanced our cash collection efforts. A reduction in inventories during the year provided cash inflows of EUR 198 and was the result of effective inventory management during the year. Annual Report 2012 43 Business review – Operating and Financial Review continued Year ended December 31, 2011 Our net cash from operating activities was EUR 324 million for the year ended December 31, 2011. Although we recorded a loss for the year of EUR 698 million, after adjusting for non-cash items such as depreciation and amortization, which was EUR 711 million, and other non-cash items such as restructuring and other specific items, income taxes and financial income and expenses, which totaled EUR 447 million, we had cash flows from operating activities before changes in working capital of EUR 564 million. The change in our net working capital provided cash flows of EUR 16 million, which was a net reduction in working capital for the year. The reduction in net working capital resulted primarily from our management and sales of accounts receivable which provided cash flow of EUR 528 million during the year but was offset by the reduction in interest-free liabilities of EUR 468 million, which was primarily attributable to a decrease in accrued expenses relating mainly to a reduction in our deferred revenue balance from the prior year, and an increase in inventories of EUR 44 million.. Our net cash used in investing activities was EUR 989 million for the year ended December 31, 2011. In connection with the Motorola Solutions Acquisition, we had a cash outflow, net of acquired cash received, of EUR 781 million. In addition, cash used for capital expenditures for the period resulted in a cash outflow of EUR 303 million. These outflows were partially offset by proceeds from short-term and other long-term loan receivables and proceeds from the sale of property, plant and equipment and intangible assets. Our net cash from financing activities was EUR 1 155 million for the year ended December 31, 2011. During 2011, we received proceeds from our shareholders of EUR 1 000 million in relation to issuing cumulative preferred shares, which represented the majority of our financing activities. We also received net proceeds from short-term borrowings of EUR 232 million primarily from the EUR 2 000 million revolving credit facility from 2009. During 2011, we also made repayments of EUR 48 million of long-term interest-bearing liabilities, primarily from the Finnish Pension Loan, and payments of EUR 29 million in dividends to non-controlling interests. Year ended December 31, 2010 Our net cash from operating activities was EUR 3 million for the year ended December 31, 2010. Although we recorded a loss for the year of EUR 1,089 million, after adjusting for non-cash items such as depreciation and amortization, which was EUR 843 million, and other non-cash items such as restructuring and other specific items, income taxes and financial income and expenses, which totaled EUR 558 million, we had cash flows from operating activities before changes in working capital of EUR 405 million. The change in our net working capital provided cash flows of EUR 228 million, which was a net reduction in working capital for the year. The reduction in net working capital resulted primarily from our management and sales of accounts receivable which provided cash flow of EUR 835 million during the year but was offset by the 44 Nokia Siemens Networks reduction in interest-free liabilities of EUR 415 million, which was primarily attributable to reductions in total provisions relating mainly to product portfolio optimization, and an increase in inventories of EUR 209 million. Our net cash used in investing activities was EUR 244 million for the year ended December 31, 2010. This was primarily attributable to cash used for capital expenditures of EUR 306 million. These cash outflows were partially offset by proceeds from short-term and other long-term loan receivables and proceeds from the sale of property, plant and equipment and other miscellaneous cash outflows and inflows. Our net cash provided by financing activities was EUR 641 million for the year ended December 31, 2010. During 2010, we received proceeds of EUR 229 million from our short-term borrowings, primarily from the EUR 2 000 million Revolving Credit Facility from 2009 and the Commercial Paper Program, and EUR 414 million from our long-term interest-bearing liabilities, primarily from drawings under the Finnish Pension Loan, Nordic Investment Bank Facility and SEB Loan. Capital expenditures Cash used for capital expenditures related to the purchases of property, plant and equipment and intangible assets and primarily of (a) cash used for the maintenance, upkeep and replacement of assets in connection with the production and testing of our products (‘Capital Expenditure’); (b) cash used for development and testing of new products in order to increase sales and profitability (‘R&D Capital Expenditure’); (c) cash used in our Global Services business unit (‘Global Services Expenditures’); and (d) other capital expenditures for real estate and central functions (‘Other Capital Expenditure’). Investments in 2010 and 2011 included the development of a new generation of radio platforms, the Multiradio generation, and associated infrastructure software which required significant initial investments. In 2012, our focus on Mobile Broadband resulted in increased capital expenditure on new technologies offset by a reduction in investments in non-core areas, thus leading to a reduction in overall capital expenditure. In accordance with our current estimate, we expect the amount of capital expenditures during 2013 to be approximately EUR 150 million, to be funded from cash flow from operating activities. Capital Expenditure For the year ended December 31 EURm 2012 2011 2010 Capital Expenditure R&D Capital Expenditure Global Services Expenditure Other Capital Expenditure 20 113 21 62 48 138 27 90 44 144 35 83 Total 216 303 306 Business review – Operating and Financial Review continued Capital resources Our principal sources of funds are expected to be cash provided by operations and amounts available under the Forward Starting Credit Facility, our Commercial Paper program and our local credit facilities. As of December 31, 2012, we have EUR 1 805 million in committed facilities, of which EUR 750 million is undrawn. Structured finance Structured finance includes customer financing and other third-party financing. Network operators in some markets sometimes require their suppliers, including us, to arrange, facilitate or provide long-term financing as a condition to obtain or bid on infrastructure projects. Drawings under the Revolving Credit Facility will be available only if, among other things, we comply with the financial and other covenants in the Revolving Credit Facility. Our ability to meet these financial covenants will depend on our results of operations, which may be affected by factors outside our control. Credit markets in general have been tight since 2009. Requests for customer financing and especially extended payment terms have remained at a reasonably high level; however, during 2012, the amount of financing provided directly to our customers has decreased. We do not currently intend to materially increase financing directly to our customers, which may have an adverse effect on our ability to compete successfully for their business. Rather, as a strategic market requirement, we plan to continue to arrange and facilitate financing, typically supported by export credit or guarantee agencies, and provide extended payment terms to a number of customers. Extended payment terms may continue to result in a material aggregate amount of trade credits, but the associated risk is mitigated by the fact that the portfolio relates to a variety of customers. We will continue to work towards our long-term financial goals which include longer term financing as a way to diversify our funding sources. Contractual obligations The following table sets forth our material contractual obligations at December 31, 2012. Contractual obligations EURm Forward Starting Facility European Investment Bank Nordic Investment Bank Finnish Pension Loan PSA1 Commercial Paper Program Operating leases Purchase commitments2 Other obligations Total Total Less than 1 year 1-5 More than years 5 years 600 150 80 132 44 82 474 799 52 – 100 45 44 – 82 141 509 48 600 50 35 88 44 – 231 290 4 – – – – – – 102 – – 2 413 969 1 342 102 The following table sets forth our total customer financing, outstanding and committed, for the years indicated. Customer finance EURm Financing commitments Outstanding long-term loans (net of allowances and write-offs) Current portion of outstanding long-term loans (net of allowances and write-offs) Total At December 31 2012 2011 2010 34 86 85 39 60 64 35 54 39 108 200 188 1 PSA relates to the amount outstanding under the PSA 2012 South African Preference Shares Subscription Agreements. 2 Purchase commitments relate to commitments from service agreements, outsourcing arrangements and inventory purchase obligations, primarily for purchases in 2013 through 2014. Annual Report 2012 45 Business review – Operating and Financial Review continued We continue to make arrangements with financial institutions and investors to sell the credit risk that we have incurred from the commitments and outstanding loans we have made, as well as from the financial guarantees we may have given. Should the demand for customer finance increase in the future, we intend to further mitigate our total structured financing exposure, market conditions permitting. In the years ended December 31, 2012, 2011 and 2010 we had no material bad debt allowances or write-offs. We expect our structured financing commitments to be financed mainly through the capital markets as well as through cash flow from operations. The structured financing commitments are available under loan facilities mainly negotiated with mobile operator customers to fund capital expenditure relating to the purchase of our network infrastructure equipment and services. Availability of the amounts is dependent upon the borrowers’ continuing compliance with stated financial and operational covenants and compliance with other administrative terms of the facilities. Contingent obligations and liabilities At December 31, 2012, guarantees provided to certain customers of the Group in the form of bank guarantees, or corporate guarantees issued by some of the Group’s entities were EUR 864 million (EUR 1 191 million at December 31, 2011), including commercial guarantees of EUR 598 million (EUR 997 million at December 31, 2011). These instruments entitle the customer to claim payment as compensation for non-performance by the Group of its obligations under network infrastructure supply agreements. 46 Nokia Siemens Networks At December 31, 2012, other guarantees on behalf of other companies were EUR 11 million (EUR 0 million at December 31, 2011). These guarantees represented commercial guarantees issued on behalf of third parties. The increase in volume is mainly due to the transfer of guarantees in connection with the disposal of certain businesses where contractual risks and revenues have been transferred, but some of the commercial guarantees have not yet been re-assigned legally. Off-balance sheet arrangements We have no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. A word from our customer Making the connections “An innovative approach proach to LTE helps us minimize our environmental al impact and our costs.” Tommy Ljunggren , ment Vice President of System Development at Mobility Services, TeliaSonera Read more about our work with Telia in our online Annual Report Country: Sweden Number of subscribers: Telia in Sweden is part of TeliaSonera group, which has 20 million mobile subscribers globally Strategic focus: The leading Swedish operator of mobile communication, fixed communication and data communication as well as broadband Annual Report 2012 201 47 Business review – Corporate responsibility Understanding our impact Our highlights 12.5% At the end of 2012, 12.5% of senior management positions were held by women €50 million Spent on employee training 29% Reduction in number of health and safety recordable incidents Corporate responsibility covers a wide range of aspects including how we are run, how we interact with the communities in which we operate, and the impact we have on the environment. Our people Workforce balancing Our restructuring program – which we are halfway through – has had a significant effect on employees. We have been consulting with employee representatives – including local Works Councils – where necessary and we have communicated to employees the changes that affect them throughout the two-year restructuring. We have followed country-specific legal requirements to find socially responsible means of reducing our workforce and of helping affected employees. Where possible, we have offered alternative employment to people whose roles were being removed. As of December 31, 2012, we had approximately 58 400 employees. During the year, the rate of voluntary attrition was 9.9%. The rate of involuntary attrition was 14.2% and the rate of attrition due to common agreement was 5.8%. Diversity and inclusion At the end of 2012, 12.5% of senior management positions were held by women, an increase of one percentage point from 2011. As a company with Finnish and German heritage, Nokia Siemens Networks also monitors the nationality of our managers: at the end of 2012, 54% of senior management positions were held by people without Finnish or German nationality. Training and development During 2012, we spent approximately EUR 50 million on training for employees. Health, safety and labor conditions Our Code of Conduct and Global Labor Standard set out clear requirements for labor conditions, based on the International Labor Organization (ILO) conventions. We are implementing the global standard at a country level, focusing on the highest risk countries for labor violations. Internal audits are used to confirm compliance. All indicators in this section of the Annual Report have been assured by DNV Two Tomorrows. 48 Nokia Siemens Networks Our health and safety management system is based on the international standard OHSAS 18001. Contractors must also comply with our health and safety standards, and we provide training to contractors to facilitate this. Regular audits are used to check compliance. In 2012, there were 151 health and safety incidents recorded (down from 214 in 2011). We continue to aspire to a completely safe, accident-free environment for our workers. Nokia Siemens Networks Code of Conduct The Code of Conduct establishes the ethical standards we expect our people to meet, wherever they work. We train our employees annually on ethical business conduct, and concerns can be reported anonymously. Any reported issue is investigated by our Ethics and Compliance Office. This over-achieves on a commitment made five years ago on GSM base station. We have so far applied energy efficient measures to more than 4 200 radio mobile broadband sites. Suppliers Our global supplier requirements, which set standards in ethical, environmental and social issues, form part of contractual agreements with suppliers and must be met by every Nokia Siemens Networks supplier. The requirements are frequently updated: in 2012, we introduced additional points on human rights and conflict minerals. Compliance is monitored through system audits, of which 57 were conducted in 2012. Radio waves and health Wireless communication technologies operate well within the limits recommended by the International Commission on Non-Ionizing Radiation Protection and endorsed by the World Health Organization, and we work to ensure continued compliance of our products with these requirements. Nokia Siemens Networks engages with its stakeholders and in public discussions on this topic as well as monitoring scientific studies. More detailed audits are undertaken with some suppliers, selected through a risk assessment process. During the course of 2012, we completed 20 of these in-depth audits and initiated a further two. Nokia Siemens Networks has a zero tolerance policy on conflict minerals and we expect our suppliers to transmit that in turn to their suppliers. In 2012, we approached 125 suppliers for due diligence, as part of our involvement in the EICC/GeSI Extractives Working Group’s Conflict-Free Smelters program, completing due diligence with 40 of them. Environment Nokia Siemens Networks’ environmental strategy has two key elements: – Designing products and services that help telecoms operators reduce the environmental impact of their networks – Ensuring maximized efficiency in our operations to minimize our environmental impact Renewable energy continues to form a substantial part of the energy used in Nokia Siemens Networks’ own facilities – over 38% of our energy usage is from certified renewable sources. Society Human rights We recognize our responsibility to help ensure that our products are used in a way that respects human rights. Our Code of Conduct spells out our zero tolerance for the violation of human rights. This commitment is reinforced in our human rights policy, which establishes due diligence processes to identify and address relevant risks across our global operations. Employees are trained in human rights through ethical business training, and those in high-risk roles – such as procurement – are given additional training. Community Nokia Siemens Networks’ community strategy focuses on three key areas where we can have the greatest impact: education and Information Communications Technology, disaster preparedness and relief, and the environment. We have policies in place relating to disaster relief and to employee volunteering. We operate an environmental management system certified to the internationally recognized standard ISO 14001. We require suppliers to have a documented Environmental Management System – compliant with ISO 14001 – in place. Nokia Siemens Networks’ portfolio reduces the environmental impact of new and legacy telecommunications networks through more efficient technology and renewable energy solutions to reduce power consumption and greenhouse gas emissions. By the end of 2012, Nokia Siemens Networks had improved the energy efficiency of GSM base station products by 21%1 and reduced the energy consumption of buildings by 8%2, compared to 2007 levels. 1 2 rom best performance BTS to 2012 equivalent capacity configuration BTS. F Compared to a business as usual scenario created in 2007 as agreed with the WWF. For more information, please see our sustainability report online. Annual Report 2012 49 Business review – Risk factors Understanding the risks we face Every business activity brings with it a degree of risk, and the Board recognizes that Nokia Siemens Networks must therefore manage a range of risks in the course of its activities. This section provides a description of the principal risk factors that could affect Nokia Siemens Networks as we try to reach our business objectives. 8 There are a limited number of customers in the networks infrastructure and related services business. Unfavorable developments in relation to a major customer may have a material adverse effect on our business, results of operations and financial condition. Our internal risk management is designed to identify and analyze these risks, as well as to control them within acceptable parameters. 9 The mobile broadband infrastructure and related services business relies on large multi-year contracts. Unfavorable developments under such contracts may have a material adverse effect on our business, results of operations and financial condition. The factors described below are not intended to form a definitive list of all risks and uncertainties. In particular, the list excludes generic risks common to many companies, such as terrorism, pandemics and succession planning. There may be additional risks unknown to us and other risks currently believed to be immaterial that could become material. These risks, either individually or together, could adversely affect our business, sales, results of operations and financial condition from time to time. The summary below covers all risk areas such as strategic, operational, financial and hazard risks: 1 Our sales and profitability depend on our success in the mobile broadband infrastructure and related services market. We may fail to effectively and profitably adapt our business and operations in a timely manner to the increasingly diverse needs of our customers in this market. 2 Competition in the mobile broadband infrastructure and related services market is intense. We may be unable to maintain or improve our market position or respond successfully to changes in the competitive environment. 3 O ur restructuring plan to improve financial performance and competitiveness may not lead to sustainable improvements in our overall competitiveness and profitability, and we may be unable otherwise to continue to reduce operating expenses and other costs. The costs, cash outflows and charges related to the implementation of the restructuring plan, including the planned personnel reductions, divestments of non-core businesses, the termination of unprofitable contracts and exiting certain countries, such as Iran, may be greater than currently estimated. 4 We may require further support from our shareholders and may have conflicts of interest with them. Our shareholders may also have conflicts of interests between themselves. We believe that our shareholders are actively considering a number of strategic alternatives in respect of their interests in Nokia Siemens Networks B.V., including new investments by third parties and an increase or decrease in the shareholders’ ownership interests in Nokia Siemens Networks. There can be no assurance of any such intentions or the timing of any such plans, nor can there be any assurance that the ownership of Nokia Siemens Networks B.V. will, or will not, change in the future. 5 Lack of improvement of or worsening general economic and financial markets conditions globally and regionally could have a significant adverse impact on our business, the results of operations, and our financial condition. 6 As the euro is our reporting currency, the dissolution of the euro would result in increased costs to adjust our financial reporting, and result in increased volatility in our reported results of operations and financial condition. 7 We may fail to effectively and profitably invest in new competitive products, services, upgrades and technologies and bring them to market in a timely manner. 50 Nokia Siemens Networks 10 We may not be able to successfully consummate acquisitions or divestitures or integrate acquired businesses, and any acquisitions or disposals may carry unanticipated liabilities. 11 We are exposed to local business risks in the countries in which we operate. Our sales derived from, and our manufacturing facilities and assets located in, emerging market countries may be materially adversely affected by economic, regulatory and political or other developments in those countries, or by other countries imposing regulations against imports to such countries. As sales from those countries represent a significant portion of our total sales, economic or political turmoil including sudden devaluation of currency in those countries could materially adversely affect our sales and results of operations. Our investments in emerging market countries may also be subject to other risks and uncertainties including challenges in repatriation of cash. Business with customers in Iran has recently become subject to significant further regulation by the European Union, the United Nations and the USA. Our Executive Board has decided to withdraw from Iran in a controlled manner, and we are in the process of winding down our business activities there. We expect to cease all revenuegenerating activities relating to Iran by June 30, 2013. Other activities relating to the withdrawal—such as dissolution of the local branch, divestment or discontinuation of certain shareholdings, closing of local bank accounts and resolution of contractual and legal obligations in Iran—will take longer. Despite this withdrawal, we may still be subject to new, existing, or tightened export control regulations, sanctions, embargoes or other forms of trade restrictions imposed on Iran. Additionally, we may be exposed to customer claims and other actions as well as investigations by authorities. The result of such claims, actions and investigations may be difficult to predict and can lead to lengthy disputes, fines or settlements, and could have a material adverse affect on the results of operations and our financial condition. 12 Our liquidity and our ability to meet our working capital requirements depend on access to available credit under our financing arrangements and other credit lines as well as cash at hand. If those sources of liquidity were to be unavailable, or cannot be refinanced when they mature, this would have a material adverse effect on our business, the results of operations, and our financial condition. 13 If the limited number of suppliers we depend on fail to deliver sufficient quantities of fully functional products, components, sub-assemblies and software on favorable terms and in compliance with our supplier requirements, our ability to deliver our products and services profitably, in line with quality requirements and on time, could be materially adversely affected. 14 If any of the companies we partner and collaborate with were to fail to perform as planned, or if we fail to achieve the collaboration or partnering arrangements needed to succeed, we may not be able to bring our products and services to market successfully or in a timely way. 15 We may fail to manage our manufacturing, service creation, delivery and logistics efficiently and without interruption, or fail to make timely and appropriate adjustments, or fail to ensure that our products and services meet our and our customers’ requirements, and are delivered on time and in sufficient volumes. 16 Rapid changes to existing regulations or technical standards or the implementation of new regulations or technical standards for products and services not previously regulated could be disruptive, time consuming and costly to us. 17 Providing customer financing or extending payment terms to customers can be a competitive requirement in the networks infrastructure and related services business and may have a material adverse effect on our business, results of operations and financial condition. 18 Any actual or alleged defects or other quality, safety and security issues in our products and services could have a material adverse effect on our sales, results of operations and reputation. 19 We have operations in a number of countries and, as a result, face complex tax issues that could result in the obligation to pay additional taxes in various jurisdictions. 20 We may be liable for any actual or alleged loss, improper disclosure or leakage of any personal or consumer data collected by us or our partners or subcontractors, made available to us or stored in or through our products and services. 21 Our net sales, costs and results of operations are affected by exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, as well as with and between other currencies. 22 Our products and services include increasingly complex technologies, some of which have been developed by us or licensed to us by third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is increasingly challenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of these technologies may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products and services, and/or costly and time consuming litigation. 23 Our existing technology licenses may expire or otherwise become subject to renegotiation. The inability to renew or finalize such arrangements on acceptable commercial terms may result in increased costs or other changes in terms that could potentially have a material adverse effect on our operating results and financial condition. 24 Our products and services include numerous patented, standardized or proprietary technologies, which we rely upon. Third parties may use without a license or unlawfully infringe our intellectual property, or commence actions seeking to establish the invalidity of the intellectual property rights of these technologies. This may have a material adverse effect on our business and results of operations. 25 Changes in various types of regulation and trade policies as well as enforcement of such regulation and policies in countries around the world could have a material adverse effect on our business and results of operations. In line with changes in strategy, as well as in some cases a difficult political or business environment and an increasingly complicated trade sanctions environment, we have reduced operations and have exited or are in the process of exiting certain countries, such as Iran. Such actions may trigger additional investigations or claims by contracting parties. The result of such investigations or claims may be difficult to predict and could lead to lengthy disputes or fines or a settlement. 26 Our operations rely on the efficient and uninterrupted operation of complex and centralized information technology systems and networks, which are integrated with those of third parties. All information technology systems, system upgrades and system transitions are potentially vulnerable to damage, malfunction or interruption from a variety of sources that could materially adversely affect our business, financial condition and results of operations. 27 We may be unable to retain, motivate, develop and recruit appropriately skilled employees. 28 Organized strikes or work stoppages by unionized employees may have a material adverse effect on our business, financial condition and results of operations. 29 An unfavorable outcome of litigation, or the conduct of litigation while it is ongoing, could have a material adverse effect on our business, results of operations and financial condition. 30 We are subject to environmental and health and safety laws that restrict our operations or increase the costs of such operations. 31 Allegations of possible health risks from the electromagnetic fields generated by base stations, and the lawsuits and publicity relating to this matter, regardless of merit, could have a material adverse effect on our sales, results of operations and reputation, by increasing difficulty in obtaining sites for base stations, or by leading regulatory bodies setting arbitrary use restrictions and exposure limits, or by causing us to allocate additional monetary and personnel resources to these issues. 32 We may be required to make further contributions to pension plans. 33 Some of the Siemens carrier-related operations transferred to us have been and continue to be the subject of criminal and other governmental investigations related to whether certain transactions and payments arranged by some current or former employees of Siemens were unlawful. As a result of those investigations, government authorities and others have taken and may take further actions against Siemens and/or its employees that may involve and affect the assets and employees transferred by Siemens to us, or there may be undetected additional violations that may have occurred prior to the transfer or violations that may have occurred after the transfer of such assets and employees. For further explanation of these risks, please refer to Nokia’s 20-F filing, which includes risks relating to Nokia Siemens Networks. A copy can be found at nokia.com/investors. Annual Report 2012 51 A word from our customer Innovative partnership “We are using innovation to differentiate ourselves in our markets.” Thibaud Rerolle, Head of Technology, Safaricom Read more about our work with Safaricom in our online Annual Report Country: Kenya Number of customers: 19 million Strategic focus: Innovation to maintain a competitive edge 52 Nokia Siemens Networks Governance 54 Corporate Governance Annual Report 2012 53 Corporate Governance Ensuring the clarity of our decision making Given the deep and far-reaching transformation underway at Nokia Siemens Networks, now is the time for us to share our new strategy, organizational structure and financial progress directly through this, our own comprehensive Annual Report. This publication defines who we are, what we do, and what sets us apart from our peers. It also sets a new standard of transparency for us, as we share, for the first time, information about the performance of our business at a segment level. As a leading global networks business, corporate governance is important to us. Because Nokia Siemens Networks is not a listed company, and reports through others, we do not formally adopt external governance codes, although of course we fulfill the requirements of our parent companies. However, we have developed governance guidelines which set out the governance responsibilities of our Board of Directors. In March 2012, we made some major changes in how we govern, how decisions are made, and how we track the execution of our strategy. This move aimed to help us achieve our restructuring goals and, beyond that, to support our transformation in the longer term. The changes addressed what the senior management team focuses on and how it implements its decisions, and were designed to improve the speed and quality of decision making, as well as tracking the results of those decisions. Overall, our governance structure approach enables us to have a clear change management process for employees and a robust decision making process for shareholders. 54 Nokia Siemens Networks “Corporate governance is important to us as a leading global networks business.” Jesper Ovesen Chairman Principal activities We began independent operations on April 1, 2007, combining Nokia Corporation’s (Nokia) networks business and Siemens AG’s (Siemens) carrier-related operations for fixed and mobile networks. In April 2011, we acquired the majority of the wireless network infrastructure assets of Motorola Solutions. Today we are a leading global provider of telecommunications infrastructure, with a focus on the mobile broadband market. In our core addressable market, we are the second largest company worldwide by revenue. We have a strong position in the newer infrastructure technologies of 3G and 4G (LTE), and in LTE, we had 77 commercial contracts at the end of 2012. Business review A review of our principal activities and performance for the year is contained in the 2012 highlights on pages 6 and 7, A letter from our Chairman on page 8, the Chief Executive Officer’s strategic review on pages 12 to 15, Our strategy and transformation on pages 18 to 20, How we operate and Where we operate on pages 24 to 27, the Operating and Financial Review on pages 29 to 46, and the Corporate responsibilty report on pages 48 and 49. A review of the principal risks and uncertainties facing the Group is set out on pages 50 and 51. Structure and management Nokia Siemens Networks B.V. is a private company with limited liability, registered in the Netherlands with its corporate seat in The Hague. Our operational headquarters is in Espoo, Finland, with a strong regional presence in Germany. Nokia Siemens Networks’ current shareholders are Nokia and Siemens. The Company has autonomy to carry on its business independently of its shareholders. The Company is consolidated in the financials of Nokia Corporation, and accounted on an equity basis by Siemens. Membership of the Board of Directors Our Board of Directors is comprised of seven directors, four of whom are appointed by Nokia and three of whom are appointed by Siemens. The appointed board members are employees of the parent companies, except for the Chairman of the Board. The Chairman and Chief Executive Officer (CEO) are appointed by Nokia. The senior management team is appointed by the Chief Executive Officer. There were no loans granted to the members of the Board of Directors at December 31, 2012. The following table sets forth the names, ages and positions of the members of the Board of Directors as of December 31, 2012. Membership of the Board of Directors Name Age Title Jesper Ovesen 55 Chairman Juha Äkräs 47 Member of the Board Timo Ihamuotila 46 Member of the Board Joe Kaeser 55 Member of the Board Barbara Kux 58 Member of the Board Louise Pentland 40 Member of the Board Peter Y. Solmssen 57 Member of the Board A short biography of each of the members of the Board of Directors is included below. Jesper Ovesen Jesper Ovesen is Chairman of our Board overseeing the strategic direction of Nokia Siemens Networks. Prior to joining in September 2011, Mr. Ovesen held a number of senior management positions in leading European companies, most recently serving as CFO of Danish telecommunications group TDC during the company’s restructuring process and initial public offering. He also served as CEO at Kirkbi, CFO at Lego, and CFO at Danske Bank. He currently holds external positions as a member of the Board of Orkla Norway, and a member of the Board of Skandinaviska Enskilda Banken. Juha Äkräs Juha Äkräs is Executive Vice President at Nokia, Human Resources, responsible for their talent management, resourcing and development, performance management and organizational development. Mr. Äkräs joined Nokia in 1993 and was appointed to the Nokia Leadership Team in 2010. He served in various leadership positions including business, strategy, customer services, marketing and finance, before moving to Human Resources in 2005. Mr. Äkräs holds a master’s degree in engineering from Helsinki University of Technology. Annual Report 2012 55 Corporate Governance continued Timo Ihamuotila Timo Ihamuotila has been a member of the Nokia leadership team since 2007 and of our Board since November 2009. Mr. Ihamuotila joined Nokia in 1993 as Manager for Dealing & Risk Management. After a three-year period away, he rejoined Nokia in 1999 as Director of Corporate Finance and was named Vice President Finance, Corporate Treasurer of Nokia Corporation, Group Treasury in 2000. In 2004, he became Senior Vice President for Nokia’s CDMA business unit, an integral part of the Mobile Phones business group. He was appointed Executive Vice President, Sales and Portfolio Management, Mobile Phones in 2007 and became responsible for Nokia’s global sales within the Markets unit in 2008. Prior to joining Nokia, he worked as an Analyst in Asset and Liability Management for the Kansallis Bank, Helsinki and from 1996 to 1999 he worked for Citibank Plc as Vice President of Nordic Derivatives Sales. Mr. Ihamuotila graduated from Helsinki School of Economics and holds a degree of Master of Science (Economics) and Licentiate of Science (Finance). Joe Kaeser In May 2006, Mr. Kaeser was appointed Member of the Managing Board of Siemens AG and Chief Financial Officer (CFO). Special Responsibilities within Siemens AG: Head of Corporate Finance and Controlling, Siemens Financial Services, Siemens Real Estate and Equity Investments. Prior to this, Mr. Kaeser served as chief strategy officer for Siemens AG from 2004 to 2006 and as the chief financial officer for the mobile communications group from 2001 to 2004. Mr. Kaeser has additionally held various other positions within the Siemens group since he joined Siemens in 1980. Mr. Kaeser also serves on the Board of Directors of Allianz Deutschland AG, NXP Semiconductors N.V. and Bosch Siemens Hausgeräte GmbH. Mr. Kaeser holds a business administration degree from Fachhochschule Regensburg. Barbara Kux Barbara Kux is a member of the Managing Board of Siemens AG since 2008. She is responsible for Supply Chain Management, Global Shared Services and serves as the company’s Chief Sustainability Officer. Prior to joining Siemens she was as a member of the Group Management Committee at Royal Philips Electronics. Before she held top management positions at leading global companies and also served as Management Consultant at McKinsey & Company Inc. In 1995, she was included in the class of 1995 of Global Leaders of Tomorrow by the World Economic Forum in Davos, Switzerland. Barbara Kux is a member of the Board of Directors of Total S.A., France and a member of the Board of Trustees of the Siemens Foundation. Barbara Kux holds an MBA with Distinction from INSEAD Fontainbleau, France. 56 Nokia Siemens Networks Louise Pentland Louise Pentland is Executive Vice President, Chief Legal Officer at Nokia, responsible for legal matters and protecting and enforcing the company’s vast portfolio of patents and other intellectual property. Ms. Pentland joined Nokia Networks in the United Kingdom in 1998 as Senior Legal Counsel, and has since held positions within Nokia including Senior Vice President and Chief Legal Officer, Acting Chief Legal Officer, Vice President and Head of Legal, Enterprise Solutions. She has been a member of the Nokia Leadership Team since 2011. Before joining Nokia, Ms. Pentland held corporate in-house legal positions after working in corporate private practice in the United Kingdom. She is a member of several legal forums and organizations, including the Association of General Counsels, Chief Legal Officer’s Roundtable and Global Leaders in Law, and also serves as Vice Chair of the International Bar Association, Corporate Counsel Forum. Ms. Pentland holds an LL.B (honors) law degree and is a qualified and active solicitor in England and Wales, in addition to being a licensed attorney and an active member of the New York Bar. Peter Y. Solmssen Peter Y. Solmssen has served as a Member of the Managing Board and General Counsel of Siemens AG since 2007. Prior thereto he was Executive Vice President and General Counsel of GE Healthcare. Mr. Solmssen studied at Harvard University and the University of Pennsylvania. Changes during 2012 During the year, there were three outgoing Board Members: Siegfried Russwurm (replaced by Barbara Kux in March 2012); Niklas Savander (replaced by Juha Äkräs in June 2012); and Riikka Tieaho (replaced by Louise Pentland in August 2012). Board meetings During the year under review, the Board met on 12 occasions with all directors eligible to attend doing so either in person or by proxy. Directors’ responsibilities The Board of Directors is accountable to Nokia Siemens Networks’ shareholders (currently Nokia and Siemens), and is responsible for the overall direction and supervision of the Group. Each of the ultimate shareholders are listed on various stock exchanges, including the New York Stock Exchange. The Company’s aim is to comply in all material respects with all rules and regulations directly applicable to it, as well as to meet all requirements to the extent applicable to the Company, including (but not limited to) those deriving from the rules and regulations related to the various stock exchange listings of the ultimate shareholders. The operations of Nokia Siemens Networks are managed under the direction of the Board within the framework set by Book 2 Dutch Civil Code and the Articles of Association of the Company as well as the Shareholders Agreement, dated April 3, 2007, by and between Nokia, Siemens, and Nokia Siemens Networks B.V. (Shareholders’ Agreement). Code of Conduct; Compliance Office; Internal Audit, including internal investigations The Board will oversee that the Group has proper moral and ethical values. The Board will approve a Code of Conduct for the Group and oversee that the management implements such a code. The Group has a Compliance Office headed by the Chief Compliance Officer. The Chief Compliance Officer will give a quarterly report to the Board on any actual matters, and an annual report on organization, responsibilities and staffing of the Compliance Office. The Group has an Internal Audit function, the head of which reports to the Board and to the head of the Internal Audit function of Nokia. The Board shall receive a report on internal audit activities and pending internal investigations from the head of the Internal Audit Function at least once in a quarter. The Board will annually review the organization, responsibilities and staffing of the Internal Audit Function. Director compensation It is the Group’s policy that other than the Chairman, the directors will not receive any separate compensation for the services they provide as members of the Board of Directors. Senior management team Our operative management body is the senior management team known as the Executive Board of Nokia Siemens Networks B.V. The following table sets forth the names, ages and positions of members of our senior management team. Membership of the senior management team Name Age Title Rajeev Suri 45 Chief Executive Officer Samih Elhage 51 Chief Financial Officer Deepti Arora 53 Vice President Quality Kathrin Buvac 32 Vice President Corporate Strategy and CEO Office Hans-Jürgen Bill 52 Executive Vice President Human Resources Ashish Chowdhary 47 Executive Vice President/ President Asia, Middle East and Africa Barry French 49 Executive Vice President Marketing, Communications and Corporate Affairs Alexander Matuschka 42 Chief Restructuring Officer Hossein Moiin 49 Executive Vice President Technology and Innovation Marc Rouanne 49 Executive Vice President Mobile Broadband Rene Svendsen-Tune 57 Executive Vice President/ President Europe and Latin America How the senior management team operates The senior management team is chaired by the Chief Executive Officer, and meets on a monthly basis. Responsibilities of the senior management team The senior management team reports to the Chief Executive Officer, who leads all matters relating to corporate governance, including audit and compensation matters. It drives Nokia Siemens Networks’ strategic agenda and decides on cross-company matters such as governance, the Group’s annual plan, large-scale capex approvals, acquisitions and divestitures, large-scale credits and risks, people matters, and executive appointments. These are areas where Nokia Siemens Networks benefits from the diverse views and deliberation of all of the senior management team. Annual Report 2012 57 Corporate Governance continued The Chief Executive Officer chairs four primary decision making bodies: 1. The senior management team itself, known as the Executive Board, which drives Nokia Siemens Networks’ strategic agenda, sets long-term targets and makes company-wide policy decisions. The Executive Board is also responsible for monitoring market developments, fostering innovation, overseeing quality improvements, developing talent, shaping our values and culture, and change management. 2. The Executive Management Team sets Nokia Siemens Networks’ three-year financial plan and annual budget, manages financial performance, and makes day-to-day operational decisions as well as decisions relating to investments and product portfolio. The Executive Management Team also focuses on near-term performance management and forecasts, enforcement of policies and targets, and regional and business unit plans, goals and strategies. The Executive Management Team was established in the first quarter of 2013 and assumes the responsibilities and decision-making scope of the former group of executive officers comprised of the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. 3. The Business Transformation Board is focused on both completing our restructuring as well as the structural changes needed to continue to move Nokia Siemens Networks to becoming a true leader. Areas covered will include Research and Development (R&D) efficiency, product competitiveness, sales acceleration, operations optimization, services transformation, financial backbone and CFO processes, the continuation of our restructuring, and various new interlock processes around procurement, operations business units and CO. 4. The Pricing Committee sets the process and policy for pricing decisions, and leads the commercial decision-making for major deals. This committee ensures appropriate transparency and scrutiny of key financial metrics, including profitability, project assets, and cash flow. The Chief Financial Officer chairs the Monthly Business Reviews, our primary vehicle for tracking unit-level performance against our strategy and annual plan. 16 + 17 58 A short biography for each of the members of our senior management team can be found on pages 16 and 17. Nokia Siemens Networks Management compensation The remuneration of the Nokia Siemens Networks’ senior management team and the Chairman of the Board of Directors was as follows: EURm 2012 2011 2010 Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payment (income)/expense 20.5 1.0 – 1.3 4.0 9.4 0.7 5.2 0.6 (0.1) 7.6 0.5 4.8 – (0.1) Total 26.8 15.8 12.8 The number of senior management team members ranged from 13 to 15 members during the year (13 to 14 members in 2011 and 12 to 14 members in 2010). The amounts presented above include remuneration to the Executive Board members only for the time they were on the senior management team. In addition to the senior management team members, the remuneration to the Chairman of the Board of Directors is included in the amounts presented above, since October 2011. There were no loans granted to the members of the senior management team at December 31, 2012. Employees The Board of Nokia Siemens Networks recognizes that its employees are key to its success and is committed to creating a working environment where everyone has the opportunity to learn, develop and contribute to the success of the business, working within a common set of values. At December 31, 2012, we had 58 411 employees (73 686 employees in 2011 and 66 160 employees in 2010), with the decrease in headcount primarily due to our restructuring activities. The number of personnel at December 31, 2012, divided according to geographical location is as follows: 2012 North East Europe 1 West Europe 2 South East Europe Africa 8 354 10 190 4 615 1 478 Europe & Africa 24 637 Middle East Greater China Japan India APAC 1 737 8 224 689 10 192 2 773 Asia & Middle East 23 615 North America Latin America 3 045 7 114 Americas 10 159 Total 58 411 NE including Finland. WE including Germany. 1 2 Compliance program We have adopted compliance programs that foster a culture with high ethical and integrity standards. We are committed to actively combating improper business practices, including corruption, and believe that as a multinational company we can play an important role in this area. We also believe that our efforts in this area can provide us with a competitive advantage with customers who demand high ethical standards in their supply chain. We address improper business practices using a four-step strategy: – Prevention: raise awareness through clear policies and training of employees; – Detection: encourage people (internally and externally) to report any concerns or suspected cases of improper conduct by providing clear reporting channels and an anonymous whistleblowing mechanism, and develop tools to identify potential issues, for example by detecting anomalies in expense claims; – Correction: investigate all reported concerns and take appropriate action when cases of corruption are confirmed, for example, through training or clarification of policies, disciplinary actions and if necessary dismissal; and – Interaction: collaborate with others in the industry, including competitors, customers and suppliers, to promote adoption of high ethical standards industry-wide. Our Code of Conduct defines the boundaries between appropriate and inappropriate business behavior. According to the Code of Conduct, our employees must not engage in activities that may lead to conflicts of interest, such as any agreement or understanding regarding gifts, hospitality, favors, benefits, or bribes, in exchange for gaining or maintaining business. The Code of Conduct is supported by the Group’s anti-corruption compliance program, which includes among other things, a detailed handbook, training, and several reporting/ helplines available for employees and external workers. Each year there is a mandatory ethical business training program for our employees focused on compliance issues. In 2012, 89.7% of our employees completed the training. Government regulation Our business is subject to direct and indirect regulation in each of the countries in which we, the companies with which we work and our customers do business. As a result, changes in or uncertainties related to various types of regulations applicable to current or new technologies, products and services could affect our business adversely. Moreover, the implementation of technological or legal requirements could impact our products and services, manufacturing and distribution processes, and could affect the timing of product and services introductions, the cost of our production, products and services, as well as their commercial success. Also, our business is subject to the impacts of changes in trade policies or regulation favoring the local industry participants, as well as other measures with potentially protectionist objectives that the host governments in different countries may take. Export control, tariffs or other fees or levies imposed on our products and services as well as environmental, product safety and security and other regulations that adversely affect the export, import, pricing or costs of our products and services could adversely affect our net sales and results of operations. For example, in the USA, our products and services are subject to a wide range of government regulations that might have a direct impact on our business, including, but not limited to, regulation related to product certification, standards, spectrum management, consumer privacy, competition and sustainability. In the European Union the EU level or local member state regulation has in many areas a direct impact on our business and customers. The European regulation influences for example conditions for innovation for multifunctional devices and services, as well as investment in fixed and wireless broadband communication infrastructure. In China new partly local 3G telecom standards have been enacted that may affect production processes and have impact on our business. Additionally, with respect to certain developing market countries for example in Asia and in Latin and South America the business environment we operate in can pose risks to our business due to unpredictable, discriminatory or protectionist regulation. Annual Report 2012 59 Corporate Governance continued We are in continuous dialogue with relevant state agencies, regulators and other decision makers through our experts, industry associations and our representatives in Washington, D.C., Brussels, Espoo, Berlin, Beijing, Delhi and Moscow and through our experts, industry associations and representatives in the regions of Middle East and Africa, Latin and South America and South-East Asia. Policy on suppliers We require a wide range of different components for production and have more than 4,000 suppliers. We generally prefer to have multiple sources for our components, but in certain cases we source some components from a single or small number of suppliers. We source components from a single or multiple suppliers depending on the availability of the component, purchasing price, and terms and conditions. Our business relationships with single suppliers typically involve a high degree of cooperation in R&D, product design, and manufacturing to ensure optimal product interoperability. We limit supply risk in relation to components for which we have a single or small number of suppliers by maintaining appropriate inventory levels. Our collaboration with suppliers has also proven effective in critical situations like the component shortages following the Japanese earthquake in 2011. In 2012, as part of our working capital initiative in connection with our restructuring program, we ramped up the inbound supply hubs to reduce factory inventories and increase inbound supplier delivery performance for our factories. Component supply and demand planning We have in place a demand and supply planning process that matches customer product demand and component supply plans. We share volume forecasts with the relevant suppliers and subsequently issue purchase orders to procure required components. Depending on the specific arrangement for individual suppliers and the respective lead times for the components they are supplying, forecasts may be used for purchasing components. Notwithstanding, we have a policy not to issue volume or other purchasing commitments to suppliers other than regular purchase orders. Health, safety and the environment Details of our approach to health and safety, and environment issues, appear within the Corporate responsibility report on pages 48 to 49. Auditor fees and services The independent auditor is elected annually by our shareholders at the Annual General Meeting. Audit fees are presented on page 125. Dividend policy and the Annual General Meeting The Annual General Meeting of Nokia Siemens Networks B.V. shall take place by June 30, 2013. Subject to applicable mandatory provisions of the laws in the Netherlands and approval at the Annual General Meeting, the parent companies have agreed a general dividend policy of an annual cash dividend at least equal to 50% of the Group’s consolidated net income for the financial years ending after December 31, 2008. This general policy may be deviated from in any year upon the joint decision of the parent companies. The Board of Directors proposes no dividend and no distribution of the cumulative reserves for the year ending December 31, 2012. Jesper Ovesen Chairman Forward-looking statements This report includes forward-looking statements. The words ‘should’, ‘could’, ‘continue’, ‘expect’, ‘target’, ‘estimate’, ‘may’, ‘plans’, ‘will’, ‘believe’, ‘anticipate’, ‘intend’, ‘predict’, ‘assume’, ‘positioned’, ‘shall’, ‘risk’ and other similar expressions that are predictions or indications of future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts, in particular but not limited to the statements in, A letter from our Chairman, Chief Executive Officer’s strategic review, Our strategy and transformation, Industry trends, the Operating and Financial Review and Risk factors, are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company, and such statements may constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Group, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among other things, general economic and business conditions, the competitive environment, the ability to employ competent personnel, market development relating to the sector and other risks described in Risk factors. The forward-looking statements are not guarantees of the future operational or financial performance of the Group. 60 Nokia Siemens Networks Financial statements Consolidated Financial Statements 2012 62 Consolidated Income Statement 63 Consolidated Statement of Comprehensive Income 64 Consolidated Statement of Financial Position 65 Consolidated Statement of Cash Flows 66 Consolidated Statement of Changes in Shareholders’ Equity 67 Notes to the Consolidated Financial Statements Company Financial Statements 2012 118 Company Statement of Financial Position 119 Company Income Statement 120 Notes to the Company Financial Statements Other Information 127 Proposed profit appropriation 127 Proposed appropriation of result 127 Subsequent events 128 Independent auditor’s report 129Glossary Annual Report 2012 61 Consolidated Financial Statements Consolidated Income Statement 2012 Notes Before specific items Specific items EURm EURm 3, 4 5, 10, 18 13 372 (9 264) – (653) Gross profit Research and development expenses 5, 10 Selling and marketing expenses 5, 10 Administrative and general expenses 5, 10 Other income 7 Other expenses 7, 9, 20, 31 4 108 (1 908) (885) (453) 105 (145) (653) (208) (382) (242) – (78) 822 (1 563) 2011 2010 Before specific items Specific items EURm EURm EURm 13 372 (9 917) 13 645 (9 886) – (51) 3 455 (2 116) (1 267) (695) 105 (223) 3 759 (1 969) (990) (497) 92 (60) (51) (107) (330) (37) – (19) (741) 8 15 (123) (199) 335 (544) 15, 33 11 11 11 12 (1 040) (342) (377) (234) (867) (164) (1 382) (611) (1 031) (63) (87) (58) Loss for the year (1 445) (698) (1 089) Attributable to: Equity holders of the parent Non-controlling interests (1 463) 18 (710) 12 (1 090) 1 (1 445) (698) (1 089) For the year ended December 31 Net sales Cost of sales Operating profit/(loss) Share of results of associates Financial income Financial expenses Other financial results Loss before tax Income tax expense Loss for the year from continuing operations Discontinued operations Loss for the year from discontinued operations 31 For an analysis of specific items, refer to Note 2, Specific items. The notes are an integral part of these consolidated financial statements. 62 Nokia Siemens Networks Total Before specific items Specific items EURm EURm EURm 13 645 (9 937) 12 206 (8 767) – (174) 12 206 (8 941) 3 708 (2 076) (1 320) (534) 92 (79) 3 439 (1 804) (992) (459) 97 (115) (174) (212) (307) (76) – (27) 3 265 (2 016) (1 299) (535) 97 (142) (209) (17) 15 (108) (58) 166 (796) (630) 11 14 (157) (105) Total Total EURm Consolidated Financial Statements Consolidated Statement of Comprehensive Income For the year ended December 31 Loss for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Translation differences Cash flow hedges Available-for-sale investments Share of other comprehensive income of associates Other increase Income tax related to components of other comprehensive income Notes 2012 2011 EURm EURm 2010 EURm (1 445) (698) (1 089) (6) 94 – 4 – – 47 17 (1) (2) 1 3 88 (99) – – 2 17 92 65 8 Total comprehensive loss for the year (1 353) (633) (1 081) Attributable to: Equity holders of the parent Non-controlling interests (1 372) 19 (652) 19 (1 097) 16 Total comprehensive loss for the year (1 353) (633) (1 081) Total comprehensive loss attributable to equity shareholders arises from: Continuing operations Discontinued operations (1 309) (63) (565) (87) (1 039) (58) (1 372) (652) (1 097) Other comprehensive income for the year, net of tax 21 22 22 15, 21 21, 22 The notes are an integral part of these consolidated financial statements. Annual Report 2012 63 Consolidated Financial Statements Consolidated Statement of Financial Position December 31 2012 2011 EURm EURm 182 387 509 31 470 63 29 173 699 641 28 587 85 23 1 671 2 236 18 16, 20, 32, 34 19 16, 34 16, 17, 34 16, 34 16, 34 984 4 111 879 37 165 2 2 418 1 275 5 215 1 051 54 61 13 1 613 31 8 596 143 9 282 57 10 410 11 575 0 9 744 133 75 (7 626) 0 9 744 136 (19) (6 163) Non-controlling interests 2 326 126 3 698 116 Total equity 2 452 3 814 821 29 303 118 366 32 106 125 1 271 629 ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments in associates and other companies Deferred tax assets Long-term loans receivable Available-for-sale investments Current assets Inventories Accounts receivable, net of allowances for doubtful accounts Prepaid expenses and accrued income Current portion of long-term loans receivable Other financial assets Available-for-sale investments, liquid assets Cash and cash equivalents Assets of disposal groups classified as held for sale Notes 8, 9, 13 13 14 15 26 16, 34 16 Total assets EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital Share premium Translation differences Fair value and other reserves Accumulated deficit Non-current liabilities Long-term interest-bearing liabilities Deferred tax liabilities Provisions Other long-term liabilities 23 23 21 22 16, 24, 34 26 28 6 Current liabilities Current portion of long-term interest-bearing liabilities Short-term borrowings Other financial liabilities Accounts payable Accrued expenses Provisions 16, 24, 32, 34 16, 24, 32, 34 16, 17, 34 16, 32, 34 25, 27 28 195 124 26 2 352 3 184 716 357 888 97 2 209 2 985 435 Liabilities of disposal groups classified as held for sale 31 6 597 90 6 971 161 7 958 7 761 10 410 11 575 Total liabilities Total equity and liabilities The notes are an integral part of these consolidated financial statements. 64 Nokia Siemens Networks Consolidated Financial Statements Consolidated Statement of Cash Flows For the year ended December 31 2012 2011 2010 EURm EURm EURm (1 445) (698) (1 089) 1 162 587 347 307 64 57 711 239 151 28 140 843 170 248 31 51 87 (10) 86 18 44 1 160 564 405 776 198 11 528 (44) (468) 852 (209) (415) Cash from operations Interest received Interest paid Other financial income and expenses, net (paid)/received Income taxes paid 2 145 11 (134) (136) (258) 580 9 (104) 30 (191) 633 5 (102) (329) (204) Net cash from operating activities 1 628 324 3 64 – 10 – – (216) (125) 6 (781) – 2 (9) 82 (303) (4) 24 (5) (4) 22 (6) 46 (306) (21) 30 (261) (989) (244) – 1 (264) (244) (13) 1 000 – (48) 232 (29) 15 414 (5) 229 (12) Net cash (used in)/from financing activities (520) 1 155 641 Foreign exchange adjustments Net increase in cash and cash equivalents (42) 805 (75) 415 38 438 Cash and cash equivalents at beginning of year 1 613 1 198 760 Cash and cash equivalents at end of year 2 418 1 613 1 198 1 712 706 729 884 757 441 2 418 1 613 1 198 Cash flows from operating activities Loss for the year Adjusted for: Restructuring and other specific items (Note 2)1 Depreciation and amortization (Note 10) Income taxes (Notes 12 & 31) Financial income and expenses (Note 11) Transfer from hedging reserve to sales and cost of sales (Note 22) Profit/(Loss) on sale of property, plant and equipment, businesses and Group companies Other adjustments Change in net working capital: Decrease in current receivables Decrease/(increase) in inventories Increase/(decrease) in interest-free liabilities2 Cash flows from investing activities Acquisition of Group companies, net of acquired cash Purchase of shares in associates Proceeds from current available-for-sale investments, liquid assets Purchase of non-current available-for-sale investments Proceeds from short-term and other long-term loans receivable Purchases of property, plant and equipment, and intangible assets Payments for disposal of businesses (Note 8) and Group companies Proceeds from sale of property, plant and equipment, and intangible assets Notes 33 33 33 8 Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of cumulative preferred shares Proceeds from long-term interest-bearing liabilities Repayment of long-term interest-bearing liabilities (Repayments of)/proceeds from short-term borrowings Dividends paid to non-controlling interests Cash and cash equivalents comprise: Bank and cash Current available-for-sale investments, cash equivalents 23 24, 34 16, 34 Excludes PPA related charges, divestment results and impairments which are presented in other line items in the above adjustments section or in Note 33, Notes to the consolidated statement of cash flows. 2 Includes changes in the following line items in the statement of financial position: accounts payable, accrued expenses, provisions and other short-term liabilities. 1 In 2010, EUR 1 500 million loans and capitalized interest of EUR 32 million from the Group’s parent companies were converted into preferred shares in Nokia Siemens Networks B.V. This is the only material non-cash transaction in all three periods presented. The figures in the consolidated statement of cash flows cannot be directly traced from the statement of financial position without additional information as a result of acquisitions and disposals of subsidiaries and net foreign exchange differences arising on consolidation. The notes are an integral part of these consolidated financial statements. Annual Report 2012 65 Consolidated Financial Statements Consolidated Statement of Changes in Shareholders’ Equity Attributable to owners of the parent EURm Notes Balance at January 1, 2010 (Loss)/profit Other comprehensive income Cash flow hedges, net of tax Currency translation differences, net of tax Other increase, net of tax Total comprehensive income/ (expense) for the year Cumulative preference shares issued Dividend Additional parent contribution Changes in ownership interests in subsidiaries Number of ordinary shares Fair value Before Number of and AccunonNoncumulative Ordinary Share Translation other mulated controlling controlling preference share deficit interests interests shares capital1 premium differences reserves 100 073 0 0 7 194 22 23 300 119 3 094 1 (1 089) (85) (85) (1 088) (85) (78) (75) 98 (38) (5 454) 3 350 (710) (710) 15 3 100 073 300 0 8 744 20 (1) 40 (2) 1 38 200 (1 097) 1 532 – 15 19 0 9 744 136 Ordinary share capital comprises EUR 400 thousand of ordinary shares of the Group. 1 The notes are an integral part of these consolidated financial statements. 9 744 (698) 20 (1) 7 47 (2) 1 116 3 814 (1 463) (1 463) 18 (1 445) 94 – 94 – (7) – 0 12 3 698 4 500 (83) (19) (6 163) (7) 100 073 (8) 95 3 445 (652) 1 000 – 94 Total comprehensive (expense)/ income for the year Dividend 16 (1 081) 1 532 (32) (32) 15 (2) 1 – 500 91 2 (709) 1 000 8 100 073 15 20 (1) 40 23 76 2 76 1 532 (Loss)/profit Other comprehensive income Cash flow hedges, net of tax 22 Available-for-sale investments, net of tax 22 Currency translation differences, net of tax 21 Share of other comprehensive income of associates 15, 21 Other decrease, net of tax Nokia Siemens Networks 2 975 (1 090) 2 Balance at December 31, 2011 66 (4 288) (1 090) 76 (Loss)/profit Other comprehensive income Cash flow hedges, net of tax 22 Available-for-sale investments, net of tax 22 Currency translation differences, net of tax 21 Share of other comprehensive income of associates 15, 21 Other increase, net of tax Balance at December 31, 2012 47 (85) 21 Balance at December 31, 2010 Total comprehensive income/ (expense) for the year Cumulative preference shares issued Dividend Acquisitions and other changes in non-controlling interests 22 Total 19 (633) 1 000 (15) (15) 17 1 17 (6) 4 – 4 – (3) 94 (1 463) (1 372) – 19 (1 353) (9) (9) 133 75 (7 626) 2 326 126 2 452 Notes to the Consolidated Financial Statements 1 Accounting principles General Nokia Siemens Networks B.V., a limited liability company incorporated and domiciled in The Hague, the Netherlands, is the ‘holding company’ for all its subsidiaries (‘Nokia Siemens Networks’ or ‘the Group’). The Group’s operational headquarters are in Espoo, Finland. The Group is a leading global provider of telecommunications infrastructure, with a focus on the mobile broadband market. Basis of presentation The consolidated financial statements of Nokia Siemens Networks are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’) and in conformity with IFRS as adopted by the European Union (‘IFRS’). The consolidated financial statements are presented in millions of euro (‘EURm’), except as otherwise noted, and are prepared under the historical cost convention, except as disclosed in the accounting policies below. The Group commenced operations on April 1, 2007 upon the contribution of certain tangible and intangible assets and certain business interests that comprised Nokia Corporation’s (‘Nokia’) networks business and Siemens Aktiengesellschaft (‘Siemens’) carrier-related operations. Nokia and Siemens (the ‘parent companies’) each own approximately 50% of Nokia Siemens Networks. Nokia is incorporated in Espoo, Finland and Siemens is incorporated in Munich, Germany. Nokia has the ability to appoint the Chief Executive Officer (‘CEO’) of the Group and the majority of the members of the Board of Directors. Accordingly, for accounting purposes, Nokia is deemed to have control and thus consolidates the results of Nokia Siemens Networks in its financial statements. Siemens accounts for its ownership using the equity method of accounting. On March 17, 2013 the Board of Directors of Nokia Siemens Networks B.V. authorized the financial statements for issuance. This paragraph is included in connection with statutory reporting requirements in the Netherlands. The company income statement of the Parent company is prepared in compliance with section 2:402 of the Netherlands Civil Code. This paragraph is included in connection with statutory reporting requirements in Germany. The fully consolidated German subsidiaries, Nokia Siemens Networks GmbH & Co. KG, registered in the commercial register of Munich under HRA 88537 and Nokia Siemens Networks Services GmbH & Co. KG, registered in the commercial register of Munich under HRA 90646 have made use of the exemption available under § 264b of the German Commercial Code (HGB). Adoption of pronouncements under IFRS In the current year, the Group has adopted the following new and revised standards, and amendments and interpretations to existing standards issued by the IASB that are relevant to its operations and effective for accounting periods commencing on or after January 1, 2012: –Amendments to IAS 1, Presentation of Financial Statements, retains the one or two statement approach at the option of the entity and only revises the way other comprehensive income is presented; separate subtotals are required for those elements which may be recycled and those elements that will not be recycled. –Amendments to IAS 12, Income Taxes, provides clarification for the measurement of deferred taxes in situations where an asset is measured using the fair value model in IAS 40, Investment Property, by introducing a presumption that the carrying amount of the underlying asset will be recovered through sale. In addition, a number of other amendments that form part of the IASB’s annual improvement project were adopted by the Group. The adoption of each of the above amendments did not have a material impact on the consolidated financial statements. Principles of consolidation The consolidated financial statements include the accounts of Nokia Siemens Networks B.V. as the parent company (‘the Parent’), and each of those companies over which the Group exercises control. Control over an entity exists when the Group owns, directly or indirectly through subsidiaries, more than 50% of the voting rights of the entity, the Group has the power to govern the operating and financial policies of the entity through agreement or the Group has the power to appoint or remove the majority of the members of the board of directors of the entity. The Group’s share of profits and losses of associates is included in the consolidated comprehensive income statement in accordance with the equity method of accounting. After the carrying amount of the investor’s interest is reduced to nil, losses continue to be recognized, when it is considered that a constructive obligation exists. An associate is an entity over which the Group exercises significant influence. Significant influence exists when the Group owns, directly or indirectly through subsidiaries, more than 20% of the voting rights of the company. If the Group owns, directly or indirectly through subsidiaries, less than 20% of the voting rights of the company, it is presumed that the Group does not have significant influence, unless such influence can be clearly demonstrated. All intercompany transactions are eliminated as part of the consolidation process. Non-controlling interests are presented separately as a component of net profit and are shown as a component of shareholders’ equity in the consolidated statement of financial position. The entities or businesses acquired during the financial periods presented have been consolidated from the date on which control of the net assets and operations was transferred to the Group. Similarly, the results of Group entities or businesses divested during an accounting period are included in the Group consolidated financial statements only to the date of disposal. Annual Report 2012 67 Notes to the Consolidated Financial Statements Business combinations The acquisition method of accounting is used to account for acquisitions of separate entities or businesses by the Group. The consideration transferred in a business combination is measured as the aggregate of the fair values of the assets transferred, liabilities incurred towards the former owners of the acquired business and equity instruments issued. Acquisition-related costs are recognized as expenses in the income statement in the period in which the costs are incurred and the related services are received. Identifiable assets acquired and liabilities assumed by the Group are measured separately at their fair value at the acquisition date. Non-controlling interests in the acquired business are measured separately at fair value or at the non-controlling interests’ proportionate share of the identifiable net assets of the acquired business. The excess of the aggregate consideration transferred over the acquisition date fair values of the identifiable net assets acquired is recorded as goodwill. Non-current assets and disposal groups held for sale Non-current assets and disposal groups are classified as held for sale when the carrying amount is expected to be recovered principally through a sale transaction rather than through continuing use. These assets, or in the case of disposal groups, assets and liabilities, are presented separately in the consolidated statement of financial position and measured at the lower of the carrying amount and fair value less costs to sell. Non-current assets classified as held for sale, or included in a disposal group that is classified as held for sale, are not depreciated. Assessment of the recoverability of long-lived assets, intangible assets and goodwill For purposes of impairment testing, goodwill has been allocated to each of the cash-generating units or groups of cash-generating units (‘CGUs’), expected to benefit from the synergies of the combination. The Group assesses the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying value of identifiable intangible assets and long-lived assets is assessed if events or changes in circumstances indicate that such carrying value may not be recoverable. Factors that trigger an impairment review include, but are not limited to, underperformance relative to historical or projected future results, significant changes in the manner of the use of the acquired assets or the strategy for the overall business and significant negative industry or economic trends. The Group conducts its impairment testing by determining the recoverable amount for the asset or cash-generating unit. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value-in-use. The recoverable amount is then compared to the asset’s carrying amount and an impairment loss is recognized if the recoverable amount is less than the carrying amount. Impairment losses are recognized immediately in the income statement. 68 Nokia Siemens Networks Disposals of separate entities or businesses If upon disposal, the Group loses control of a separate entity or business, it records a gain or loss on disposal at the date when control is lost. The gain or loss on disposal is calculated as the difference between the fair value of the consideration received and the carrying amounts of derecognized assets (including any goodwill) and liabilities of the disposed entity or business, and the carrying amount of any non-controlling interest in the entity, adjusted by amounts recognized in other comprehensive income in relation to that entity or business. Segment information Operating segments have been determined by reference to the internal reporting information provided to the chief operating decision-maker, who is responsible for allocating resources and assessing the performance of the operating segments. In 2012, the chief operating decision-maker was a group of executive officers comprising the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. Foreign currency translation Functional and presentation currency The financial statements of the majority of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in euro, which is the functional and presentation currency of the Parent. Transactions in foreign currencies Transactions in foreign currencies are recorded at the rates of exchange prevailing at the dates of the individual transactions. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used. At the end of an accounting period, the unsettled balances on foreign currency monetary assets and liabilities are valued at the rates of exchange prevailing at the end of the accounting period. Foreign exchange gains and losses arising from statement of financial position items and the fair value changes in the related hedging instruments are reported in financial income and expenses. For non-current available-for-sale investments, such as shares, the unrealized foreign exchange gains and losses are recognized in other comprehensive income. Foreign group companies In the consolidated financial statements, all income and expenses of foreign group companies, where the functional currency is other than euro, are translated into euro at the average foreign exchange rates for the accounting period. All assets and liabilities of foreign group companies are translated into euro at the foreign exchange rates at the end of the accounting period. Differences resulting from the translation of income and expenses at the average rate and assets and liabilities at the closing rate are recognized as translation differences in other comprehensive income. On the disposal of all or part of a foreign group company by sale, liquidation, repayment of share capital or abandonment, the cumulative amount or proportionate share of the translation difference is recognized as income or expense in the same period in which the gain or loss on disposal is recognized. Notes to the Consolidated Financial Statements Foreign group companies in hyperinflationary economies The financial statements of foreign group companies, where the functional currency is the currency of a hyperinflationary economy, are adjusted to reflect changes in general purchasing power. In such instances, non-monetary items in the statement of financial position and all items in the income statement should be expressed in terms of the measuring unit current at the end of the accounting period. These items are restated through the application of a general price index. The comparatives, which were presented as current year amounts in the prior-year financial statements in a stable currency (i.e. not a currency of a hyperinflationary economy), are not restated. After the financial statements have been restated in the current purchasing power, all amounts for the current period are then translated into the stable currency at the closing rate for inclusion in the consolidated financial statements. Inflationary gains and losses on the net monetary position are recognized as gains and losses in the income statement. Revenue recognition The majority of the Group’s sales are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. The Group accounts for special pricing agreements and other volume-based discounts as a reduction in revenue. Service revenue, which typically includes managed services and maintenance services, is generally recognized on a straight-line basis over the specified period unless there is evidence that some other method better represents the rendering of services. The Group enters into transactions involving multiple components consisting of any combination of hardware, services and software. The commercial effect of each separately identifiable component of the transaction is evaluated in order to reflect the substance of the transaction. Revenue is allocated to each component based on its relative fair value. The Group determines the fair value of each component by taking into consideration factors such as the price when the component, or a similar component is sold separately by the Group or a third party. The revenue allocated to each component is recognized when the revenue recognition criteria for that component have been met. In addition, sales from contracts involving solutions achieved through the modification of complex telecommunications equipment are recognized using the percentage of completion method when the outcome of the contract can be estimated reliably. A contract’s outcome can be estimated reliably when total contract revenue and the costs to complete the contract can be estimated reliably, it is probable that the economic benefits associated with the contract will flow to the Group and the stage of contract completion can be measured reliably. When the Group is not able to meet one or more of those conditions, the policy is to recognize revenue only equal to costs incurred to date, to the extent that such costs are expected to be recovered. Progress towards completion is measured by reference to cost incurred to date as a percentage of estimated total project costs, using the cost-to-cost method. The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as dependable measurement of the progress made towards completing a particular project. Recognized revenues and profits are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. The cumulative impact of a revision in estimates is recorded in the period such revisions become probable and can be estimated reliably. Losses on projects in progress are recognized in the period they become probable and can be estimated reliably. Shipping and handling costs The costs of shipping and distributing products are included in cost of sales. Research and development Research and development costs are expensed as incurred, except for certain development costs, which are capitalized when it is probable that a development project will generate future economic benefits and certain criteria, including commercial and technological feasibility, have been met. Capitalized development costs, comprising direct labor and related overhead, are amortized on a systematic basis over their expected useful lives of between two and five years. Capitalized development costs are subject to regular assessments of recoverability based on anticipated future revenues, including the impact of changes in technology. Unamortized capitalized development costs determined to be in excess of their recoverable amounts are expensed immediately. Other intangible assets Acquired patents, trademarks, licenses, software licenses for internal use, customer relationships and developed technology are capitalized and amortized using the straight-line method over their useful lives, generally three to seven years. Where an indication of impairment exists, the carrying amount of the related intangible asset is assessed for recoverability. Any resulting impairment losses are recognized immediately in the income statement. Employee benefits Pensions The Group companies have various pension schemes in accordance with the local conditions and practices in the countries in which they operate. The schemes are generally funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations. In a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. The Group’s contributions to defined contribution plans are recognized in the income statement in the period to which the contributions relate. All arrangements that do not fulfill these conditions are considered defined benefit plans. Annual Report 2012 69 Notes to the Consolidated Financial Statements For defined benefit plans, pension costs are assessed using the projected unit credit method: the pension cost is recognized in the income statement so as to spread the service cost over the service lives of employees. The pension obligation is measured as the present value of the estimated future cash outflows using interest rates on high quality corporate bonds or government bonds with appropriate maturities. Actuarial gains and losses outside the corridor are recognized over the average remaining service lives of employees. The corridor is defined as 10% of the greater of the value of plan assets and defined benefit obligation at the beginning of the respective year. Past service costs are recognized immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. The liability (or asset) recognized in the statement of financial position is the pension obligation at the closing date less the fair value of plan assets, the share of unrecognized actuarial gains and losses and past service costs. Any net pension asset is limited to unrecognized actuarial losses, past service cost, the present value of available refunds from the plan and expected reductions in future contributions to the plan. Actuarial valuations for the Group’s defined benefit pension plans are performed annually. In addition, actuarial valuations are performed when a material curtailment or settlement of a defined benefit plan occurs in the Group. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the expected useful lives of the assets as follows: Buildings and constructions Industrial and office buildings Light buildings and constructions 20 – 33 years 3 – 20 years Machinery and equipment Production machinery, measuring and test equipment Other machinery and equipment 1 – 5 years 3 – 10 years Land and water areas are not depreciated. 70 Nokia Siemens Networks Maintenance, repairs and renewals are generally expensed in the period in which they are incurred. However, major renovations are capitalized and included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. Leasehold improvements are depreciated over the shorter of the lease term or useful life. Gains and losses on the disposal of property, plant and equipment are included in operating profit or loss. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group has entered into various operating lease contracts. The related payments are treated as rental expenses and recognized in the income statement on a straight-line basis over the lease terms unless another systematic approach is more representative of the time pattern of the Group’s benefit. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using standard cost, which approximates actual cost on a FIFO (first-in, first-out) basis. Net realizable value is the amount that can be realized from the sale of the inventory in the normal course of business after allowing for the costs of realization. In addition to the cost of materials and direct labor, an appropriate proportion of production overhead is included in the inventory values. An allowance is recorded for excess inventory and obsolescence based on the lower of cost and net realizable value. Financial assets The Group has classified its financial assets as one of the following categories: available-for-sale investments, derivative and other current financial assets, loans receivable, accounts receivable or cash and cash equivalents. Derivatives are described below in the section on Derivative financial instruments. Derivatives and other current financial assets are presented in Note 16, Fair value of financial instruments. Available-for-sale investments The Group invests a portion of cash needed to cover the projected cash needs of its ongoing operations in highly liquid, interest-bearing investments. The following investments are classified as availablefor-sale based on the purpose for acquiring the investments and the Group’s ongoing intentions: (1) Highly liquid, fixed income and money-market investments that are readily convertible to known amounts of cash with maturities at acquisition of three months or less, which are included in cash and cash equivalents in the statement of financial position. Due to the high credit quality and short-term nature of these investments there is an insignificant risk of changes in value. (2) Similar types of investments as in category (1), but with maturities at acquisition of longer than three months, classified in the statement of financial position as current availablefor-sale investments, liquid assets. (3) Investments in technology related publicly quoted equity shares, or unlisted private equity shares and unlisted funds, are classified in the statement of financial position as non-current available-for-sale investments. Notes to the Consolidated Financial Statements Current fixed income and money-market investments are fair valued by using quoted market rates, discounted cash flow analyses and other appropriate valuation models at the statement of financial position date. Investments in publicly quoted equity shares are measured at fair value using exchange quoted bid prices. Other available-for-sale investments carried at fair value include holdings in unlisted shares. Fair value is estimated by using various factors, including, but not limited to: (1) the current market value of similar instruments, (2) prices established from a recent arm’s length financing transaction of the target companies, (3) analysis of market prospects and operating performance of the target companies taking into consideration public market comparable companies in similar industry sectors. The remaining available-for-sale investments, which are technology-related investments in private equity shares and unlisted funds for which the fair value cannot be measured reliably due to non-existence of public markets or reliable valuation methods against which to value these assets, are carried at cost less impairment. All purchases and sales of investments are recorded on the trade date, which is the date that the Group commits to purchase or sell the asset. The fair value changes of available-for-sale investments are recognized in fair value and other reserves as part of other comprehensive income, with the exception of interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognized directly in the income statement. Dividends on available-for-sale equity instruments are recognized in the consolidated income statement when the Group’s right to receive payment is established. When the investment is disposed of, the related accumulated fair value changes are released from other comprehensive income and recognized in the income statement. The weighted average method is used when determining the cost basis of publicly listed equities being disposed of by the Group. The FIFO method is used to determine the cost basis of fixed income securities being disposed of by the Group. An impairment is recorded when the carrying amount of an available-for-sale investment is greater than the estimated fair value and there is objective evidence that the asset is impaired. The cumulative net loss relating to that investment is removed from equity and recognized in the income statement for the period. If, in a subsequent period, the fair value of the investment in a non-equity instrument increases and the increase can be objectively related to an event occurring after the loss was recognized, the loss is reversed, with the amount of the reversal included in the income statement. Loans receivable Loans receivable include loans to customers and are measured initially at fair value and subsequently at amortized cost less impairment using the effective interest method. Loans are subject to regular review as to their collectability and available collateral. In the case that a loan is deemed not fully recoverable, a provision is made, and included in other operating expenses to reflect the shortfall between the carrying amount and the present value of the expected cash flows. Interest income on loans receivable is recognized in the income statement in other income or financial income depending on the nature of the receivable by applying the effective interest rate. The long-term portion of loans receivable is included in the statement of financial position in long-term loans receivable and the current portion in current portion of long-term loans receivable. Accounts receivable Accounts receivable include both amounts invoiced to customers and amounts where the Group’s revenue recognition criteria have been fulfilled but the customers have not yet been invoiced. Accounts receivable are carried at amortized cost using the effective interest rate method less allowances for doubtful accounts. Allowances for doubtful accounts are based on a periodic review of all outstanding amounts, including an analysis of historical bad debt, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms. Bad debts are written off when identified as uncollectible and are included in other expenses. The Group derecognizes an accounts receivable balance only when the contractual rights to the cash flows from the asset expire or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. Cash and cash equivalents Bank and cash consist of cash at bank and in hand. Cash equivalents consist of highly liquid available-for-sale investments purchased with remaining maturities at the date of acquisition of three months or less. Financial liabilities Loans payable Loans payable are recognized initially at fair value, net of transaction costs incurred. In subsequent periods, loans are stated at amortized cost using the effective interest method. The long-term portion of loans payable is included in the statement of financial position in long-term interest-bearing liabilities and the current portion in the current portion of long-term interest-bearing liabilities. Interest costs are recognized in the income statement as financial expenses in the period in which they are incurred. Accounts payable Accounts payable are carried at the original invoiced amount which is considered to be fair value due to the short-term nature of the Group’s accounts payable. Derivative financial instruments All derivatives are recognized initially at fair value on the date a derivative contract is entered into and are subsequently remeasured at fair value. The method of recognizing the resulting gain or loss varies according to whether the derivatives are designated and qualify under hedge accounting. Generally the cash flows of a hedge are classified as cash flows from operating activities in the consolidated statement of cash flows as the underlying hedged items relate to the Group’s operating activities. When a derivative contract is accounted for as a hedge of an identifiable position relating to financing or investing activities, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged. Annual Report 2012 71 Notes to the Consolidated Financial Statements Derivatives not designated in hedge accounting relationships carried at fair value through profit and loss Fair values of cash-settled equity derivatives are calculated based on quoted market rates at each statement of financial position date. Changes in fair value are recognized in the income statement. Fair values of forward rate agreements, interest rate options, futures contracts and exchange traded options are calculated based on quoted market rates at each statement of financial position date. Discounted cash flow analyses are used to value interest rate and currency swaps. Changes in the fair value of these contracts are recognized in the income statement. Forward foreign exchange contracts are valued at the market forward exchange rates. Changes in fair value are measured by comparing these rates with the original contract forward rate. Currency options are valued at each statement of financial position date by using the Garman & Kohlhagen option valuation model. Changes in the fair value of these instruments are recognized in the income statement. For derivatives not designated under hedge accounting but hedging identifiable exposures such as anticipated foreign currency denominated sales and purchases, the gains and losses are recognized in other income or expenses. The gains and losses on all other derivatives not designated under hedge accounting are recognized in financial income and expenses (refer to Note 11, Financial income and expenses). Embedded derivatives, if any, are identified and monitored by the Group and measured at fair value at each statement of financial position date with changes in fair value recognized in the income statement. Hedge accounting The Group uses hedge accounting in respect of certain forward foreign exchange contracts and options, or option strategies which have zero net premium or a net premium paid, and where the critical terms of the bought and sold options within a collar or zero premium structure are the same and where the nominal amount of the sold option component is no greater than that of the bought option. Cash flow hedges: Hedging of forecast foreign currency denominated sales and purchases The Group applies hedge accounting for ‘Qualifying hedges’. Qualifying hedges are those properly documented cash flow hedges of the foreign exchange rate risk of future forecast foreign currency denominated sales and purchases that meet the requirements set out in IAS 39, Financial Instruments: Recognition and Measurement. The hedged item must be ‘highly probable’ and must present an exposure to variations in cash flows that could ultimately affect profit or loss. The hedge must be highly effective, both prospectively and retrospectively. For qualifying foreign exchange forwards, the change in fair value that reflects the change in spot exchange rates is deferred in fair value and other reserves to the extent that the hedge is effective. For qualifying foreign exchange options or option strategies, the change in intrinsic value is deferred in fair value and other reserves to the extent that the hedge is effective. In all cases the ineffective portion is recognized immediately in the income statement in financial income and expenses (refer to Note 11, Financial income and expenses). Hedging costs, either expressed as the change in fair value that 72 Nokia Siemens Networks reflects the change in forward exchange rates less the change in spot exchange rates for forward foreign exchange contracts, or changes in the time value for options, or options strategies are recognized in other income or expenses. Accumulated fair value changes from qualifying hedges are released from fair value and other reserves into the income statement as adjustments to sales and cost of sales in the period when the hedged item affects the income statement. Forecast foreign currency sales and purchases affect profit and loss at various dates up to approximately 15 months from the statement of financial position. If the forecasted transaction is no longer expected to take place, all deferred gains or losses are released immediately into the income statement as adjustments to sales and cost of sales. If the hedged item ceases to be highly probable but is still expected to take place, accumulated gains and losses remain in equity until the hedged cash flow affects the income statement. Cash flow hedges: Hedging of foreign currency risk of highly probable business acquisitions The Group hedges the cash flow variability due to foreign currency risk inherent in highly probable business acquisitions that result in the recognition of non-financial assets. When those assets are recognized in the statement of financial position, the gains and losses previously deferred in fair value and other reserves are transferred from fair value and other reserves and included in the initial acquisition cost of the asset. In order to apply for hedge accounting, the forecasted transactions must be highly probable and the hedges must be highly effective prospectively and retrospectively. Cash flow hedges: Hedging of cash flow variability on variable rate liabilities The Group applies cash flow hedge accounting for hedging cash flow variability on certain variable rate liabilities. The effective portion of the gain or loss relating to interest rate swaps hedging variable rate borrowings is deferred in fair value and other reserves. The gain or loss relating to the ineffective portion is recognized immediately in the income statement in financial income and expenses (refer to Note 11, Financial income and expenses). For hedging instruments settled before the maturity date of the related liability, hedge accounting will immediately discontinue from that date onwards, with all the cumulative gains and losses on the hedging instruments recycled gradually to the income statement in financial income and expenses (refer to Note 11, Financial income and expenses) when the hedged variable interest cash flows affect the income statement. Income taxes The tax expense comprises current tax and deferred tax. Current taxes are based on the results of the Group companies and are calculated according to local tax rules. Tax is recognized in the income statement except to the extent that it relates to items recognized in other comprehensive income or directly in equity, then the tax is recognized in other comprehensive income or equity, respectively. Notes to the Consolidated Financial Statements Deferred tax assets and liabilities are determined, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the unused tax losses or deductible temporary differences can be utilized. When circumstances indicate it is no longer probable that deferred tax assets will be utilized, they are assessed for realizability and adjusted as necessary. Deferred tax liabilities are recognized for temporary differences that arise between the fair value and tax base of identifiable net assets acquired in business combinations. Deferred tax assets and deferred tax liabilities are offset for presentation purposes when there is a legally enforceable right to set off current tax assets against current tax liabilities, and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Project loss provisions The Group provides for onerous contracts based on the lower of the expected cost of fulfilling the contract and the expected cost of terminating the contract. The enacted or substantively enacted tax rates as of each statement of financial position date that are expected to apply in the period when the asset is realized or the liability is settled are used in the measurement of deferred tax assets and liabilities. Dividends Dividends are recognized in the consolidated financial statements of the Group when approved by the Board of Directors and by the Annual General Meeting of the Shareholders in accordance with the Articles of Association of Nokia Siemens Networks B.V. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. When the Group expects a provision to be reimbursed, the reimbursement is recognized as an asset only when the reimbursement is virtually certain. The Group assesses the adequacy of its existing provisions and adjusts the amounts as necessary based on actual experience and changes in future estimates at each statement of financial position date. Warranty provisions The Group provides for the estimated liability to repair or replace products under warranty at the time revenue is recognized. The provision is an estimate based on historical experience of the level of repairs and replacements. Tax provisions The Group recognizes a provision for tax contingencies based upon the estimated future settlement amount at each statement of financial position date. Restructuring provisions The Group provides for the estimated cost to restructure when a detailed formal plan of restructuring has been completed, approved by management and the restructuring plan has been announced. Restructuring costs consist primarily of personnel restructuring charges. The other main components are costs associated with the closure of manufacturing sites and exiting real estate locations, divestment related charges and impairment charges. Other provisions The Group provides for other contractual obligations based on the expected cost of executing any such contractual commitments. Share-based payment The Group established a share-based incentive program in 2012 under which options are granted to selected employees. The options will be cash-settled at exercise unless certain corporate transactions such as an initial public offering occur. For cash-settled share-based payment transactions, the employee services received and the liability incurred are measured at the fair value of the liability. The fair value of the options is determined based on the reporting date estimated value of shares less the exercise price of the options. The fair value of the liability is remeasured at each reporting date and at the date of settlement and the related change in fair value is recognized in the income statement. Use of estimates and critical accounting judgments The preparation of financial statements in conformity with IFRS requires the application of judgment by management in selecting appropriate assumptions for calculating financial estimates which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Set forth below are areas requiring significant judgment and estimation that may have an impact on reported results and the financial position. Revenue recognition The majority of the Group’s sales are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Sales may materially change if management’s assessment of such criteria was determined to be inaccurate. Annual Report 2012 73 Notes to the Consolidated Financial Statements The Group enters into transactions involving multiple components consisting of any combination of hardware, services and software. The commercial effect of each separately identifiable component of the transaction is evaluated in order to reflect the substance of the transaction. Revenue is allocated to each separately identifiable component based on the relative fair value of each component. The Group determines the revenue recognition method for each component based on the scope of work, including the nature of the services rendered. The revenue for each component is recognized when the revenue recognition criteria for that component have been met. Determination of the fair value for each component requires the use of estimates and judgment taking into consideration factors such as the price when the component is sold separately by the Group or the price when a similar component is sold separately by the Group or a third party, which may have a significant impact on the timing and amount of revenue recognition. Revenue from contracts involving solutions achieved through the modification of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. Recognized revenues and profits are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. Current sales and profit estimates for projects may materially change due to the early stage of a long-term project, new technology, changes in the project scope, changes in costs, changes in timing, changes in customers’ plans, realization of penalties, and other corresponding factors. Refer to Note 4 Revenue recognition. Customer financing The Group has provided a limited number of customer financing arrangements and agreed extended payment terms with selected customers. Should the actual financial position of the customers or general economic conditions differ from assumptions, the collectability of such arrangements may be required to be reassessed, which could result in a write-off of these balances in future periods. The Group endeavors to mitigate this risk through the transfer of its rights to the cash collected from these arrangements to third party financial institutions on a non-recourse basis in exchange for an upfront cash payment. Refer to Note 16, Fair value of financial instruments. Allowances for doubtful accounts The Group maintains allowances for doubtful accounts for estimated losses resulting from the subsequent inability of customers to make the required payments. If the financial conditions of customers were to deteriorate, reducing their ability to make payments, additional allowances may be required in future periods. Refer to Note 20, Allowances for doubtful accounts. Inventory-related allowances The Group periodically reviews inventory for excess amounts, obsolescence and declines in market value below cost and records an allowance against the inventory balance for any such declines. These reviews require management to estimate future demand for products. Possible changes in these estimates could result in revisions to the valuation of inventory in future periods. Refer to Note 18, Inventories. 74 Nokia Siemens Networks Warranty provisions The Group provides for the estimated cost of product warranties at the time revenue is recognized. The Group’s warranty provision is established based upon best estimates of the amounts necessary to settle future and existing claims on products sold as of each statement of financial position date. As new products incorporating complex technologies are continuously introduced, and as local laws, regulations and practices may change, changes in these estimates could result in additional allowances or changes to recorded allowances required in future periods. Refer to Note 28, Provisions. Restructuring provisions The Group provides for the estimated future cost related to restructuring programs. The restructuring provision is based on management’s best estimate. Restructuring costs primarily relate to personnel restructuring and changes in estimates of timing or amounts of costs to be incurred may become necessary as the restructuring program is implemented. Refer to Note 28, Provisions. Business combinations The Group applies the acquisition method of accounting to account for acquisitions of separate entities or businesses. The consideration transferred in a business combination is measured as the aggregate of the fair values of the assets transferred, liabilities incurred towards the former owners of the acquired business and equity instruments issued. Identifiable assets acquired and liabilities assumed by the Group are measured separately at their fair values as of the acquisition date. The excess of the aggregate of the consideration transferred over the acquisition date fair values of the identifiable net assets acquired is recorded as goodwill. The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring management judgment. Actual results may differ from the forecasted amounts and the difference could be material. Refer to Note 8, Acquisitions and disposals. Assessment of the recoverability of long-lived and intangible assets and goodwill The recoverable amounts for long-lived assets, intangible assets and goodwill have been determined based on the expected future cash flows attributable to the asset or cash-generating units discounted to present value. The key assumptions applied in the determination of the recoverable amount include the discount rate, length of the explicit forecast period and estimated growth rates, profit margins and level of operational and capital investment. Amounts estimated could differ materially from what will actually occur in the future. Refer to Note 9, Impairment. Fair value of derivatives and other financial instruments The fair value of financial instruments that are not traded in an active market (for example, unlisted equities and embedded derivatives) is determined using various valuation techniques. The Group uses judgment to select an appropriate valuation methodology as well as underlying assumptions based on existing market practice and conditions. Changes in these assumptions may cause the Group to recognize impairments or losses in future periods. Refer to Note 16, Fair value of financial instruments, Note 17, Derivative financial instruments and Note 34, Financial and capital risk management. Notes to the Consolidated Financial Statements Income taxes Management judgment is required in determining income tax expense, tax provisions, deferred tax assets and liabilities and the extent to which deferred tax assets can be recognized. When circumstances indicate it is no longer probable that deferred tax assets will be utilized, they are assessed for realizability and adjusted as necessary. If the final outcome of these matters differs from the amounts recorded initially, differences may impact the income tax expense in the period in which such determination is made. Refer to Note 12, Income tax expense and Note 26, Deferred Taxes. The utilization of deferred tax assets is dependent on future taxable profit in excess of the profits arising from reversal of existing taxable temporary differences. The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient taxable profits will be available in the future from which the reversal of temporary differences and tax losses can be deducted. Recognition therefore involves judgment with regard to future financial performance of a particular legal entity or tax group in which the deferred tax asset has been recognized. Pensions The determination of pension obligations and expenses for defined benefit pension plans is dependent on certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and annual rate of increase in future compensation levels. A portion of plan assets is invested in equity securities which are subject to equity market volatility. Changes in assumptions and actuarial conditions may materially affect the pension obligation and future expense. Refer to Note 6, Pensions. New accounting pronouncements under IFRS The Group will adopt the following new and revised standards, and amendments and interpretations to existing standards issued by the IASB that are expected to be relevant to its operations: –IFRS 9, Financial Instruments, will change the classification, measurement and impairment of financial instruments based on the Group’s objectives for the related contractual cash flows. –IFRS 10, Consolidated Financial Statements, establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. –IFRS 11, Joint Arrangements, establishes that the legal form of an arrangement should not be the most significant factor in the determination of the appropriate accounting for the arrangement. Each party in a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and then accounts for those rights and obligations in accordance with that type of joint arrangement. –IFRS 12, Disclosure of Interests in Other Entities, requires the disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. definition of fair value in a single new IFRS standard. The new standard provides a framework for measuring fair value, related disclosure requirements about fair value measurements and further authoritative guidance on the application of fair value measurement in inactive markets. –Amended IAS 19, Employee Benefits, discontinues the use of the ‘corridor’ approach and remeasurement impacts will be recognized in other comprehensive income. Net interest expense as a product of discount rate and net pension liability will be recognized in the income statements while the effect from the difference between the discount rate and actual return on plan assets will be reflected in remeasurements within other comprehensive income. Previously unrecognized actuarial gains and losses are also recognized in other comprehensive income. Other long-term benefits are required to be measured in the same way even though changes in the recognized amount are recognized in profit or loss. Treatment for termination benefits, specifically the point in time when an entity would recognize a liability for termination benefits, is also revised. The effective date for IFRS 10, IFRS 11 and IFRS 12 is January 1, 2013, as issued by the IASB. In December 2012, the EU endorsed adoption of these standards for companies in the EU, with a mandatory effective date of January 1, 2014, earlier adoption is permitted. The Group will early adopt these standards on January 1, 2013 and will also adopt IFRS 13 and the amended IAS 19 on their effective date, January 1, 2013. On December 16, 2011 the IASB amended the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7, Financial Instruments: Disclosures. The Group will adopt the standard on the revised effective date. The Group does not currently expect the adoption of the amended IAS 19 to have a material impact on the financial condition and the results of operations of the Group on a going forward basis. However, the standard requires retrospective application for all financial statements presented including previous years. While the Group does not anticipate a material impact to prior period income statements as a result of the retrospective application, the Group expects a material change in the net pension liabilities and other comprehensive income due to the elimination of the ‘corridor approach’. For 2012, there will be approximately EUR 174 million (EUR 14 million for 2011) increase in our pension liabilities, approximately EUR 156 million (EUR 12 million for 2011) decrease, net of tax, in our other comprehensive income, and approximately EUR 10 million and (EUR 3 million for 2011) increase in our net deferred tax asset. Excluding the impacts of the amended IAS 19, the Group does not expect that the adoption of the other standards effective January 1, 2013 will have a material impact. –IFRS 13, Fair Value Measurement, replaces fair value measurement guidance contained within individual IFRSs with a single, unified Annual Report 2012 75 Notes to the Consolidated Financial Statements 2 Specific items The Group separately identifies and discloses certain items, referred to as specific items, by virtue of size, nature or occurrence, including restructuring charges, country/contract exit charges, purchase price accounting (‘PPA’) related charges and asset impairment charges. This is consistent with the way that financial performance is measured by management and reported to the senior management team and Board of Directors and it assists in providing a meaningful analysis of operating results by excluding items that may not be indicative of the operating results of the Group’s business. In November 2011, the Group announced a strategic shift to focus on the mobile network infrastructure market. This involved a decision to focus the Group’s portfolio on its core profitable businesses and sell or ramp down non-core businesses. The Group also narrowed its regional focus to make the high value and technologically advanced Japan, South Korea and USA its priority countries and to review certain underperforming countries or contracts with a view to exiting if necessary. At the same time, the Group announced its intention to reduce its workforce by 17,000 employees by the end of 2013. In 2012, the Group made significant progress in executing this plan both in terms of focusing on the mobile network infrastructure business, divesting several businesses, exiting certain underperforming customer contracts, withdrawing from certain countries and making significant reductions in headcount. The associated charges are included in the tables below. The following table presents specific items included in the operating profit/loss for the Group’s continuing operations for the years ended December 31, 2012, 2011 and 2010: Country/ contract exit and mergerRestructuring related charges charges EURm 2012 Cost of sales Research & development expenses Selling & marketing expenses Administrative & general expenses Other expenses Total 2011 Cost of sales Research & development expenses Selling & marketing expenses Administrative & general expenses Other expenses Total 2010 Cost of sales Research & development expenses Selling & marketing expenses Administrative & general expenses Other expenses Total PPA related charges Other one-time charges Total 564 170 116 155 50 89 – – – 18 – 38 266 – 4 – – – 87 6 653 208 382 242 78 1 055 107 308 93 1 563 28 26 17 13 19 12 2 5 23 – 11 79 308 1 – – – – – – 51 107 330 37 19 103 42 399 – 544 60 27 15 43 27 114 (8) 6 33 – – 193 286 – – – – – – – 174 212 307 76 27 172 145 479 – 796 The following table presents specific items included in the operating profit/loss for the Group’s discontinued operations, Optical Networks, for the years ended December 31, 2012, 2011 and 2010: 2012 2011 2010 Total PPA related charges PPA related charges – – 23 1 6 23 – 2 – – 7 – 23 30 2 7 Restructuring charges Other one-time charges Cost of sales Research & development expenses Other expenses 1 6 – Total 7 EURm 76 Nokia Siemens Networks Notes to the Consolidated Financial Statements Restructuring charges in 2012 consist primarily of personnel restructuring charges (EUR 911 million). The other main components are real estate exit costs and a loss, net of gains, of EUR 50 million arising from the sale of divested businesses (refer to Note 8, Acquisitions and disposals). Restructuring charges in 2011 consisted primarily of personnel restructuring charges (EUR 68 million) and impairment charges as a result of writing down the carrying amount of certain disposal groups classified as held for sale to the fair value less costs to sell (refer to Note 31, Non-current assets and disposal groups classified as held for sale). Restructuring charges in 2010 related to personnel restructuring (EUR 114 million) and structural restructuring for outsourcing and closing manufacturing sites and other real estate locations. In 2012, country/contract exit charges relate to the realignment of the Group’s customer contract and geographic market portfolio and the related charges to terminate certain underperforming contracts and to withdraw from certain countries in line with the Group’s restructuring program. Merger-related charges in 2011 and 2010 related to the realignment of the product portfolio and the related charges to replace discontinued products at customer sites in connection with the Group’s formation. Purchase price accounting (‘PPA’) related charges primarily consist of the amortization of finite lived intangible assets (customer relationships, developed technology and licenses to use tradename and trademark) recognized in the purchase price allocation stemming from the Group’s formation and subsequent business combinations. In 2012, other one time charges consist of consultancy fees in connection with the restructuring program included in administrative and general expenses and impairment charges of EUR 6 million for continuing operations and EUR 23 million for discontinued operations included in other expenses (refer to Note 9, Impairment and Note 31, Non-current assets and disposal groups classified as held for sale) in the consolidated income statement. 3 Segment information The Group’s chief operating decision-maker (‘CODM’) is a group of executive officers comprising the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. Operating segments have been determined based on the information reviewed by the chief operating decision-maker for the purposes of allocating resources and assessing performance. The chief operating decision-maker considers the business from both a geographic and product perspective. The set of components that constitutes the Group’s operating segments has been determined by reference to the core principle governing segment reporting, that is, based on the provision of information that enables evaluation of the nature and financial effects of the business activities in which the Group engages and the economic environments in which it operates. Disclosure of information by product dimension is considered to best fulfill this requirement. The Group consists of four product-based operating segments: Mobile Broadband, Global Services, Optical Networks and Non-core. At December 31, 2012 Optical Networks is classified as a disposal group held for sale and as it has represented a separate major line of business in the past, it is presented as discontinued operations (refer to Note 31, Non-current assets and disposal groups classified as held for sale). As such, it has been excluded from segment reporting. The Non-core segment does not qualify as a reportable segment in 2012 as it represents less than 10% of the Group’s revenue and operating results. Mobile Broadband provides radio and core network hardware and software to mobile operators as well as related software and essential services. Global Services provides professional services including network planning and optimization, the complete management of network operations, the care and maintenance of network hardware and software and also network implementation and turnkey solutions. Management assesses the performance of the operating segments based on a measure of operating profit that excludes specific items (for an analysis of specific items, refer to Note 2, Specific items). The costs of central functions and the Group’s worldwide sales and marketing organization have been allocated to the segments based on the utilization of the respective resources. Taxes, financial income and expenses, other financial results and share of results of associates are not allocated to segments. There are no transactions between the segments. Segment revenue as reported here is measured largely in a manner consistent with revenue as reported in the consolidated income statement. Group level adjustments related to customer projects accounted for under the percentage of completion accounting method have been allocated to the segments. No single customer represents 10% or more of Group revenues. No measures of assets and liabilities by segment are reviewed by the chief operating decision-maker. Annual Report 2012 77 Notes to the Consolidated Financial Statements Mobile Broadband EURm Global Services All other segments Total segments Other 2012 Net sales Operating profit/(loss) before specific items Operating profit/(loss) before specific items % Depreciation and amortization (excluding PPA related charges) PPA related charges Restructuring charges 6 043 488 8.1% 199 158 283 6 929 332 4.8% 66 130 414 365 (33) (9.0)% 7 6 93 13 337 787 35 35 272 294 790 – 14 265 2011 Net sales Operating profit/(loss) before specific items Operating profit/(loss) before specific items % Depreciation and amortization (excluding PPA related charges) PPA related charges Restructuring charges 6 335 214 3.4% 220 195 27 6 737 229 3.4% 71 119 24 573 (108) (18.8)% 14 15 19 13 645 335 – – 305 329 70 – 70 33 2010 Net sales Operating profit/(loss) before specific items Operating profit/(loss) before specific items % Depreciation and amortization (excluding PPA related charges) PPA related charges Restructuring charges 5 789 153 2.6% 263 271 83 5 889 84 1.4% 67 104 32 528 (71) (13.4)% 13 34 – 12 206 166 – – 343 409 115 – 70 57 Total 13 372 822 6.1% 272 308 1 055 13 645 335 2.5% 305 399 103 12 206 166 1.4% 343 479 172 For an analysis of specific items, refer to Note 2, Specific items. Net sales by geographic area The table below presents the Group’s net sales by geographic area by location of customer: EURm 2012 2011 2010 North East Europe West Europe1 South East Europe Africa 891 1 900 1 039 548 1 107 2 032 1 257 579 1 086 2 115 1 378 514 Europe & Africa 4 378 4 975 5 093 Middle East Greater China Japan India APAC 687 1 278 2 173 737 1 270 817 1 457 1 533 911 1 176 876 1 448 704 885 1 110 Asia & Middle East 6 145 5 894 5 023 North America Latin America 1 201 1 648 1 018 1 758 649 1 441 Americas Total Of which the Netherlands (country of domicile) 1 78 Nokia Siemens Networks 2 849 2 776 2 090 13 372 13 645 12 206 111 185 113 Notes to the Consolidated Financial Statements Non-current assets The table below presents the Group’s largest countries in terms of non-current assets: EURm 2012 2011 Finland USA China India Japan Germany Poland Other 452 183 107 74 66 24 24 148 334 311 177 95 71 62 32 431 1 078 1 513 – 1 2012 2011 2010 3 431 2 603 4 769 2 942 5 094 2 872 Total The Netherlands (country of domicile) Non-current assets comprise intangible assets and property, plant and equipment. 4 Revenue recognition The following table presents net sales for continuing operations for the years ended December, 31: EURm Contract sales recognized under percentage of completion accounting Services revenue for managed services and network maintenance contracts Sales of telecommunication equipment, software and related services not involving the modification of complex telecommunication equipment Total net sales 7 338 5 934 4 240 13 372 13 645 12 206 The following revenue recognition related items are included in the consolidated statement of financial position: 2012 EURm Contract revenues recorded prior to billings Assets 700 Billings in excess of costs incurred Assets Liabilities 1 267 216 Advances received related to construction Retentions related to construction contracts 2011 Liabilities 260 58 100 95 136 All assets in the above table are included within accounts receivable and all liabilities are included within accrued expenses in the statement of financial position. The aggregate amount of costs incurred and recognized profits (net of recognized losses) for construction contracts in progress is EUR 18 107 million at December 31, 2012 (EUR 20 077 million in 2011). Annual Report 2012 79 Notes to the Consolidated Financial Statements 5 Employee benefits expense EURm 2012 2011 2010 Salaries and wages Share-based payment expense/(income) Pension expenses Other social expenses 3 744 11 204 494 3 466 (8) 196 482 3 015 (5) 186 414 Total 4 453 4 136 3 610 Pension expenses include expenses related to defined contribution plans of EUR 164 million (EUR 153 million in 2011 and EUR 141 million in 2010). The average monthly number of employees in 2012 was 64 052 (71 882 in 2011 and 65 379 in 2010). 6 Pensions The Group’s largest defined benefit pension plans are in Germany where individual benefits are generally based on eligible compensation levels and/or ranking within the company and years of service. The majority of active employees in Germany participate in the pension scheme BAP (Beitragsorientierter Altersversorgungs Plan), formerly known as Beitragsorientierte Siemens Altersversorgung. This plan is a partly funded defined benefit pension plan, the benefits of which are predominantly based on contributions made by the company and returns earned on such contributions, subject to a minimum return guaranteed by the company. Prior to this plan, employees participated in the IP-Plan (Individuelle Pensionszusage), which was closed to new entrants in 2003 and any entitlement previously earned was integrated into the BAP. The funding vehicle for the BAP and former IP plan is the ‘NSN Pension Trust e.V’. Other significant plans are in Switzerland, India and the United Kingdom (‘UK’). In Switzerland, individual benefits are provided through the collective foundation Profond. The plan’s benefits are based on age, years of service, salary and on an individual old age account. The funding vehicle for the pension scheme is the Profond Vorsorgeeinrichtung. In India, government mandated Gratuity and Provident plans provide benefits based on years of service and projected salary levels at date of separation for the Gratuity plan and through an interest rate guarantee on existing investments in a Government prescribed Provident Fund Trust. In the UK, individual benefits are generally dependent on eligible compensation levels and years of service for the defined benefit section of the plan and on individual investment choices for the defined contribution section of the plan. The funding vehicle for the pension plan is the Nokia Siemens Networks Pension Plan that is run on a Trust basis. In addition, the Group operates a number of post-employment benefit plans in various other countries. These plans include both defined contribution and defined benefit plans. 80 Nokia Siemens Networks Notes to the Consolidated Financial Statements Defined benefit pension plans The following table reconciles the opening and closing balances of the defined benefit obligation and the fair value of plan assets at December 31: EURm 2012 2011 Present value of defined benefit obligation at beginning of year Foreign currency exchange rate changes Current service cost Interest cost Plan participants’ contributions Past service cost loss Actuarial loss Acquisitions and divestments Curtailments1 Settlements Benefits paid Other movements2 (1 221) 2 (49) (56) (15) (2) (220) 14 13 12 47 (2) (1 088) 3 (47) (56) (8) (1) (7) (1) 3 16 28 (63) Present value of defined benefit obligation at end of year (1 477) (1 221) Plan assets at fair value at beginning of year Foreign currency exchange rate changes Expected return on plan assets Actuarial gain/(loss) on plan assets Employer contribution Plan participants’ contributions Benefits paid Acquisitions and divestments Settlements Other movements2 1 124 (2) 56 61 31 15 (32) (12) (9) 1 1 050 (2) 52 (48) 34 8 (21) (2) (10) 63 Plan assets at fair value at end of year 1 233 1 124 In 2012, the Group recognized curtailments related to restructuring in various countries including Germany, Belgium, Switzerland and the Netherlands. In 2011, the Group reclassified an existing pension plan as a defined benefit plan due to a requirement to cover a shortfall in the return on plan assets. This reclassification did not have a material impact on the Group’s financial statements. 1 2 The following table reconciles the present value of the defined benefit obligation and the fair value of plan assets to the accrued pension cost recognized in the statement of financial position: EURm Present value of defined benefit obligation Fair value of plan assets Deficit Unrecognized past service cost Unrecognized net actuarial loss Amount not recognized as an asset in the statement of financial position due to the limit in IAS 19 paragraph 58(b) Accrued pension cost in statement of financial position 2012 2011 (1 477) 1 233 (1 221) 1 124 (244) 1 171 (97) 1 16 (2) (2) (74) (82) The present value of the defined benefit obligation includes EUR 243 million (EUR 126 million in 2011) of wholly funded obligations, EUR 1 196 million (EUR 1 055 million in 2011) of partly funded obligations and EUR 38 million (EUR 40 million in 2011) of unfunded obligations. Annual Report 2012 81 Notes to the Consolidated Financial Statements The amounts recognized in the income statement are as follows: EURm 2012 2011 2010 Current service cost Interest cost Expected return on plan assets Net actuarial loss/(gain) recognized Past service cost loss Impact of IAS 19 paragraph 58(b) Curtailments and settlements 49 56 (56) 5 2 – (16) 47 56 (52) 7 1 (7) (9) 47 52 (55) (3) 1 3 – Total included in employee benefits expense 40 43 45 2012 2011 The movements in accrued pension cost recognized in the statement of financial position are as follows: EURm Accrued pension cost at beginning of year Net expense recognized Contributions paid Benefits paid Acquisitions and divestments Foreign currency exchange rate changes 82 40 (31) (15) (2) – 78 43 (34) (6) 2 (1) Accrued pension cost at end of year 74 82 The net accrued pension cost above is made up of an accrual of EUR 106 million included in other long-term liabilities (EUR 108 million in 2011), a prepayment of EUR 41 million included in prepaid expenses and accrued income (EUR 31 million in 2011) and EUR 9 million reclassification to liabilities included in disposal groups classified as held for sale (EUR 5 million in 2011). Refer to Note 31, Non-current assets and disposal groups classified as held for sale. The following table shows the deficit or surplus in the Group’s plans and the history of experience adjustments: EURm 2012 Present value of defined benefit obligation Fair value of plan assets (Deficit)/surplus Experience adjustment (loss)/gain on plan obligations Experience adjustment gain/(loss) on plan assets 2011 2010 2009 2008 (1 477) 1 233 (1 221) 1 124 (1 088) 1 050 (964) 955 (822) 847 (244) (97) (38) (9) 25 (21) 61 21 (48) 19 (9) 1 41 31 3 The principal actuarial weighted average assumptions used are as follows: % 2012 2011 Discount rate for determining present values Inflation rate Expected long-term rate of return on plan assets Annual rate of increase in future compensation levels Pension increases 3.54 1.82 3.11 2.36 1.64 4.89 1.83 4.50 2.39 1.60 82 Nokia Siemens Networks Notes to the Consolidated Financial Statements The Group’s weighted average pension plan asset allocation as a percentage of plan assets by asset category at December 31 is as follows: % Asset category: Equity securities Debt securities Insurance contracts Real estate Short-term investments Other Total 2012 2011 24 56 5 5 4 6 22 59 5 5 4 5 100 100 The objective of the investment activities is to maximize the excess of plan assets over projected benefit obligations, within an accepted risk level, taking into account the interest rate and inflation sensitivity of the assets as well as the obligations. Additionally, the objective is to generate an efficient strategic asset allocation in accordance with the Group’s investment policy to achieve the required return on pension assets. The total expected return on plan assets is based on the expected return multiplied by the respective percentage weight of the market-related value of plan assets. The expected return is defined on a uniform basis, reflecting long-term historical returns, current market conditions and strategic asset allocation. In 2012, the actual return on plan assets was EUR 117 million (EUR 4 million in 2011). In 2013, the Group expects to make contributions of EUR 25 million to its defined benefit pension plans. 7 Other income and expenses Other income totals EUR 105 million in 2012 (EUR 92 million in 2011 and EUR 97 million in 2010). None of the items within this total are individually significant. Other expenses total EUR 223 million in 2012 (EUR 79 million in 2011 and EUR 142 million in 2010). This includes a loss, net of gains, of EUR 50 million arising from the sale of divested businesses (refer to Note 8, Acquisitions and disposals), EUR 40 million costs resulting from the sale of receivables transactions, EUR 38 million of expense that is the net result of bad debt write-offs and changes to the doubtful account allowances (refer to Note 20, Allowances for doubtful accounts) and EUR 23 million impairment charges in connection with the Optical Networks business (refer to Note 9, Impairment and Note 31, Non-current assets and disposal groups classified as held for sale). Other income in 2011 included a gain of EUR 9 million on the sale of real estate in Beijing, China. Other expenses included EUR 35 million of income that is the net result of bad debt write-offs and changes to the doubtful account allowances (refer to Note 20, Allowances for doubtful accounts) and costs of EUR 33 million resulting from sale of receivables transactions. Other expenses also included impairment charges of EUR 19 million as a result of writing down the carrying amount of certain disposal groups classified as held for sale to the fair value less costs to sell (refer to Note 9, Impairment). Other income in 2010 included EUR 21 million which mainly relates to interest or amounts paid in excess to the Brazil Instituto Nacional do Seguro Social (‘INSS’ or National Institute for Social Security). The Group had the right to recover the interest receivable and overpayments made from the INSS. Other expenses included EUR 28 million in charges related to the transfer of the Group’s Italian Radio Access activities to Value Team SpA, an IT consulting and solutions company of the Value Partners Group. In all three years presented, other income and expenses also include the fair value changes of derivatives hedging identifiable and probable forecasted cash flows and the costs and income of hedging forecasted sales and purchases (forward points of cash flow hedges). Annual Report 2012 83 Notes to the Consolidated Financial Statements 8 Acquisitions and disposals Acquisitions completed in 2012 There were no acquisitions effected in 2012. On April 30, 2012 the Group completed the accounting for the Motorola Solutions’ networks business combination, which was effected on April 30, 2011. The acquired business consisted of Motorola Solutions’ wireless networks infrastructure equipment manufacturing and sales operations, including the GSM, CDMA, WCDMA, WiMAX and LTE product portfolios and services offerings, and was carried out through a combination of asset and share deals. The business acquisition strengthened the Group’s position in certain regions, particularly North America and Japan. The goodwill of EUR 164 million arising from the acquisition is attributable to the increased presence in these key markets and the assembled workforce. The majority of the goodwill acquired is deductible for income tax purposes. The following table summarizes additional adjustments identified during the measurement period and the final fair values of assets acquired, liabilities assumed and the non-controlling interest at the acquisition date: EURm Total cash consideration Provisional fair values Adjustments Final fair values 642 – 642 Non-current assets Goodwill Intangible assets subject to amortization: Developed technology Customer relationships Other intangible assets 155 9 164 156 195 3 – – – 156 195 3 Property, plant and equipment Investments in associates Deferred tax assets 509 105 6 36 9 (8) – – 518 97 6 36 656 1 657 103 228 20 31 – (6) – – 103 222 20 31 382 1 038 (6) (5) 376 1 033 15 15 – – 15 15 Current assets Inventories Accounts receivable Prepaid expenses and accrued income Bank and cash Total assets acquired Non-current liabilities Deferred tax liabilities Other long-term liabilities 30 – 30 Current liabilities Accounts payable Accrued expenses Provisions 154 166 30 (1) (2) (2) 153 164 28 Total liabilities assumed Non-controlling interest 350 380 16 (5) (5) – 345 375 16 Net assets acquired 642 – 642 The fair values of developed technology and customer relationships acquired in the deal have been estimated through relief from royalty and excess earnings methods of valuation, respectively. Key assumptions applied in the valuation models included royalty rates ranging from 3% to 10% for the developed technology, and a discount rate of 14.1% for customer relationships. 84 Nokia Siemens Networks Notes to the Consolidated Financial Statements The acquisition of the Motorola Solutions’ networks business included a contingent consideration arrangement that required Motorola Solutions to make installment payments to the Group subject to certain conditions being fulfilled by the Group. The maximum amount of installment payments under the arrangement, EUR 85 million, was received, of which EUR 68 million was received in 2012 and EUR 17 million in 2011. On receipt of the final payment in 2012, EUR 4 million was recognized in the consolidated income statement as the consideration received was in excess of the fair value of the EUR 81 million receivable recognized. The fair value of accounts receivable of EUR 222 million includes trade receivables with a fair value of EUR 146 million. The gross contractual amount for trade receivables due at the date of acquisition was EUR 255 million, of which EUR 109 million was expected to be uncollectible. Acquisition-related costs of EUR 4 million and EUR 8 million for 2011 and 2010, respectively, are included in the consolidated income statement in administrative and general expenses. From the date of acquisition on April 30, 2011 the Group included net sales of EUR 894 million and a net loss of EUR 4 million for the year ended December 31, 2011 in respect of the acquired Motorola Solutions’ networks business. The net loss included EUR 39 million related to restructuring charges and EUR 48 million related to the amortization of acquired intangible assets and other purchase price accounting related charges. The Group’s net sales and net loss for the year ended December 31, 2011 would have been EUR 14 828 million and EUR 612 million, respectively, had the acquisition occurred on January 1, 2011. This unaudited pro forma information is not necessarily indicative of the results of the combined operations had the acquisition actually occurred on January 1, 2011 or indicative of the future results of the combined operations. The non-controlling interest (representing 49% of Motorola Solutions’ Hangzhou subsidiary) in the Motorola Solutions’ networks business recognized at the acquisition date was measured at the present ownership interests’ proportionate share in the recognized amounts of the acquiree’s net identifiable assets and amounted to EUR 16 million. Other acquisitions effected in 2011 On January 3, 2011 the Group acquired 100% of the share capital of Iris Telekomünikasyon Mühendislik Hizmetleri A.S, a telecom and engineering services provider with its headquarters in Istanbul, Turkey. The purchase consideration paid and goodwill arising from the acquisition amounted to EUR 20 million and EUR 6 million, respectively. Acquisitions effected in 2010 There were no acquisitions in 2010. Disposals effected in 2012 In 2012, the Group divested several non-core businesses as part of the implementation of its strategy to focus on mobile broadband and services. On January 11, 2012 the Group entered into an agreement with Motorola Solutions Inc. to transfer all assets and liabilities related to the Norwegian nationwide TETRA Nødnett project, including associated employees. The transaction was completed on February 24, 2012. The sale of the WiMax business to NewNet Communication Technologies, LLC was completed on February 3, 2012. On May 3, 2012 the Group concluded the sale of its fixed line broadband access business to Adtran Inc., and on June 1, 2012 the initial closing of the transaction to sell the microwave transport business to DragonWave Inc. was completed. Additionally, the Group carried out three other disposals that did not have a material impact on the consolidated financial statements. The total net consideration paid in connection with these disposals amounted to EUR 124 million in cash. Additionally, shares with fair market value of EUR 5 million were received. Annual Report 2012 85 Notes to the Consolidated Financial Statements The results of businesses disposed of are included in the consolidated income statement up to the date of disposal. The assets and liabilities disposed of were as follows: EURm 2012 Property, plant and equipment Inventories Accounts receivable Prepaid expenses and accrued income 1 24 28 1 Total assets disposed of 54 Accounts payable Accrued expenses Provisions 19 13 117 Total liabilities disposed of 149 Additionally, provisions of EUR 26 million were recognized for contractual obligations entered into at closing. A loss, net of gains, of EUR 50 million arising from the sale of these businesses is included in other expenses in the consolidated income statement. Disposals effected in 2011 There were no disposals in 2011. Disposals effected in 2010 On May 12, 2010 the Group completed the transfer of its Radio Access activities in Italy to Value Team SpA, an IT consulting and solutions company of the Value Partners Group. The two companies also signed a long-term collaboration agreement which defines Value Team as one of the Group’s preferred partners in the development of new technologies, mainly in mobile networks. In 2010, the Group also completed the divestment of its cable television business in Luxembourg, and the sale of 100% ownership in Garderos Software Innovations GmbH in Germany. Total consideration received for the disposals in 2010 amounted to EUR 11 million in cash. In 2011, an additional EUR 1 million of cash was received in relation to divestments effected in 2010. The assets and liabilities disposed of were as follows: EURm 2010 Property, plant and equipment Inventories Accounts receivable Bank and cash 7 1 24 12 Total assets disposed of 44 Accounts payable Accrued expenses 1 8 Total liabilities disposed of 9 86 Nokia Siemens Networks Notes to the Consolidated Financial Statements 9 Impairment Goodwill 2012 For the purpose of impairment testing, goodwill is allocated to the Group’s cash-generating units or groups of cash-generating units (‘CGUs’) that are expected to benefit from the synergies of the business combination in which the goodwill arose. The recoverable amounts of the groups of cash-generating units were determined based on the fair value less costs to sell approach. In the absence of observable market prices, the fair values less costs to sell were estimated based on an income approach, specifically a discounted cash flow model. The cash flow projections employed in the model were based on financial plans approved by management covering an explicit forecast period of three years. Cash flows in the subsequent periods reflect a realistic pattern of slowing growth that declines towards an estimated terminal growth rate utilized in the terminal period. The terminal growth rates utilized do not exceed the long-term average growth rates for the industry and economies in which the cash-generating units operate. The projections utilized are consistent with external sources of information wherever available. The key assumptions applied in the impairment testing analysis and goodwill allocated to each group of cash-generating units at December 31, 2012 are presented in the table below: EURm Radio Access Networks group of CGUs Global Services group of CGUs Total Discount rate Carrying amount of goodwill Terminal growth rate Post-tax Pre-tax 90 92 1.37% 0.00% 10.88% 9.68% 14.74% 13.33% 182 Other key variables within the future cash flow projections utilized include assumptions around estimated sales growth and gross margin. Due to exchange rate fluctuations, the goodwill allocated to the Global Services group of cash-generating units which is largely denominated in US dollars, is EUR 1 million less at December 31, 2012 compared to the euro value at September 30, 2012, the date of goodwill impairment testing. The goodwill impairment testing analysis did not result in impairment charges. A sensitivity analysis has been carried out with respect to the gross margin and discount rate assumptions applied. The recoverable amounts calculated based on the sensitized assumptions do not indicate impairment. Further, no reasonably possible changes in other key assumptions on which the Group has based its determination of the recoverable amounts would result in impairment charges. 2011 Goodwill impairment testing was performed at December 31, 2011 following the Group’s announcement of a new strategy and related restructuring in November 2011. For the purpose of the impairment testing, goodwill which was provisional with respect to the business acquired from Motorola Solutions was allocated on a provisional basis to the Group’s cash-generating units as follows: EURm Carrying amount of goodwill Network Systems Global Services Business Solutions 83 90 – Total 173 The recoverable amounts of the cash-generating units were determined based on the fair value less costs to sell approach. In the absence of observable market prices, the fair value less costs to sell was estimated based on an income approach, specifically a discounted cash flow model. Annual Report 2012 87 Notes to the Consolidated Financial Statements The cash flow projections employed in the model were based on financial plans approved by management. These projections are consistent with external sources of information, wherever available. Cash flows beyond the explicit forecast period of four years were extrapolated by applying an estimated residual growth rate of 1% for the cash-generating units. This residual growth rate does not exceed the long-term average growth rates for the industry and economies in which the cash-generating units operate. The post-tax cash flow projections of the cash-generating units were discounted using a post-tax discount rate of 10.36%, which corresponds to a pre-tax discount rate of 13.77%. Other key variables within the future cash flow projections include assumptions around estimated sales growth and gross margin. The goodwill impairment testing analysis did not result in impairment charges. A sensitivity analysis was carried out by applying lower estimated gross margin assumptions and certain execution risk adjustments to expected savings in operating expenses. The recoverable amounts calculated based on these sensitized assumptions did not indicate impairment. Further, no reasonably possible changes in other key assumptions on which the Group had based its determination of the cash-generating units’ recoverable amounts would have resulted in impairment charges. Other intangible assets The Group recognized a charge of EUR 8 million on intangible assets in connection with its decision to cease product development for certain operations. This impairment charge is included in other expenses in the consolidated income statement. In 2011, in connection with the Group’s announcement of a new strategy and related restructuring in November 2011 and as part of the goodwill impairment testing, the Group conducted an assessment of the carrying amounts of the identifiable intangible and tangible assets that were allocated to the above cash-generating units and concluded that the carrying amounts were recoverable. Investments in associates and other companies In 2012, the Group recognized an impairment charge of EUR 6 million to adjust investment in one of its associates to the recoverable amount. This impairment charge is recognized in other expenses in the consolidated income statement. Non-current assets and disposal groups held for sale In 2012, the Group recognized impairment charges of EUR 23 million on the property, plant and equipment of the Optical Networks business as a result of writing down the carrying amount to the fair value less costs to sell (refer to Note 31, Non-current assets and disposal groups classified as held for sale). This impairment charge is included within other expenses in the consolidated income statement. In 2011, the Group recognized impairment charges totaling EUR 19 million as a result of writing down the carrying amount of certain disposal groups classified as held for sale to the fair value less costs to sell. The impairment charge is included in other expenses in the consolidated income statement. 10 Depreciation and amortization Depreciation and amortization by function: EURm 2012 2011 2010 Depreciation and amortization by function Cost of sales Research and development Selling and marketing Administrative and general 74 180 271 62 74 261 312 64 70 424 291 58 Total 587 711 843 The above table includes depreciation and amortization related to discontinued operations, totaling EUR 11 million in 2012 (EUR 19 million in 2011 and EUR 20 million in 2010). 88 Nokia Siemens Networks Notes to the Consolidated Financial Statements 11 Financial income and expenses EURm Interest income on available-for-sale financial instruments Interest income on loans receivables carried at amortized cost Other financial income Financial income 2012 2011 2010 13 1 1 12 1 2 11 – 3 15 15 14 Interest expense on financial liabilities carried at amortized cost Other financial expenses (113) (10) (95) (13) (137) (20) Financial expense (123) (108) (157) Net foreign exchange (losses)/gains: From foreign exchange derivatives designated at fair value through profit and loss From statement of financial position items revaluation Net losses on other derivatives designated at fair value through profit and loss (28) (171) – 58 (114) (2) (356) 255 (4) Other financial results (199) (58) (105) Total (307) (151) (248) EURm 2012 2011 2010 Income tax expense/(benefit) Current tax Deferred tax 239 103 270 (36) 255 (91) Total 342 234 164 (9) 351 (13) 247 47 117 342 234 164 12 Income tax expense Netherlands Other countries Total The difference between the income tax expense computed at the statutory rate in the Netherlands of 25% (25% in 2011 and 25.5% in 2010) and income taxes recognized in the consolidated income statement is reconciled as follows at December 31: EURm 2012 2011 2010 Income tax benefit at statutory rate Permanent differences Taxes for prior years Effect of different statutory tax rates in foreign subsidiaries Net change in tax contingencies Changes in income tax rates Increase in valuation adjustments of deferred tax assets1 Benefit arising from previously unrecognized tax losses and temporary differences Change of deferred tax liability on undistributed earnings Other (260) 31 (18) (28) (24) 5 640 (94) 30 1 12 5 6 265 (221) 102 73 (11) 2 2 278 – 1 (5) (9) 9 9 (63) 4 (2) Income tax expense 342 234 164 In 2012, this item primarily relates to current year Finnish tax losses and temporary differences and past and current year German tax losses and temporary differences for which no deferred tax was recognized. In 2011 and 2010, this item primarily related to Finnish tax losses and temporary differences for which no deferred tax was recognized. 1 Income tax returns of certain Group companies for the years prior to and after the formation of the Group are under examination by the relevant tax authorities. The Group does not believe that any significant additional taxes in excess of those already provided for will arise as a result of these examinations. Annual Report 2012 89 Notes to the Consolidated Financial Statements 13 Intangible assets EURm 2012 2011 Goodwill Acquisition cost January 1 Translation differences¹ Acquisitions¹ 173 (1) 10 – 12 161 Accumulated acquisition cost December 31 182 173 Net book value January 1 Net book value December 31 173 182 – 173 Other intangible assets Acquisition cost January 1 Translation differences Additions Acquisitions Impairment losses Disposals and retirements 3 021 (2) 25 – (51) (17) 2 625 24 16 365 – (9) Accumulated acquisition cost December 31 2 976 3 021 Accumulated amortization January 1 Translation differences Impairment losses Disposals and retirements Amortization (2 328) (1) 43 16 (319) (1 928) (1) – 7 (406) Accumulated amortization December 31 (2 589) (2 328) Net book value January 1 Net book value December 31 693 387 697 693 Capitalized development costs² Acquisition cost January 1 Disposals and retirements 823 (7) 823 – Accumulated acquisition cost December 31 816 823 Accumulated amortization January 1 Disposals and retirements Amortization (817) 7 (6) (785) – (32) Accumulated amortization December 31 (816) (817) 6 – 38 6 Net book value January 1 Net book value December 31 Goodwill adjustment due to a fair value adjustment relating to the acquisition of Motorola Solutions’ networks business (refer to Note 8, Acquisitions and disposals). Capitalized development costs are included in Other intangible assets in the consolidated statement of financial position. 1 2 At December 31, 2012 other intangible assets include customer relationships with a carrying value of EUR 217 million (EUR 466 million in 2011), developed technology with a carrying value of EUR 131 million (EUR 177 million in 2011), and licenses to use tradename and trademark of EUR 1 million (EUR 20 million in 2011). The remaining amortization period ranges from one month to three years for licenses to use tradename and trademark, from one month to five years for developed technology and from three months to five years for customer relationships. 90 Nokia Siemens Networks Notes to the Consolidated Financial Statements 14 Property, plant and equipment EURm 2012 2011 9 1 – 1 – 8 Accumulated acquisition cost December 31 10 9 Net book value January 1 Net book value December 31 9 10 1 9 Buildings and constructions Acquisition cost January 1 Translation differences Additions Acquisitions Impairment losses Disposals and retirements 266 (2) 32 – (1) (32) 214 – 29 32 – (9) Accumulated acquisition cost December 31 263 266 (96) 1 25 (43) (56) (1) 6 (45) Land and water areas Acquisition cost January 1 Translation differences Acquisitions Accumulated depreciation January 1 Translation differences Disposals and retirements Depreciation Accumulated depreciation December 31 (113) (96) Net book value January 1 Net book value December 31 170 150 158 170 1 673 – 173 (8) (86) (177) (44) 1 479 (4) 247 65 (10) (88) (16) Machinery and equipment Acquisition cost January 1 Translation differences Additions Acquisitions¹ Impairment losses Disposals and retirements Assets classified as held for sale Accumulated acquisition cost December 31 1 531 1 673 Accumulated depreciation January 1 Translation differences Impairment losses Disposals and retirements Assets classified as held for sale Depreciation (1 247) – 63 169 35 (219) (1 103) (14) – 82 14 (226) Accumulated depreciation December 31 (1 199) (1 247) 426 332 376 426 36 (3) 13 – (2) 24 (1) 31 1 – (5) (12) (10) 2 (8) (13) Net book value January 1 Net book value December 31 Fixed assets under construction Net carrying amount January 1 Translation differences Additions Acquisitions Disposals and retirements Transfers to: Other intangible assets Buildings and constructions Machinery and equipment Net carrying amount December 31 Total property, plant and equipment 17 36 509 641 Fair value adjustment relating to the acquisition of Motorola Solutions’ networks business (refer to Note 8, Acquisitions and disposals). 1 Annual Report 2012 91 Notes to the Consolidated Financial Statements 15 Investments in associates EURm 2012 2011 Net carrying amount of associates January 1 Translation differences Additions Share of results Dividends Impairment Disposals Share of other comprehensive income 28 – – 8 – (6) (3) 4 42 (1) 6 (17) – – – (2) Net carrying amount of associates December 31 31 28 The Group’s investments in associates are in unlisted companies in all years presented. The reporting date of the financial statements used for calculation is within three months of the Group’s period end, in accordance with the availability of financial information of the Group’s associates. In 2012, the Group recognized an impairment charge of EUR 6 million to adjust investment in one of its associates to the recoverable amount. There are no unrecognized losses in respect of associates (EUR 2 million in 2011). The following table presents the Group’s principal associates. All amounts are in millions. Assets Principal associates 2010 TD Tech Holding Ltd.1 Fujian Funo Mobile Communication Technology Ltd.2 2011 TD Tech Holding Ltd.1 Fujian Funo Mobile Communication Technology Ltd.2 2012 TD Tech Holding Ltd.1 Fujian Funo Mobile Communication Technology Ltd.2 Local currency is HKD. Local currency is CNY. 1 2 92 Nokia Siemens Networks Local currency Liabilities EUR Local currency 1 785 174 351 Net sales Profit/(loss) for the year EUR Local currency EUR Local currency EUR 1 298 127 4 689 452 220 21 40 97 11 230 25 24 3 741 73 769 76 1 570 144 (527) (48) 426 51 145 18 292 32 28 3 542 53 419 41 2 264 227 152 15 440 54 141 17 234 29 18 2 Notes to the Consolidated Financial Statements 16 Fair value of financial instruments The following table presents the carrying amounts and the fair values of financial instruments by measurement category at December 31: Carrying amounts EURm Current Non-current availableavailablefor-sale for-sale financial financial assets assets 2012 Available-for-sale investments1 Long-term loans receivable2 Accounts receivable Current portion of long-term loans receivable3 Derivatives and other current financial assets Fixed income and money-market investments carried at fair value 708 Total financial assets 708 Loans and receivables measured at amortized cost 156 63 4 111 37 9 156 4 220 Financial liabilities measured at amortized cost 29 29 Long-term interest-bearing liabilities Current portion of long-term loans payable Other long-term non-interest bearing financial liabilities Short-term borrowings Derivative and Other Financial liabilities Accounts payable Total financial liabilities Financial assets and liabilities at fair value through profit or loss 16 – – 16 – Total carrying amounts Fair value 29 63 4 111 37 165 29 60 4 111 37 165 708 708 – 5 113 5 110 821 195 821 195 824 195 124 10 2 352 124 26 2 352 124 26 2 352 3 502 3 518 3 521 Annual Report 2012 93 Notes to the Consolidated Financial Statements Carrying amounts Current Non-current availableavailablefor-sale for-sale financial financial assets assets EURm 2011 Available-for-sale investments1 Long-term loans receivable2 Accounts receivable Current portion of long-term loans receivable3 Derivatives and other current financial assets Fixed income and money-market investments carried at fair value 897 Total financial assets 897 Loans and receivables measured at amortized cost 42 85 5 215 54 19 42 5 373 Financial liabilities measured at amortized cost 23 23 Long-term interest-bearing liabilities Current portion of long-term loans payable Other long-term non-interest bearing financial liabilities Short-term borrowings Derivative and Other Financial liabilities Accounts payable Total financial liabilities Financial assets and liabilities at fair value through profit or loss 76 – – 76 – Total carrying amounts Fair value 23 85 5 215 54 61 23 82 5 215 54 61 897 897 – 6 335 6 332 366 357 3 888 21 2 209 366 357 3 888 97 2 209 372 357 3 888 97 2 209 3 844 3 920 3 926 Includes investments in publicly quoted equity shares and investments carried at fair value of EUR 5 million and EUR 24 million, respectively in 2012 (EUR 1 million and EUR 22 million in 2011). 2 Includes EUR 39 million (EUR 60 million in 2011) relating to customer financing. 3 Includes EUR 35 million (EUR 54 million in 2011) relating to customer financing. 1 The long-term loans receivable fair value is measured by amortizing the future cash flows of customer loans using the current credit risk factor (discount factor) of the borrower, whereas the carrying amount is based on the effective interest rate. The fair values of accounts receivable and accounts payable are assumed to approximate their carrying amounts due to their short-term nature. The fair values are estimated to be equal to the carrying amounts for short-term financial assets and financial liabilities due to the limited credit risk and short maturity. Fixed income and money-market investments include available-for-sale investments, liquid assets of EUR 2 million (EUR 13 million in 2011) and available-for-sale investments, cash equivalents of EUR 706 million (EUR 884 million in 2011). The fair value of long-term interest bearing liabilities is determined with reference to quoted yield curves. Derivative and other current financial assets include EUR 156 million derivative assets (EUR 42 million in 2011). Derivative and other financial liabilities include EUR 16 million derivative liabilities (EUR 76 million in 2011) and a non-derivative short-term financial liability of EUR 8 million related to assets held temporarily by the Group due to a sale of receivable arrangement in China (EUR 21 million in 2011). The fair value of other financial liabilities is assumed to approximate the carrying amount due to its short-term nature. For information on the valuation of items measured at fair value refer to Note 1, Accounting principles. Refer to Note 17, Derivative financial instruments for the split of hedge accounted and non-hedge accounted derivatives. 94 Nokia Siemens Networks Notes to the Consolidated Financial Statements Fair value hierarchy The following table presents the valuation methods used to determine the fair values of financial instruments carried at fair value at December 31: EURm 2012 Fixed income and money-market investments carried at fair value Investments at fair value through profit and loss Available-for-sale investments in publicly quoted equity shares Other available-for-sale investments carried at fair value Derivative assets Total financial assets Instruments with quoted prices in active markets (Level 1) Valuation technique using observable data (Level 2) Valuation technique using non-observable data (Level 3) Total 708 – – – – – 708 – 5 – – – 14 156 – 10 – 5 24 156 713 170 10 893 Derivative liabilities – 26 – 26 Total financial liabilities – 26 – 26 Instruments with quoted prices in active markets (Level 1) Valuation technique using observable data (Level 2) Valuation technique using non-observable data (Level 3) Total 897 – – – – – 897 – 1 – – – 13 42 – 9 – 1 22 42 EURm 2011 Fixed income and money-market investments carried at fair value Investments at fair value through profit and loss Available-for-sale investments in publicly quoted equity shares Other available-for-sale investments carried at fair value Derivative assets Total financial assets 898 55 9 962 Derivative liabilities – 76 – 76 Total financial liabilities – 76 – 76 Level 1 includes financial assets and liabilities that are measured in whole or significant part by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. This level includes listed bonds and other securities, listed shares and exchange traded derivatives. Level 2 includes financial assets and liabilities measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions. These include assets and liabilities for which pricing is obtained via pricing services but where prices have not been determined in an active market, financial assets with fair values based on broker quotes, investments in private equity funds with fair values obtained via fund managers and assets that are valued using the Group’s own valuation models in which the material assumptions are market observable. The majority of the Group’s over-the-counter derivatives and certain other instruments not traded in active markets fall within this level. Level 3 valuation techniques using non-observable inputs mean that fair values are determined in whole or in part using a valuation technique based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data. However, the fair value measurement objective remains the same, that is, to estimate an exit price from the Group’s perspective. The main asset classes in this level are unlisted equity investments and unlisted funds. Annual Report 2012 95 Notes to the Consolidated Financial Statements The following table reconciles the opening and closing balances of financial instruments in Level 3: Other available-for-sale investments carried at fair value EURm Balance at December 31, 2010 7 Purchases Other movements 9 (7) Balance at December 31, 2011 9 Purchases 1 Balance at December 31, 2012 10 17 Derivative financial instruments Assets Fair value1 EURm Liabilities Notional2 Fair value1 Notional2 2012 Cash flow hedges: Forward foreign exchange contracts Derivatives not designated in hedge accounting relationships carried at fair value through profit and loss: Forward foreign exchange contracts Currency options bought Currency options sold Interest rate swaps – 40 (2) 1 111 143 12 – 1 4 400 503 – 150 (12) – – (2) 1 545 – 54 150 Total 156 5 093 (16) 2 860 Assets Fair value1 EURm Liabilities Notional2 Fair value1 Notional2 2011 Cash flow hedges: Forward foreign exchange contracts Derivatives not designated in hedge accounting relationships carried at fair value through profit and loss: Forward foreign exchange contracts Currency options bought Currency options sold Interest rate swaps Other derivatives 7 1 680 (15) 1 838 33 2 – – – 2 617 312 – – – (57) – – (3) (1) 2 752 – 136 150 – Total 42 4 609 (76) 4 876 The fair value of derivative financial instruments is included as an asset in other financial assets and as a liability in other financial liabilities. Includes the gross amount of all notional values for contracts that have not yet been settled or cancelled. The amount of notional value outstanding is not necessarily a measure or indication of market risk as the exposure of certain contracts may be offset by that of other contracts. 1 2 At December 31, 2012, the Forward foreign exchange contracts under Cash flow hedges exclude the impact of the classification change of the Forward foreign exchange contracts from qualifying cash flow hedges to non-qualifying cash flow hedges, and are included under Forward foreign exchange contracts in Derivatives not designated in hedge accounting relationships carried at fair value through profit and loss. Previously these were included under Forward foreign exchange contracts under Cash flow hedges. For comparability purposes, this reclassification was also made for 2011. There is no change in total derivative financial instruments assets or liabilities as a result of the reclassification. 96 Nokia Siemens Networks Notes to the Consolidated Financial Statements 18 Inventories EURm 2012 2011 Raw materials and supplies Work in progress Finished goods Advances to suppliers 200 217 564 3 315 235 719 6 Total 984 1 275 In 2012, the cost of inventories recognized as an expense and included in cost of sales was EUR 3 868 million (EUR 4 266 million in 2011 and EUR 4 007 million in 2010). Movements in allowances for excess and obsolete inventory: EURm 2012 2011 2010 At January 1 Charged to income statement Deductions 223 142 (127) 225 105 (107) 272 75 (122) At December 31 238 223 225 Deductions include utilization and releases of the allowances. In 2012, deductions also include a reclassification to assets of disposal groups classified as held for sale of EUR 39 million (EUR 2 million in 2011). Refer to Note 31, Non-current assets and disposal groups classified as held for sale. 19 Prepaid expenses and accrued income EURm 2012 2011 VAT Other taxes Deposits Prepaid pension costs Other prepaid expenses and accrued income 167 409 45 41 217 194 430 50 31 346 Total 879 1 051 Other prepaid expenses and accrued income include various amounts which are individually insignificant. 20 Allowances for doubtful accounts Movements in allowances for doubtful accounts: EURm 2012 2011 2010 At January 1 Charged to income statement Deductions 110 46 (36) 159 43 (92) 154 70 (65) At December 31 120 110 159 Deductions include utilization and releases of the allowances. In 2011, deductions also included reclassifications to assets of disposal groups classified as held for sale of EUR 2 million. Refer to Note 31, Non-current assets and disposal groups classified as held for sale. Annual Report 2012 97 Notes to the Consolidated Financial Statements 21 Currency translation differences EURm Gross Tax Net Balance at January 1, 2010 Exchange differences on translating foreign operations Attributable to non-controlling interests 20 88 (15) 2 3 – 22 91 (15) Balance at December 31, 2010 93 5 98 Exchange differences on translating foreign operations Attributable to non-controlling interests 45 (7) – – 45 (7) 131 5 136 (2) (1) – – (2) (1) 128 5 133 Balance at December 31, 2011 Exchange differences on translating foreign operations Attributable to non-controlling interests Balance at December 31, 2012 The tax relating to exchange differences on translating foreign operations is current tax. 22 Fair value and other reserves Hedging reserve EURm Balance at January 1, 2010 Cash flow hedges: Net fair value (losses)/gains Transfer of losses to income statement as adjustment to net sales1 Transfer of gains to income statement as adjustment to cost of sales1 Balance at December 31, 2010 Cash flow hedges: Net fair value (losses)/gains Transfer of losses to income statement as adjustment to net sales1 Transfer of gains to income statement as adjustment to cost of sales1 Transfer of losses/(gains) as a basis adjustment to assets and liabilities2 Available-for-sale investments: Net fair value losses Balance at December 31, 2011 Cash flow hedges: Net fair value gains Transfer of losses to income statement as adjustment to net sales1 Transfer of gains to income statement as adjustment to cost of sales1 Balance at December 31, 2012 1 2 Available-for-sale investments Tax Net Gross Tax Net Gross Tax Net 64 (17) 47 – – – 64 (17) 47 (129) 14 (115) – – – (129) 14 (115) 149 – 149 – – – 149 – 149 (119) – (119) – – – (119) – (119) (35) (3) (38) – – – (35) (3) (38) (24) 6 (18) – – – (24) 6 (18) 4 – 4 – – – 4 – 4 24 – 24 – – – 24 – 24 13 (3) 10 – – – 13 (3) 10 – – – (1) – (1) (1) – (1) (18) – (18) (1) – (1) (19) – (19) 30 – 30 – – – 30 – 30 157 – 157 – – – 157 – 157 (93) – (93) – – – (93) – (93) 76 – 76 (1) – (1) 75 – 75 Deferred tax for the Group’s foreign subsidiaries was not recognized at December 31, 2012, 2011 and 2010 due to valuation adjustments. Included in the initial acquisition consideration for the Motorola Solutions’ networks business. Refer to Note 8, Acquisitions and disposals. 98 Nokia Siemens Networks Total Gross Notes to the Consolidated Financial Statements In order to ensure that amounts deferred in the cash flow hedging reserve represent only the effective portion of gains and losses on properly designated hedges of future transactions that remain highly probable at the statement of financial position date, the Group has adopted a process under which all derivative gains and losses are initially recognized in the consolidated income statement. The appropriate reserve balance is calculated at the end of each period and recorded in fair value and other reserves. The Group continuously reviews the underlying cash flows and the hedges allocated thereto, to ensure that the amounts transferred to fair value reserves during the year ended December 31, 2012, 2011 and 2010 do not include gains or losses on forward exchange contracts that have been designated to hedge forecasted sales or purchases that are no longer expected to occur. All the net fair value gains or losses recorded in fair value and other reserves at December 31, 2012 on open forward foreign exchange contracts, which hedge anticipated future foreign currency sales or purchases, are transferred from the hedging reserve to the consolidated income statement when the hedged items affect the income statement at various dates up to approximately 15 months from the statement of financial position date. 23 Issued share capital and share premium EURm 2012 2011 2010 Share capital Share premium Additional parent contribution 0 9 726 18 0 9 726 18 0 8 726 18 Total 9 744 9 744 8 744 Issued capital comprises: 100 073 fully paid ordinary shares 500 fully paid cumulative preference shares Additional parent contribution 7 194 2 532 18 7 194 2 532 18 7 194 1 532 18 Total 9 744 9 744 8 744 Number of shares Par value EUR Share capital EUR 49 999 49 999 25 50 4 4 4 1 199 996 199 996 100 50 Share capital Ordinary share class Class A Class B Class C Class D 100 073 Cumulative preference share class Class CPA Class CPB Class CPC Class CPD 400 142 Number of shares Par value EUR Share capital EUR 150 150 100 100 0.01 0.01 0.01 0.01 1.5 1.5 1.0 1.0 500 5 Annual Report 2012 99 Notes to the Consolidated Financial Statements Fully paid ordinary shares EURm Number of shares Share capital Share premium Balance at January 1, 2010 Movement 100 073 – 0 – 7 194 – Balance at December 31, 2010 Movement 100 073 – 0 – 7 194 – Balance at December 31, 2011 Movement 100 073 – 0 – 7 194 – Balance at December 31, 2012 100 073 0 7 194 Each class A share, class B share and class C share confers the right to cast 400 votes and each class D share confers the right to cast 100 votes at the general meeting of Nokia Siemens Networks. Class D shares are not entitled to vote on the appointment, removal or suspension of managing directors. The class C and class D shares are not entitled to any balance in a share premium reserve. If dividends or other distributions are made, the shares shall give entitlement to such dividends and other distributions in accordance with the following ratio: Class A share – 1 Class B share – 1 Class C share – 1/100th Class D share – 4/100th However, no distributions to holders of class A shares, class B shares, class C shares and class D shares shall be made until the cumulative preference share premium, cumulative preference shares profit reserves and unrecognized cumulative preference dividends have been fully distributed to the holders of the cumulative preference shares A, B, C, and D. Fully paid cumulative preference shares EURm Number of shares Share capital Share premium Balance at January 1, 2010 Movement 0 300 0 – – 1 532 Balance at December 31, 2010 Movement 300 200 0 – 1 532 1 000 Balance at December 31, 2011 Movement 500 – 0 – 2 532 – Balance at December 31, 2012 500 0 2 532 Each cumulative preference share confers the right to cast one vote at the general meeting of Nokia Siemens Networks. Cumulative preference shareholders A and B are entitled to cumulative profit reserves A and B, which is cumulatively 10% of the share par value plus the share premium. As the cumulative preference share premium A and B and cumulative preference share profit reserves A and B were not fully distributed on July 1, 2012 the percentage increases annually on July 1 by 1% per year up to a maximum of 13%. Cumulative preference shareholders C and D are entitled to cumulative profit reserves C and D, which is cumulatively 12% of the share par value plus the share premium. If the cumulative preference share premium C and D and cumulative preference share profit reserves C and D have not been fully distributed on July 1, 2014 the percentage shall increase annually on July 1 by 1% per year up to a maximum of 15%. No distributions of cumulative profit reserves have been made at December 31, 2012. The total amount of cumulative preference share dividends not recognized at December 31, 2012 is EUR 576 million (EUR 267 million in 2011 and EUR 76 million in 2010). Distributions of any other reserves or distributions to ordinary shares shall not take place until the cumulative preference share premium, cumulative preference shares profit reserves and unrecognized cumulative preference share dividends have been fully distributed to the holders of the cumulative preference shares A, B, C and D. Legal reserve Nokia Siemens Networks B.V. has a legal reserve of EUR 66 million (EUR 68 million in 2011 and EUR 45 million in 2010) that is not available for distribution to its shareholders. The legal reserve consists of the portion of the cumulative share in the income of group companies of Nokia Siemens Networks B.V. which is restricted from distribution due to Dutch regulatory requirements. The legal reserves are included in the accumulated deficit in the consolidated statement of financial position. 100 Nokia Siemens Networks Notes to the Consolidated Financial Statements 24 Loans and borrowings The following table presents the carrying amounts of the Group’s long-term interest-bearing liabilities, current portion of long-term interestbearing liabilities and short-term borrowings at December 31 (refer to Note 34, Financial and capital risk management): EURm 2012 2011 European Investment Bank: final maturity January 20151 Nordic Investment Bank: final maturity March 20151 Finnish pension loan: final maturity October 2015 Firstrand Bank Limited: maturity March 2015 Forward Starting Credit Facility term loan: maturity March 2014 Other 50 35 88 44 600 4 150 80 132 – – 4 Long-term interest-bearing liabilities 821 366 European Investment Bank Nordic Investment Bank Finnish pension loan Firstrand Bank Limited: maturity October 2012 Skandinaviska Enskilda Banken: final maturity June 2012 Other 100 45 44 – – 6 100 – 44 91 115 7 Current portion of long-term interest-bearing liabilities 195 357 – 82 3 39 613 148 89 38 124 888 1 140 1 611 Revolving credit facility Commercial Paper Borrowings on committed and uncommitted basis Other Short-term borrowings Total loans and borrowings 1The proceeds of the loan are used to finance investments in research and development in Radio Access Network technology. In 2011, the Group entered into a forward starting credit facility (‘FSCF’) with major international banks with an available commitment of EUR 1 500 million effective from the forward start date of June 1, 2012. This facility replaced the matured EUR 2 000 million revolving credit facility from 2009. The forward starting credit facility comprises two parts, a revolving credit facility maturing in June 2015 and a term loan facility that matures in June 2013. In December 2012, the Group made a EUR 150 million repayment of the term loan and agreed on a restated EUR 1 350 million forward starting credit facility with the lenders which extended the maturity of the remaining EUR 600 million term loan to March 2014. The forward starting credit facility is used for general corporate purposes and includes financial covenants relating to financial leverage and interest coverage of the Group. Nokia Siemens Networks B.V. and Nokia Siemens Networks Oy act as the Guarantors for the facility. At December 31, 2012 EUR 600 million term loan was outstanding (EUR 613 million was drawn under the EUR 2 000 million revolving credit facility at December 31, 2011) and is included in long-term interest-bearing liabilities. At December 31, 2012 all financial covenants are satisfied. Nokia Siemens Networks B.V. acts as the Guarantor for the Finnish pension loan guarantee facility and the EUR 500 million commercial paper program in Finland. Nokia Siemens Networks B.V. and Nokia Siemens Networks Oy act as the Guarantors for the European Investment Bank and the Nordic Investment Bank loans. The European Investment Bank and the Nordic Investment Bank loans and the Finnish pension loan guarantee facility include similar covenants to the restated forward starting credit facility. All the financial covenants are satisfied at December 31, 2012. The Group’s credit facilities are subject to financial covenants and cross default provisions and the Group is in compliance with these at December 31, 2012. Management believes there is sufficient headroom with respect to the covenants to meet the Group’s liquidity needs. 25 Share-based payment The Group established a share-based incentive program in 2012 under which options are granted to selected employees. The options become exercisable on the fourth anniversary of the grant date or, if earlier, on the occurrence of certain corporate transactions such as an initial public offering (‘IPO’). The exercise price of the options is based on a per share value on grant as determined for the purposes of the incentive program. The options will be cash-settled at exercise unless an IPO has taken place, at which point they would be converted into equity-settled options. If the Annual Report 2012 101 Notes to the Consolidated Financial Statements awards are cash-settled, the holder will be entitled to half of the share appreciation based on the exercise price and the estimated value of shares on that date. If an IPO has not taken place by the sixth anniversary of the grant date, the Group will cash out any remaining options. If an IPO has taken place, equity options remain exercisable until the tenth anniversary of the grant date. The gains that may be made under the plan are also subject to a cap. The options are accounted for as a cash-settled share-based payment liability based on the circumstances at December 31, 2012. The fair value of the liability is determined based on the reporting date estimated value of shares less the exercise price of the options. For the purpose of estimating the share-based payment expense, it is assumed that the cash-settled options would be exercised immediately by participants upon vesting four years after the grant date. The total carrying amount for liabilities arising from share-based payment transactions is EUR 11 million at December 31, 2012 and is accrued in salaries and wages (refer to Note 27, Accrued expenses) in the consolidated statement of financial position. Refer to Note 5, Employee benefits expense, for the share-based payment expense recognized in the consolidated income statement. In the event that an IPO does occur, the share-based payment expense related to the equity-settled options will be measured based on the original grant date fair value. 26 Deferred taxes EURm 2012 2011 Deferred tax assets: Inter-company profit in inventory Tax losses carried forward Non-current assets1 Current assets, current liabilities and other provisions Pension Other temporary differences Reclassification due to netting of deferred taxes on company level 58 69 81 320 215 28 (301) 51 154 108 320 223 26 (295) Total deferred tax assets 470 587 Deferred tax liabilities: Undistributed earnings Non-current assets1 Current assets, current liabilities and other provisions Other temporary differences Reclassification due to netting of deferred taxes on company level (20) (39) (262) (9) 301 (20) (58) (245) (4) 295 Total deferred tax liabilities (29) (32) Net deferred tax asset 441 555 – – Tax (charged)/credited to other comprehensive income at end of year Non-current assets include purchase price accounting related amortization of intangible assets. 1 At December 31, 2012 the Group has loss carry forwards primarily attributable to foreign subsidiaries of EUR 3 051 million (EUR 1 220 million in 2011), of which EUR 1 698 million (EUR 47 million in 2011) will expire within ten years. At December 31, 2012 the Group has loss carry forwards and temporary differences of EUR 6 253 million (EUR 4 151 million in 2011) and EUR 237 million of tax credits (EUR 122 million in 2011) for which no deferred tax assets were recognized in the consolidated financial statements due to a history of recent losses in certain jurisdictions. The unrecognized deferred tax assets relate primarily to Finland and Germany. The amount of temporary differences for which no deferred tax assets were recognized was EUR 3 482 million (EUR 3 805 million in 2011) and the amount of loss carry forwards for which no deferred tax assets were recognized was EUR 2 771 million (EUR 346 million in 2011). EUR 1 548 million of these loss carry forwards (EUR 16 million in 2011) will expire within ten years and EUR 1 223 million (EUR 330 million in 2011) of these loss carry forwards have no expiry date. Tax credits for which no deferred tax assets were recognized expire within five years. The recognition of the remaining deferred tax assets is supported by offsetting deferred tax liabilities, earnings history and profit projections in the relevant jurisdictions. At December 31, 2012 the Group has undistributed earnings of EUR 347 million (EUR 424 million in 2011) for which no deferred tax liability was recognized as these earnings are considered to be permanent investments. 102 Nokia Siemens Networks Notes to the Consolidated Financial Statements 27 Accrued expenses EURm 2012 2011 Advance payments Salaries and wages Billings in excess of costs incurred1 Social security VAT Other taxes Other 1 080 746 216 151 111 192 688 919 561 260 160 126 234 725 Total 3 184 2 985 Refer to Note 4, Revenue recognition. 1 Other accrued expenses include EUR 370 million (EUR 382 million in 2011) related to customer projects, EUR 90 million (EUR 94 million in 2011) related to research and development expenses as well as various other amounts which are individually insignificant. Accrued holiday pay is included in salaries and wages in 2012 and has been reclassified from social security for comparability purposes in 2011. There is no change in total accrued expenses as a result of the reclassification. 28 Provisions EURm Warranty and Retrofit Tax Restructuring Project losses Other Total At January 1, 2011 Charged/(credited) to income statement: Additional provisions Changes in estimates Acquisitions Reclassification1 Utilized during year Translation differences 72 90 144 207 126 639 60 (33) 30 (3) (32) – 57 (41) – – (1) – 74 (38) – – (94) – 237 (70) – (112) (169) – 216 (113) 5 (1) (67) (3) 644 (295) 35 (116) (363) (3) At December 31, 2011 94 105 86 93 163 541 Charged/(credited) to income statement: Additional provisions Changes in estimates Reclassification1 Utilized during year Translation differences 49 (28) (2) (41) – 36 (30) – (24) – 977 (48) – (447) – 248 (65) (4) (128) – 48 (25) 17 (48) (7) 1 358 (196) 11 (688) (7) At December 31, 2012 72 87 568 144 148 1 019 In 2012, the reclassification of other provisions consists of EUR 26 million from accrued expenses for contractual commitments with vendors, and EUR 9 million to accounts payable due to a settlement agreement. All other reclassifications relate to divestments (refer to Note 31, Non-current assets and disposal groups classified as held for sale). 1 Annual Report 2012 103 Notes to the Consolidated Financial Statements EURm 2012 2011 Analysis of total provisions at December 31: Non-current Current 303 716 106 435 1 019 541 Total Warranty provisions relate to products sold. The Group’s policy for estimating warranty provisions is disclosed in Note 1, Accounting principles. Outflows of warranty provisions are generally expected to occur within the next 18 months. Tax provisions include corporate income tax, VAT and other taxes. The timing of outflows related to tax provisions is inherently uncertain. In 2012, the restructuring provision includes personnel and other restructuring related costs, such as real estate exit costs. Previously, the restructuring provision was based on personnel costs only and any other restructuring costs were provided for in other provisions. For comparability purposes, this reclassification was made for 2011. There is no change in total provisions as a result of the reclassification. The majority of outflows of restructuring provisions are expected to occur over the next two years. Provisions for project losses relate to onerous contracts. The Group’s policy for providing for onerous contracts is disclosed in Note 1, Accounting principles. Utilization of provisions for project losses is generally expected to occur over the next 12 months. Other provisions include provisions for various contractual obligations, of which EUR 35 million relates to contractual commitments with vendors, and provisions of EUR 18 million for infringement of intellectual property rights. Outflows are generally expected to occur over the next two years. 29 Commitments and contingencies EURm Collateral for the Group’s commitments Assets pledged Contingent liabilities on behalf of Group companies Other guarantees Contingent liabilities on behalf of other companies Other guarantees Financing commitments Customer finance commitments1 Venture fund commitments¹ 2012 2011 2 2 864 1 191 11 – 34 9 86 – Refer to Note 34, Financial and capital risk management. 1 The amounts above represent the maximum principal amount of commitments and contingencies. At December 31, 2012 other guarantees on behalf of Group companies include commercial guarantees of EUR 598 million (EUR 997 million in 2011) provided to certain customers of the Group in the form of bank guarantees or corporate guarantees issued by some of the Group’s entities. These instruments entitle the customer to claim payment as compensation for non-performance by the Group of its obligations under network infrastructure supply agreements. Depending on the nature of the guarantee, compensation is payable on demand or subject to verification of non-performance. The volume of other guarantees has decreased by EUR 327 million mainly due to expired guarantees. Other guarantees on behalf of other companies represent commercial guarantees issued on behalf of third parties. The increase in volume is mainly due to the transfer of guarantees in connection with the disposal of certain businesses where contractual risks and revenues have been transferred, but some of the commercial guarantees have not yet been re-assigned legally. Financing commitments are available under loan facilities negotiated mainly with the Group’s customers. Availability of the amounts is dependent upon the borrower’s continuing compliance with stated financial and operational covenants and compliance with other administrative terms of the facility. The loan facilities are primarily available to fund capital expenditure relating to purchases of network infrastructure equipment and services. 104 Nokia Siemens Networks Notes to the Consolidated Financial Statements Venture fund commitments are financing commitments to a fund making initial capital investments in start-up companies. As a limited partner in the fund, the Group is committed to make capital contributions and entitled to cash distributions according to the respective partnership agreements. The Group is party to routine litigation incidental to the normal conduct of business. In the opinion of management, the outcome of such litigation is not likely to be material to the financial condition or result of operations. At December 31, 2012 the Group has purchase commitments of EUR 799 million (EUR 529 million in 2011) relating to commitments from service agreements, outsourcing arrangements and inventory purchase obligations, primarily for purchases in 2013 through 2014. 30 Leasing contracts The Group leases office, manufacturing and warehouse space under various non-cancellable operating leases. Certain contracts contain renewal options for various periods of time. The future costs for non-cancellable leasing contracts are as follows: EURm Leasing payments Operating leases 2013 2014 2015 2016 2017 Thereafter 141 97 69 40 25 102 Total 474 Rental expenses amount to EUR 309 million in 2012 (EUR 261 million in 2011 and EUR 255 million in 2010), including restructuring charges of EUR 59 million in 2012 (EUR 2 million in 2011 and EUR 14 million in 2010). 31 Non-current assets and disposal groups classified as held for sale On December 1, 2012 the Group entered into an agreement to sell its Optical Networks business to Marlin Equity Partners. The proposed transaction involves the complete Optical Networks product portfolio, services offering and existing customer contracts. The transaction is expected to close in the first half of 2013 and management’s best estimate of the loss to be recognized, following the derecognition of assets and liabilities transferred, amounts to EUR 130 million. On December 5, 2012 the Group signed an agreement to sell its business support systems (‘BSS’) business, including the billing and charging software products and solutions and related services, to Redknee Solutions Inc. The transaction is anticipated to close in the first half of 2013. These divestments further enhance the Group’s strategic focus on the mobile broadband business. The assets and liabilities included in the disposal groups classified as held for sale at December 31 were as follows: EURm 2012 Non-current assets Property, plant and equipment Current assets Inventories Accounts receivable, net of allowances for doubtful accounts Prepaid expenses and accrued income 9 91 39 4 Assets of disposal groups classified as held for sale 143 Current liabilities Accrued expenses Provisions 84 6 Liabilities of disposal groups classified as held for sale 90 Annual Report 2012 105 Notes to the Consolidated Financial Statements The result of discontinued operations, involving the Optical Networks business, and the result recognized on the re-measurement of the disposal group to fair value less costs to sell, are as follows for the years ended December 31: EURm 2012 2011 2010 Net sales Cost of sales 407 (283) 396 (302) 455 (325) Gross profit Research and development expenses Selling and marketing expenses Administrative and general expenses Other expenses 124 (110) (28) (20) (24) 94 (130) (28) (18) – 130 (136) (28) (18) – Loss before tax for discontinued operations Income tax expense (58) (5) (82) (5) (52) (6) Loss for the year from discontinued operations (63) (87) (58) In order to determine the results for the discontinued operations, revenues and costs have been allocated to the business only to the extent that the Group will no longer be entitled to revenues or incur expenses once the business is disposed of. Net cash flows from discontinued operations are as follows for the years ended December 31: EURm 2012 2011 2010 Operating cash flow Investing cash flow Financing cash flow (28) (12) – (84) (15) – (55) (20) – Total cash flow (40) (99) (75) The financing of the Group is managed on a centralized basis and as such, there are no financing cash flows associated with discontinued operations. 2011 In 2011, the Group started to implement a strategy to rationalize its business and divest of certain non-core assets. In connection with this strategy, at December 31, 2011 the Group had entered into disposal agreements or was actively negotiating the sale of certain of its operations. At December 31, 2011 the Group had assets and liabilities included in several disposal groups classified as held for sale. Impairment charges totaling EUR 19 million were recognized as a result of measuring these disposal groups at fair value less costs to sell. Certain of these transactions included contractual provisions that required cash payment by the Group on closing, and possible additional subsequent payments to be made based on potential employee redundancies within the disposal group. Refer to Note 8, Acquisitions and disposals. Assets and liabilities included in disposal groups classified as held for sale at December 31 were as follows: EURm 2011 Property, plant and equipment Inventories Accounts receivable, net of allowances for doubtful accounts Prepaid expenses and accrued income 2 31 22 2 Assets of disposal groups classified as held for sale 57 Provisions Other long-term liabilities Accounts payable Accrued expenses 116 6 17 22 Liabilities of disposal groups classified as held for sale 161 106 Nokia Siemens Networks Notes to the Consolidated Financial Statements During 2011, due to the changes in the business environment in Egypt, the property in the 6th of October City was reclassified from held for sale to property, plant and equipment. There was no effect on the income statement as a result of the reclassification. The property in China was sold during 2011 with a gain of EUR 9 million. 32 Related party transactions Nokia and Siemens contributed to Nokia Siemens Networks certain tangible and intangible assets and certain business interests that comprised Nokia’s networks business and Siemens’ carrier-related operations. Nokia and Siemens each own approximately 50% of Nokia Siemens Networks. Nokia has the ability to appoint the Chief Executive Officer of the Group and the majority of the members of the Board of Directors. Accordingly, Nokia is deemed to have control and thus consolidates the results of Nokia Siemens Networks in its financial statements. Siemens accounts for its ownership using the equity method of accounting. Transactions with the Group’s shareholders The Group has a number of contracts with its shareholders, Nokia and Siemens, and their subsidiary companies. Sales transactions with the parent companies mainly relate to historical contracts agreed by the parent companies prior to the formation of the Group, where the Group now has an obligation to deliver products or services to fulfill these agreements. The amounts outstanding are unsecured and will be settled in cash. There have been no guarantees provided or received for any related party receivables or payables. In China, the Group owes accounts payable of approximately EUR 180 million to Nokia. These accounts payable relate to the networks business before that business was transferred by Nokia to the Group upon its formation in 2007 and consist of customer receivables collected by the Group on behalf of Nokia. Management believes that the Group will be asked to repay this payable in the near future. No expense has been recognized in the period for bad or doubtful debts in respect of the amounts owed by the related parties (EUR 1 million in 2011 and EUR 0 million in 2010). At December 31, 2012 EUR 1 million (EUR 1 million in 2011) of the valuation allowance for doubtful accounts relates to amounts owed by various Siemens entities. During 2012, the Group incurred expenses of EUR 239 million (EUR 386 million in 2011 and EUR 508 million in 2010) receiving products and services from both shareholders relating to information technology (‘IT’) infrastructure, shared services, leases and software development. In December 2010, the Group sold a building, situated in Karaportti 8, Espoo, Finland to Nokia for EUR 27 million. The Group then entered into an operating lease with Nokia to lease the building for 15 years. The Group’s transactions with its shareholders are summarized in the following table: Purchases of goods or services Sales of goods or services EURm Nokia Siemens Amounts owed by related parties Amounts owed to related parties Loan or finance liability balances outstanding to shareholders 2012 2011 2010 2012 2011 2010 2012 2011 2012 2011 2012 2011 5 20 6 23 1 46 93 146 161 225 168 340 34 10 29 7 227 26 242 19 7 32 6 32 The deposits and loans with Nokia are described in the following tables: 2012 Description of loans or other finance receivables and liabilities Short-term deposit from Nokia Siemens Networks to Nokia in Venezuela Short-term loans from Nokia to Nokia Siemens Networks Finance B.V. 2011 Description of loans or other finance receivables and liabilities Short-term deposit from Nokia Siemens Networks to Nokia in Venezuela Short-term loans from Nokia to Nokia Siemens Networks Finance B.V. Amount of loan in the agreement currency Original term Interest rate at December 31 Balance at December 31 VEF 49 million 52 days 1.00% EUR 7 million EUR 7 million 7 days 0.02% EUR 7 million Amount of loan in the agreement currency Original term Interest rate at December 31 Balance at December 31 VEF 42 million 123 days 2.00% EUR 6 million EUR 6 million 7 days 0.71% EUR 6 million Annual Report 2012 107 Notes to the Consolidated Financial Statements The Group maintains offsetting deposits at Nokia as long as loans from Nokia are outstanding. At December 31, 2012 the interest-free loan from Siemens granted to the Group to bridge finance for certain payments withheld by a customer was EUR 32 million (EUR 32 million in 2011). The parent companies have provided a committed overdraft facility of EUR 100 million which has not been utilized at December 31, 2012. The overdraft facility can be cancelled by the parent companies at one month’s notice. No commitment fees are paid on this facility. In September 2011, the Group received a capital injection of EUR 1 000 million from its parent companies (refer to Note 23, Issued share capital and share premium). At December 31, 2012 the Group has deferred contracts with Siemens. These contracts require invoicing to be done by Siemens as the party with which the original transaction had been contracted, but the risks and revenues related to fulfilling the contractual requirements remained with the Group when these contracts transferred to the Group after April 1, 2007. The receivables associated with these deferred contracts with Siemens are included in the above amounts owed by related parties. Lease transactions with the Group’s shareholders The Group has multiple operating leases with both Nokia and Siemens. These operating leases mainly relate to property and typically have a lease term of five years or longer. The Group leases this property from Nokia and Siemens to support its network operations around the world. Total lease expenses paid in 2012 to Nokia and Siemens are EUR 10 million (EUR 19 million in 2011 and EUR 21 million in 2010) and EUR 29 million (EUR 32 million in 2011 and EUR 41 million in 2010) respectively. EURm Nokia Siemens 2013 2014 2015 2016 2017 Thereafter 6 5 5 5 3 21 24 19 14 7 6 – Total 45 70 EURm 2012 2011 2010 Share of results of associates Share of other comprehensive income/(loss) of associates Share of shareholders’ equity of associates Sales to associates Purchases from associates Receivables from associates Liabilities to associates 8 4 28 8 147 – 32 (17) (2) 19 29 43 – 13 11 – 40 15 148 3 8 Leasing payments Transactions and positions with associates Board of Directors The members of the Board of Directors are appointed by the parent companies of the Group. The appointed board members are employees of the parent companies, except for the Chairman of the Board. No other board members, except the Chairman, receive remuneration or retirement benefits from the Group for the services they provide as members of the Board of Directors. There were no loans granted to the members of the Board of Directors at December 31, 2012. 108 Nokia Siemens Networks Notes to the Consolidated Financial Statements Management compensation The remuneration of the Nokia Siemens Networks’ senior management team and the Chairman of the Board of Directors during the period was as follows: EURm 2012 2011 2010 Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payment expense 20.5 1.0 – 1.3 4.0 9.4 0.7 5.2 0.6 (0.1) 7.6 0.5 4.8 – (0.1) Total 26.8 15.8 12.8 The number of executive board members ranged from 13 to 15 members during the year (13 to 14 members in 2011 and 12 to 14 members in 2010). The amounts presented above include remuneration to the executive board members only for the time they were on the Executive Board. In addition to the executive board members, the remuneration to the Chairman of the Board of Directors is included in the amounts presented above since October 2011. There were no loans granted to the members of the Group Executive Board at December 31, 2012. 33 Notes to the consolidated statement of cash flows EURm 2012 2011 2010 Other adjustments for: Scrapping/write-off of property, plant and equipment/intangible assets Share of results of associates Impairment charges (Note 9) Share-based payment expense/(income) Post-employment benefits (Note 6) Other (income)/expenses 9 (8) 37 11 40 (2) 7 17 19 (2) 43 2 7 (11) 2 (5) 45 6 Other adjustments, total 87 86 44 The cash outflows for restructuring and other specific items, excluding impairments and PPA related charges, are EUR 645 million in 2012 (EUR 188 million in 2011 and EUR 510 million in 2010). Annual Report 2012 109 Notes to the Consolidated Financial Statements 34 Financial and capital risk management Risk management at the Group is a systematic and proactive way to analyze, review and manage all opportunities, threats and risks related to the Group’s objectives rather than solely to eliminate risks. The Group’s Treasury function focuses on financial risks. The Group’s financial risk management objective is to guarantee cost-efficient funding at all times and to identify, evaluate and hedge financial risks and optimize cash management processes. There is a strong focus in the Group on protecting shareholder value. Treasury activities support this aim by (1) minimizing the adverse effects caused by fluctuations in the financial markets on the profitability of the underlying business, and (2) managing the capital structure of the Group by balancing prudently the levels of liquid assets and financial borrowings. Treasury activities are governed by policies approved by the Board of Directors. Treasury policy provides principles for overall financial risk management and determines the allocation of responsibilities for financial risk management in the Group. Operating procedures cover specific areas such as foreign exchange risk, interest rate risk, use of derivative financial instruments, as well as liquidity and credit risk. The Group is risk averse in its treasury activities. (a) Market risk Foreign exchange risk The objective of the foreign exchange (‘FX’) risk management activities is to support the Group in protecting shareholder value by minimizing the effects of uncertainty in the international foreign exchange markets. The main principle is that all major foreign exchange exposures are identified, analyzed and hedged by the Group’s treasury function. Specifically: –Statement of financial position risks from foreign exchange positions in currencies other than the functional currency of the respective Group entity are identified and hedged on an ongoing basis. –Cash flow risks arising from highly probable forecasted sales and purchases of the Group are identified on a monthly basis and hedged under hedge accounting for a period of up to 15 months. These forecasted sales and purchases are typically realized within an equivalent period. –Other forecasted cash flow risks are managed selectively and the related hedges are carried at fair value through profit and loss. The Group has some exposure due to unhedged risks which consists of exposures in currencies that either cannot be hedged or which are considered immaterial. In 2012, these currencies represent approximately 2% of the Group’s net sales (less than 2% of net sales in 2011). Exposures are mainly hedged with derivative financial instruments such as forward foreign exchange contracts and foreign exchange options. The majority of financial instruments hedging foreign exchange risk has a duration of less than a year. The Group does not hedge forecasted foreign currency cash flows beyond two years. Since the Group has entities where the functional currency is other than euro, the shareholders’ equity is exposed to fluctuations in exchange rates. Equity changes caused by movements in foreign exchange rates are shown as a currency translation difference in the Group’s consolidated financial statements. The Group may use, from time to time, foreign exchange contracts and foreign currency denominated loans to hedge its equity exposure arising from foreign net investments. The Group has entities in Venezuela and Belarus where the functional currency is the currency of a hyperinflationary economy. The Group assessed the entities’ financial statements in accordance with IAS 29, Financial Reporting in Hyperinflationary Economies. The impact is not material in 2012 or 2011. In 2010, the Group recorded an expense of EUR 14 million, mainly affected through an increase in financial income and expenses, as a result of the Group’s hyperinflationary accounting assessment for its entity in Venezuela. Hyperinflationary accounting did not have a material impact on the statement of financial position in 2012 or 2011. Trading in hyperinflationary economies carries a risk of future devaluation of monetary assets and liabilities. This risk cannot be hedged. The Group has foreign exchange exposure in Iran which cannot be hedged. Iran does not have a hyperinflationary economy but it is impacted by international sanctions, foreign currency access is limited, and several exchange rates are available. The Group has therefore elected to use a rate at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. The Group recognized a foreign exchange loss of EUR 109 million due to foreign exchange fluctuations in the Iranian rial in 2012. 110 Nokia Siemens Networks Notes to the Consolidated Financial Statements The tables below present the currencies that represent a significant portion of the currency mix in outstanding financial instruments at December 31: 2012 EURm FX derivatives used as cash flow hedges (absolute net amount)1 FX exposure from statement of financial position items (absolute net amount)2, 3 FX derivatives not designated in a hedge relationship and carried at fair value through profit and loss (absolute net amount)2, 3 2011 EURm FX derivatives used as cash flow hedges (absolute net amount)1 FX exposure from statement of financial position items (absolute net amount)2, 3 FX derivatives not designated in a hedge relationship and carried at fair value through profit and loss (absolute net amount)2, 3 USD JPY CNY INR Other 479 1 030 462 128 – 178 – 133 142 817 1 155 185 171 68 618 USD JPY KRW ZAR Other 141 496 467 161 – 147 – 146 133 928 469 396 126 156 796 The foreign exchange derivatives are used to hedge the foreign exchange risk from forecasted highly probable cash flows related to sales, purchases and business acquisition activities. In some of the currencies, especially US dollars (USD) and Japanese yen (JPY), the Group has substantial foreign exchange risks in both estimated cash inflows and outflows, which have been netted in the table. Refer to Note 22, Fair value and other reserves for more details on hedge accounting. The underlying exposures for which these hedges are entered into are not presented in the table as they are not financial instruments as defined under IFRS 7, Financial Instruments: Disclosures. 2 The statement of financial position items and some probable forecasted cash flows which are denominated in foreign currencies are hedged by a portion of foreign exchange derivatives not designated in a hedge relationship and carried at fair value through profit and loss. 3 The Group has hedged the statement of financial position exposure with a combination of foreign exchange forwards and foreign exchange options. 1 Interest rate risk The Group is exposed to interest rate risk either through market value fluctuations of statement of financial position items (i.e. price risk) or through changes in interest income or expenses. Interest rate risk mainly arises through interest-bearing assets and liabilities. Estimated future changes in cash flows and statement of financial position structure also expose the Group to interest rate risk. The objective of interest rate risk management is to support the Group in protecting its shareholder value by optimizing the balance between minimizing uncertainties caused by fluctuations in interest rates and minimizing the consolidated net interest expense. The interest rate exposure of the Group is monitored and managed centrally by the Group’s treasury function. Due to the Group’s current statement of financial position structure, the primary emphasis is placed on managing the interest rate risk of debt. At December 31, the interest rate profile of the Group’s interest-bearing assets and liabilities is presented in the table below: 2012 EURm 2011 Fixed rate Floating rate Fixed rate Floating rate Assets1 Liabilities2 405 (293) 2 121 (812) 375 (1 128) 1 397 (444) Assets and liabilities before derivatives Interest rate derivatives 112 (1) 1 309 – (753) (152) 953 150 Assets and liabilities after derivatives 111 1 309 (905) 1 103 The increase in floating rate assets is primarily due to an increase in bank and cash. In 2012 and 2011, fixed rate assets mainly include available-for-sale investments, cash equivalents, long-term loans receivable and short-term loans. 2 The increase in floating rate liabilities is primarily due to an increase in long-term loans from financial institutions. The decrease in fixed rate liabilities is mainly due to a decrease in short-term and long-term loans from financial institutions. 1 Annual Report 2012 111 Notes to the Consolidated Financial Statements Value-at-Risk The Group uses the Value-at-Risk (‘VaR’) methodology to assess the Group’s exposures to foreign exchange and interest rate risks. The VaR based methodology provides estimates of potential fair value losses in market risk sensitive instruments as a result of adverse changes in specified market factors, at a specified confidence level over a defined holding period. For the Group, the foreign exchange VaR is calculated using the Monte Carlo method which simulates random values for exchange rates in which the Group has exposures and it takes the nonlinear price function of certain foreign exchange derivative instruments into account. The variance-covariance methodology is used to assess and measure the interest rate risk. The VaR is determined using volatilities and correlations of rates and prices estimated from a one-year sample of historical market data, at a 95% confidence level, using a one-month holding period. To put more weight on recent market conditions, an exponentially weighted moving average is performed on the data with an appropriate decay factor. This model implies that within a one-month holding period, the potential loss will not exceed the VaR estimate in 95% of possible outcomes. In the remaining 5% of possible outcomes, the potential loss will be at minimum equal to the VaR figure and on average, substantially higher. The VaR methodology relies on a number of assumptions such as: (1) risks are measured under average market conditions, assuming the market risk factors follow normal distributions; (2) future movements in market risk factors follow estimated historical movements; and (3) the assessed exposures do not change during the holding period. Thus, it is possible that for any given month, the potential losses at 95% confidence level are different and could be substantially higher than the estimated VaR. Foreign exchange Value-at-Risk The VaR figures for the Group’s financial instruments which are sensitive to foreign exchange fluctuations are presented in the table below. As defined in IFRS 7, Financial Instruments: Disclosures, the financial instruments included in the VaR calculations are: (1) foreign exchange exposures from outstanding statement of financial position items and other foreign exchange derivatives carried at fair value through profit and loss which are not in a hedge relationship and are mostly used for hedging statement of financial position items; and (2) foreign exchange derivatives designated as forecasted cash flow hedges. Most of the VaR is caused by these derivatives as forecasted cash flow exposures are not financial instruments as defined in IFRS 7 and thus not included in the VaR calculation. Foreign exchange Value-at-Risk: EURm At December 31 Average for the year Range for the year 2012 2011 42 46 27-60 13 29 13-52 Interest rate Value-at-Risk Interest rate VaR is calculated using the variance-covariance method to assess and measure interest rate risk. The VaR figures for the Group’s interest rate exposure in the debt portfolio are presented in the table below. Sensitivities to credit spreads are not reflected in the figures below. Interest rate Value-at-Risk: EURm At December 31 Average for the year Range for the year 2012 2011 – – 0-1 1 4 1-6 (b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises from bank and cash, fixed income and money-market investments, derivative financial instruments, loans receivable and credit exposures to customers, including outstanding receivables, financial guarantees and committed transactions. Credit risk is managed separately for business related exposure and financial credit exposure. Except for loan commitments given but not used of EUR 34 million in 2012 (EUR 86 million in 2011), the maximum exposure to credit risk is limited to the book value of the financial assets included in the Group’s consolidated statement of financial position. 112 Nokia Siemens Networks Notes to the Consolidated Financial Statements Business related credit risk The Group aims to ensure the highest possible quality in accounts receivable and loans due from customers. The credit policy sets out the framework for the management of the business related credit risks in all Group companies and affiliates. Credit exposure is measured as the total of accounts receivable and loans due from customers and committed credits. At December 31, 2012 accounts receivable excluding allowances for doubtful accounts are EUR 4 231 million. At December 31, 2011 accounts receivable, excluding allowances for doubtful accounts as well as amounts expected to be uncollectible for acquired receivables, amounted to EUR 5 436 million. Loans receivable are EUR 74 million (EUR 115 million in 2011). The credit policy requires credit decisions to be based on credit evaluation including credit rating for larger exposures. The Group’s rating policy defines the rating principles, and ratings are approved by the rating committee. Credit risks are approved and monitored according to the credit policy. Concentrations of customer or country risks are monitored at Group level. When appropriate, assumed credit risks are mitigated with the use of approved instruments, such as letters of credit, collateral or insurance and sale of receivables. Accounts receivable do not include any major concentrations of credit risk by customer. The top three customers account for approximately 9.1%, 4.3% and 2.4% (4.4%, 2.5% and 2.5% in 2011) of the Group accounts receivable and loans receivable at December 31, 2012. The top three credit exposures by country amount to 11.7%, 11.0% and 7.0% (13.3%, 6.2% and 5.6% in 2011). The Group considers the political, economic and regulatory environment with respect to such concentrations when assessing and managing credit risk. The Group has provided allowances for doubtful accounts as needed on accounts receivable and loans receivable based on an analysis of its customers’ credit quality and credit history. The Group establishes an allowance for doubtful accounts that represents an estimate of expected losses at the end of the period. All receivables and loans receivable are considered on an individual basis to determine the allowance for doubtful accounts. The overall portfolio of the customer accounts receivable includes trade receivables of EUR 2 948 million (EUR 3 642 million in 2011) and accrued receivables based on the percentage of completion method of accounting of EUR 1 164 million (EUR 1 573 million in 2011). The Group concluded that the carrying amount of trade receivables that does not create any additional credit risk exposure amounts to EUR 1 562 million at December 31, 2012 (EUR 1 958 million in 2011), as all the contractual cash flows are expected to be recoverable. Of these receivables, the aggregate value of receivables performing in accordance with the contractual payment terms is EUR 1 463 million (EUR 1 814 million in 2011), while the aggregate value of past due receivables is EUR 100 million (EUR 144 million in 2011). The aging of these past due receivables is as follows: EURm Past due 1-30 days Past due 31-180 days More than 180 days Total 2012 2011 45 32 23 55 60 29 100 144 At December 31, 2012 the gross carrying amount of accounts receivable, related to customer balances for which valuation allowances have been recognized, is EUR 1 505 million (EUR 1 905 million in 2011). The valuation allowances for these accounts receivable are EUR 120 million (EUR 110 million in 2011) and the amounts expected to be uncollectible for acquired receivables are EUR 16 million (EUR 111 million in 2011). Refer to Note 8, Acquisitions and disposals and Note 20, Allowances for doubtful accounts. At December 31, 2012 and 2011 there are no valuation allowances recognized for customer loans. There are no past due customer loans at December 31, 2012 (EUR 1 million in 2011, which was paid in January 2012). At December 31, 2012 and 2011, all accounts receivable under sale of receivables transactions have qualified for asset derecognition. Financial credit risk Financial instruments contain an element of risk of loss resulting from counterparties being unable to meet their obligations. This risk is monitored and managed centrally. The Group minimizes financial credit risk by limiting its counterparties to a sufficient number of major banks and financial institutions. In addition, the Group also monitors the total potential financial losses, should its counterparties be unable to fulfill their obligations on the open derivative contracts the Group has maintained with them on an ongoing basis. Annual Report 2012 113 Notes to the Consolidated Financial Statements (c) Liquidity risk Liquidity risk is defined as financial distress or extraordinary high financing costs arising due to a shortage of liquid funds in a situation where business conditions unexpectedly deteriorate and require financing. Transactional liquidity risk is defined as the risk of executing a financial transaction below fair market value, or not being able to execute the transaction at all within a specific period of time. The objective of liquidity risk management is to maintain sufficient liquidity and to ensure that it is available fast enough without endangering its value, in order to avoid uncertainty related to financial distress at all times. The Group ensures a sufficient liquidity at all times by efficient cash management and by keeping sufficient committed and uncommitted credit lines available. In September 2011, the Group received a capital injection of EUR 1 000 million from its parent companies to further strengthen the Group’s financial position and support strategic flexibility, productivity and innovation in areas such as mobile broadband and related services. Refer to Note 23, Issued share capital and share premium. Additionally, the parent companies have provided a committed overdraft facility of EUR 100 million which has not been utilized at December 31, 2012. The overdraft facility can be cancelled by the parent companies at one month’s notice. No commitment fees are paid on the facility. For details of the Group’s loans and borrowings, refer to Note 24, Loans and borrowings. 114 Nokia Siemens Networks Notes to the Consolidated Financial Statements The following table is an undiscounted cash flow analysis for both financial assets and financial liabilities that are presented on the consolidated statement of financial position and ‘off-balance sheet’ instruments such as loan commitments according to their remaining contractual maturity. At December 31, 2012 EURm Non-current financial assets Long-term loans receivable Other non-current assets Current financial assets Current portion of long-term loans receivable Short-term loans receivable1 Available-for-sale investments Cash Cash flows related to derivative financial assets net settled: Derivative contracts – receipts Cash flows related to derivative financial assets gross settled: Derivative contracts – receipts Derivative contracts – payments Accounts receivable2, 3 Non-current financial liabilities Long-term liabilities Current financial liabilities Current portion of long-term interest-bearing liabilities Short-term borrowings Cash flows related to derivative financial liabilities net settled: Derivative contracts – payments Cash flows related to derivative financial liabilities gross settled: Derivative contracts – receipts Derivative contracts – payments Other financial liabilities4 Accounts payable3 Contingent financial assets and liabilities Loan commitments given undrawn5 Financial guarantee given uncalled Loan commitments obtained undrawn6 Total Due within 3 months Due between 3 and 12 months Due between 1 and 3 years Due between 3 and 5 years Due beyond 5 years 69 1 – – – – 39 1 30 – – – 39 8 710 1 711 12 8 708 1 711 27 – 2 – – – – – – – – – – – – – – – – – – – 4 943 (4 802) 2 948 3 066 (3 005) 2 334 1 877 (1 797) 614 – – – – – – – – – (901) (8) (55) (838) – – (208) (125) (83) (70) (125) (55) – – – – – – (2) (2) – – – – 2 709 (2 724) (10) (2 352) 2 318 (2 330) (10) (2 213) 278 (280) 113 (114) – – – – (139) – – – (34) (28) (6) – – – 821 97 (9) 733 – – Annual Report 2012 115 Notes to the Consolidated Financial Statements At December 31, 2011 EURm Non-current financial assets Long-term loans receivable Other non-current assets Current financial assets Current portion of long-term loans receivable Short-term loans receivable1 Available-for-sale investments Cash Cash flows related to derivative financial assets net settled: Derivative contracts – receipts Cash flows related to derivative financial assets gross settled: Derivative contracts – receipts Derivative contracts – payments Accounts receivable2, 3 Non-current financial liabilities Long-term liabilities Current financial liabilities Current portion of long-term interest-bearing liabilities Short-term borrowings Cash flows related to derivative financial liabilities net settled: Derivative contracts – payments Cash flows related to derivative financial liabilities gross settled: Derivative contracts – receipts Derivative contracts – payments Other financial liabilities4 Accounts payable3 Contingent financial assets and liabilities Loan commitments given undrawn5 Financial guarantee given uncalled Loan commitments obtained undrawn6 Total Due within 3 months Due between 3 and 12 months Due between 1 and 3 years Due between 3 and 5 years Due beyond 5 years 95 1 – – – – 37 1 53 – 5 – 59 20 900 729 10 19 898 729 49 1 2 – – – – – – – – – – – – – – – – – – – 4 609 (4 614) 3 642 4 224 (4 230) 2 830 385 (384) 772 – – 40 – – – – – – (402) (1) (2) (265) (115) (19) (387) (896) (61) (809) (326) (87) – – – – – – (3) (1) (1) (1) – – 4 726 (4 776) (20) (2 209) 4 293 (4 311) (20) (2 128) 433 (465) – – – – – – (63) (18) – – (86) (37) (49) – – – 1 480 96 1 384 – – – Short-term loans receivable are included in other financial assets. Accounts receivable maturity analysis does not include receivables accounted for based on the percentage of completion accounting method of EUR 1 164 million (EUR 1 573 million in 2011). 3 The fair values of accounts receivable and accounts payable are assumed to approximate their carrying values due to their short-term nature. 4 In 2012, other financial liabilities include EUR 10 million non-derivative short-term financial liabilities (EUR 20 million in 2011). Refer to Note 16, Fair value of financial instruments. 5 Loan commitments given but undrawn have been included in the earliest period in which they could be drawn. 6 Loan commitments obtained undrawn have been included based on the period in which they expire and include related commitment fees. 1 2 For the above tables, a line-by-line reconciliation to the consolidated statement of financial position is not possible due to the inclusion of ‘off-balance sheet’ instruments such as loan commitments and the inclusion of interest receivable and payable. 116 Nokia Siemens Networks Notes to the Consolidated Financial Statements Capital risk management The Group manages its capital and financing to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance. The Group reviews the capital structure and expected financing requirements on a regular basis. For the Group’s operations, the capital structure has been largely defined by the respective asset contributions of the parent companies on April 1, 2007, subsequent capital injections from the parent companies and the financing requirements arising from operating and investing activities including restructuring activities. EURm 2012 2011 Total loans and borrowings1 Less: Cash and cash equivalents 1 133 (2 418) 1 605 (1 613) Net cash Total equity (1 285) 2 452 (8) 3 814 Total capital 1 167 3 806 Total borrowings comprise long-term interest bearing liabilities, the current portion of long-term loans and short-term borrowings. In 2012, total borrowings are offset by short-term deposits of EUR 7 million (EUR 6 million in 2011) that were provided by the Group to Nokia and therefore reduce the amount presented in total borrowings above. Refer to Note 24, Loans and borrowings and Note 32, Related party transactions. 1 35 Subsequent events On March 14, 2013 Nokia Siemens Networks B.V., Nokia Corporation and Nokia Finance International B. V. commenced an arbitration under the rules of the International Chamber of Commerce against Siemens AG. The claimants seek damages for an alleged breach by Siemens AG of warranties and other clauses in the Framework Agreement dated June 19, 2006 (as amended and restated) between the parties. The alleged breaches arise out of a series of contracts entered between Siemens AS and the Norwegian Ministry of Justice and the Police dated December 22, 2006 immediately prior to the transfer of that contract to Nokia Siemens Networks B.V. and its affiliates. The claimants seek damages presently estimated at EUR 238 million. The Group is aware that Siemens AG will contest both liability and amount. Annual Report 2012 117 Company Financial Statements Company Statement of Financial Position (before proposed appropriation of result) As at December 31 EURm Notes 2012 2011 1 4 547 11 22 13 4 768 – 24 7 4 593 4 799 – 21 6 1 473 27 27 501 Total assets 4 620 5 300 EQUITY AND LIABILITIES Shareholders’ equity Share capital Share premium Translation differences Fair value and other reserves Accumulated deficit Loss for the year 0 9 744 133 75 (6 163) (1 463) 0 9 744 136 (19) (5 453) (710) ASSETS Non-current assets Participations in group companies Deferred tax assets Long-term loans receivable Available-for-sale investments Current assets Other financial assets Other receivables Cash and cash equivalents 2 2 3 4 Total equity 5 2 326 3 698 Non-current liabilities Provisions Deferred tax liabilities 6 556 19 438 13 575 451 1 684 35 1 096 55 1 719 1 151 Current liabilities Loans from group companies Other liabilities 7 8 Total liabilities 2 294 1 602 Total equity and liabilities 4 620 5 300 The notes are an integral part of these consolidated financial statements. 118 Nokia Siemens Networks Company Financial Statements Company Income Statement For the year ended December 31 EURm 2012 2011 2010 Loss from group companies after taxes Company loss for the year after taxes (1 429) (34) (662) (48) (1 064) (26) Loss for the period (1 463) (710) (1 090) The notes are an integral part of these consolidated financial statements. Annual Report 2012 119 Notes to the Company Financial Statements General notes for the preparation of the Company Financial Statements The company financial statements have been prepared in accordance with the statutory provisions of Part 9, Book 2, of the Netherlands Civil Code and the firm pronouncements in the Dutch Accounting Standards as issued by the Dutch Accounting Standards Board. For the principles for the recognition and measurement of assets and liabilities and the determination of the result for its Company Financial Statements, Nokia Siemens Networks B.V. applies the option provided in Section 2:362 (8) of the Netherlands Civil Code. This means that the principles for the recognition and measurement of assets and liabilities and determination of the result (hereinafter referred to as ‘Accounting principles’) of the Company Financial Statements of Nokia Siemens Networks B.V. are the same as those applied for the Consolidated Financial Statements under International Financial Reporting Standards. For the accounting policies for the Company statement of financial position and income statement, reference is made to the notes to the consolidated statement of financial position and income statement pages 67 to 117. The financial information relating to Nokia Siemens Networks B.V. is presented in the Consolidated Financial Statements. In accordance with section 2:402 of the Netherlands Civil Code, the Company Financial Statements only contain an abridged income statement. Definition of Company:‘Company’ refers to the financial statements of the Parent, Nokia Siemens Networks B.V. Definition of the Group:The Nokia Siemens Networks B.V. group of companies (The Parent and all its subsidiaries). Commitments and Refer to Note 29, Commitments contingencies: and contingencies, in the Consolidated Financial Statements. Consolidated Financial Refer to Note 1, Accounting Statements: principles: Basis of presentation section, in the Consolidated Financial Statements. Employees of the Company:The Company has two employees. Directors’ remuneration:Refer to Note 32, Related party transactions: Management compensation section, in the Consolidated Financial Statements. Nokia Siemens Networks B.V. Jesper Ovesen (Chairman), Board of Directors:Timo Ihamuotila, Joe Kaeser, Barbara Kux, Louise Pentland, Peter Y. Solmssen and Juha Äkräs. 120 Nokia Siemens Networks 1 Participations in group companies Group companies and other associated companies in which the Company exercises significant influence are stated at net equity value. Significant influence exists when the Company owns, directly or indirectly through subsidiaries, more than 20% of the voting rights of the company. Participations in group companies are initially acquired at the fair value of identifiable assets and liabilities upon acquisition. Any subsequent valuation is calculated using the accounting principles applied in these financial statements. Participations in group companies with negative equity values are carried at nil. A provision is recognized when the Company is fully or partially liable for the obligations of the group company or has the firm intention to allow the group company to settle its obligations. The long-term loan receivables are considered as part of the equity consideration when a provision is necessary. The following table reconciles the opening and closing balances of participations in group companies: EURm 2012 2011 Net carrying amount January 1 Loss from group companies after taxes Dividend from group companies Additions, and acquisitions and disposals Translation differences Changes in other comprehensive income Transfers to provisions, net Other movements 4 768 (1 429) (75) 1 071 (2) 93 118 3 4 189 (662) (133) 1 187 38 31 108 10 Net carrying amount December 31 4 547 4 768 The line item additions, acquisitions and disposals includes the capital injections and disposals done in the participations by the Company. The material transactions were capital injections in Nokia Siemens Networks Oy of EUR 900 million in 2012 and EUR 850 million in 2011. Additionally in 2011, there was EUR 315 million in an internal share deal purchase of Nokia Siemens Networks Japan Co. Ltd. by Nokia Siemens Networks B.V. from Nokia Siemens Networks Oy. Notes to the Company Financial Statements Participations in group companies at December 31, 2012: Name Place of residence and country Full consolidation Nokia Siemens Networks MEA FZ-LLC Nokia Siemens Networks Afghanistan LLC Nokia Siemens Networks CJSC Nokia Siemens Networks Argentina S.A. Nokia Siemens Networks Holdings Österreich GmbH Nokia Siemens Networks Österreich GmbH Nokia Siemens Networks Australia Pty. Ltd. Nokia Siemens Networks Baku LLC Nokia Siemens Networks Banja Luka d.o.o. Nokia Siemens Networks d.o.o. za mrezne sisteme, Sarajevo Nokia Siemens Networks Bangladesh Ltd. Nokia Siemens Networks N.V. Nokia Siemens Networks EOOD Nokia Siemens Networks Bolivia S.A. Nokia Siemens Networks Serviços Ltda. Nokia Siemens Networks do Brasil Sistemas de Comunicações Ltda. IRIS Telekom FLLC Nokia Siemens Networks LLC Nokia Siemens Networks Canada Inc. Nokia Siemens Networks Schweiz AG Nokia Siemens Networks Chile Ltda. Hunan Hua Nuo Technology Co. Ltd. Nokia (Beijing) Communication Technology Service Co. Ltd. Nokia Siemens Networks (Beijing) Communications Ltd. Nokia Siemens Networks (China) Ltd. Nokia Siemens Networks (Suzhou) Supply Chain Services Co. Ltd. Nokia Siemens Networks (Tianjin) Co. Ltd. Nokia Siemens Networks Technology (Beijing) Co. Ltd. Nokia Siemens Networks Technology Service Co. Ltd. Nokia Siemens Networks (Hangzhou) Co. Ltd. Nokia Siemens Networks (Shanghai) Ltd. Nokia Siemens Networks (Suzhou) Co. Ltd. Nokia Siemens Networks Neusoft Commtech Co. Ltd. Nokia Siemens Networks System Co. Ltd. Nokia Siemens Networks Colombia Ltda. Nokia Siemens Networks Costa Rica S.A. Nokia Siemens Networks Czech Republic s.r.o. Nokia Siemens Networks Beteiligungen Inland GmbH & Co. KG Nokia Siemens Networks Beteiligungen Inland Management GmbH Nokia Siemens Networks Deutschland GmbH Nokia Siemens Networks GmbH & Co. KG Nokia Siemens Networks International Holding GmbH Nokia Siemens Networks Management GmbH Nokia Siemens Networks Management International GmbH Nokia Siemens Networks Operations GmbH Nokia Siemens Networks Optical GmbH Nokia Siemens Networks Services GmbH & Co. KG Nokia Siemens Networks Services Management GmbH Nokia Siemens Networks Transfergesellschaft mbH Nokia Siemens Networks Vermögensverwaltung GmbH Nokia Siemens Networks Vorratsgesellschaft 6 mbH Nokia Siemens Networks Danmark A/S Nokia Siemens Networks Algérie SARL Nokia Siemens Networks Ecuador S.A. Nokia Siemens Networks Oü Nokia Siemens Networks Egypt LLC Dubai, United Arab Emirates Kabul, Afghanistan Yerevan, Armenia Buenos Aires, Argentina Vienna, Austria Vienna, Austria Sydney, Australia Baku, Azerbaijan Banja Luka, Bosnia-Herzegovina Sarajevo, Bosnia-Herzegovina Dhaka, Bangladesh Turnhout, Belgium Sofia, Bulgaria Cochabamba, Bolivia Sao Paolo, Brazil Sao Paolo, Brazil Minsk, Belarus Minsk, Belarus Mississauga, Canada Zürich, Switzerland Santiago, Chile Changsha, China Beijing, China Beijing, China Beijing, China Suzhou, China Tianjin, China Beijing, China Beijing, China Hangzhou, China Shanghai, China Suzhou, China Liaoning, China Beijing, China Santafe de Bogota, Colombia San Jose, Costa Rica Prague, Czech Republic Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Munich, Germany Copenhagen, Denmark Algiers, Algeria Guayaquil, Ecuador Tallinn, Estonia Cairo, Egypt Group ownership % 100.00* 100.00** 100.00 100.00 100.00 100.00 100.00* 100.00* 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00* 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00** 60.00 83.90 54.00 83.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00* 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00* Annual Report 2012 121 Notes to the Company Financial Statements Name Place of residence and country Nokia Siemens Networks S.A.E. Telcel S.A. Nokia Siemens Networks S.L. Nokia Siemens Networks Asset Management Oy Nokia Siemens Networks Oy Nokia Siemens Tietoliikenne Oy Nokia Siemens Networks France S.A. Apertio Ltd. Apertio Partners Ltd. Invergence Ltd. Nokia Siemens Networks UK Ltd. Nokia Siemens Networks Hellas A.E. Nokia Siemens Networks Guatemala S.A. Nokia Siemens Networks H.K. Ltd. Nokia Siemens Networks Honduras S.A. Nokia Siemens Networks Zagreb d.o.o. Nokia Siemens Networks Kft Nokia Siemens Networks TraffiCOM Kft PT Nokia Siemens Networks Atrica Ireland Ltd. Nokia Siemens Networks Ireland Ltd. Nokia Siemens Networks - Technologies Israel (1990) Ltd. Nokia Siemens Networks Ethernet Solutions Ltd. Nokia Siemens Networks Israel Ltd. Nokia Siemens Networks Pvt. Ltd. Pishahang Communications Networks Development Company Nokia Siemens Networks Italia S.p.A. Nokia Siemens Networks S.p.A. Nokia Siemens Networks Japan Corp. Nokia Siemens Networks Kenya Ltd. Nokia Siemens Networks in Kyrgyzstan LLC Nokia Siemens Networks Korea Ltd. Nokia Siemens Networks Kuwait Company W.L.L Atrica Ltd. (Cayman Islands) Nokia Siemens Kazakhstan T.O.O. Nokia Siemens Networks Lanka Pvt. Ltd. UAB Nokia Siemens Networks Nokia Siemens Networks S.I.A. Nokia Siemens Networks Maroc SARL Nokia Siemens Networks S.R.L. Nokia Siemens Networks Delivery S.A. de C.V. Nokia Siemens Networks S.A. de C.V. Nokia Siemens Networks Servicios S.A. de C.V. Nokia Siemens Networks Sdn Bhd. Nokia Siemens Networks Nigeria Ltd. Nokia Siemens Networks Nicaragua S.A. Nokia Siemens Networks Finance B.V. Nokia Siemens Networks Nederland B.V. Nokia Siemens Networks Norge AS Nokia Siemens Networks NZ Ltd. Nokia Siemens Networks Peru S.A. Nokia Siemens Networks Philippines Inc. Nokia Siemens Networks Pakistan (Private) Limited Nokia Siemens Networks Sp. z.o.o Nokia Siemens Networks Portugal S.A. Nokia Siemens Networks Romania SRL Nokia Siemens Networks Srbija d.o.o. OOO Nokia Siemens Networks ZAO Nokia Siemens Networks Cairo, Egypt Madrid, Spain Madrid, Spain Helsinki, Finland Helsinki, Finland Helsinki, Finland Bobigny, France Bristol, United Kingdom Bristol, United Kingdom Bristol, United Kingdom Huntingdon, United Kingdom Athens, Greece Guatemala City, Guatemala Hong Kong, China Tegucigalpa, Honduras Zagreb, Croatia Budapest, Hungary Budapest, Hungary Jakarta, Indonesia Clare, Ireland Dublin, Ireland Hod HaSharon, Israel Hod HaSharon, Israel Hod HaSharon, Israel New Delhi, India Tehran, Iran Milan, Italy Milan, Italy Tokyo, Japan Nairobi, Kenya Bishkek, Kyrgyzstan Seoul, South Korea Safat, Kuwait George Town, Cayman Islands Almaty, Kazakhstan Colombo, Sri Lanka Vilnius, Lithuania Riga, Latvia Rabat, Morocco Chisinau, Moldova Mexico City, Mexico Mexico City, Mexico Mexico City, Mexico Kuala Lumpur, Malaysia Lagos, Nigeria Managua, Nicaragua Haarlem, The Netherlands s’Gravenhage, The Netherlands Oslo, Norway Auckland, New Zealand Lima, Peru Makati, Philippines Islamabad, Pakistan Warsaw, Poland Amadora, Portugal Bucharest, Romania Belgrade, Serbia Moscow, Russia Moscow, Russia 122 Nokia Siemens Networks Group ownership % 75.20 100.00 99.90 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00** 100.00* 100.00* ** 100.00 100.00 99.00 100.00 100.00 100.00 100.00* 100.00 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00* 100.00 100.00 100.00 100.00 100.00 100.00* 100.00* ** 100.00 100.00* 100.00 100.00 100.00* 100.00 100.00 100.00 100.00 100.00 100.00 100.00* 100.00 Notes to the Company Financial Statements Name Place of residence and country Wireless Technologies Center LLC Nokia Siemens Networks AB Nokia Siemens Networks Holdings Singapore Ltd. Nokia Siemens Networks Singapore Pte. Ltd. Nokia Siemens Networks d.o.o. Nokia Siemens Networks Slovakia s.r.o. Nokia Siemens Networks El Salvador S.A. Nokia Siemens Networks (Thailand) Ltd. Nokia Siemens Networks CCC Tunisia SARL Nokia Siemens Networks Tunisia S.A. IRIS Telekomünikasyon Mühendislik Hizmetleri A.S˛ . Nokia Siemens Networks Iletisim A.S˛ . Nokia Siemens Networks Taiwan Co. Ltd. Nokia Siemens Networks Tanzania Ltd. Nokia Siemens Networks Ukraine LLC OOO MKM Telekom Nokia Siemens Networks Holdings USA Inc. Nokia Siemens Networks US LLC IRIS Telekom Toshkent LLC Nokia Siemens Networks Tashkent LLC Nokia Siemens Networks de Venezuela C.A. Belvory Assets Ltd. Cartwright Group Ltd. Nokia Siemens Networks Technical Services Viêt Nam Ltd. Nokia Siemens Networks RSA Pty. Ltd. Nokia Siemens Networks South Africa Pty. Ltd. Tomsk, Russia Stockholm, Sweden Singapore, Singapore Singapore, Singapore Ljubljana, Slovenia Bratislava, Slovakia San Salvador, El Salvador Bangkok, Thailand Tunis, Tunisia Tunis, Tunisia Istanbul, Turkey Istanbul, Turkey Taipei, Taiwan Dar Es Salaam, Tanzania Kiev, Ukraine Vyshgorod, Ukraine Delaware, USA Delaware, USA Tashkent, Uzbekistan Tashkent, Uzbekistan Caracas, Venezuela Tortola, British Virgin Islands Tortola, British Virgin Islands Phuong Mai, Vietnam Centurion, South Africa Centurion, South Africa Associated companies and other equity stakes Fujian Funo Mobile Communication Technology Co. Ltd. Open Cloud Ltd. TD Tech Holding Ltd. Carrier Ethernet Solutions MobiRail V.O.F. ETSI Technologies Inc. Site-Con Inc. Nokia Siemens Networks Al Saudia Ltd. Fuzhou, China Cambridge, United Kingdom Hong Kong, China Amsterdam, The Netherlands Rotterdam, The Netherlands Rizal, Philippines Makati, Philippines Riyadh, Saudi Arabia Group ownership % 75.00 100.00* 100.00 100.00* 100.00 100.00 100.00** 100.00 100.00 100.00 100.00 100.00 100.00 65.00* 100.00 66.33** 100.00 100.00 100.00 100.00 100.00* 100.00 100.00 100.00 87.00* 100.00 49.00 35.00 51.00 40.00** 50.00 40.00 40.00** 49.00 * Provision recognized – Refer to Note 6, Provisions, in the Company Financial Statements. **In process of liquidation. Annual Report 2012 123 Notes to the Company Financial Statements 2 Other non-current assets In 2012, long-term loans receivable consists of an investment of EUR 22 million (EUR 24 million in 2011) recognized at amortized cost using the effective interest rate. In 2012, available-for-sale investments consist of an investment of EUR 13 million carried at fair value (EUR 7 million in 2011). 3 Other receivables In 2012, other receivables include EUR 11 million of accrued income tax and EUR 9 million intercompany accrued income with other group companies. In 2011, other receivables of EUR 473 million consist mainly of intercompany accounts receivable with other group companies. 4 Cash and cash equivalents Cash and cash equivalents are comprised of bank and cash balances. 5 Shareholders’ equity Refer to the Consolidated Statement of Changes in Shareholders’ Equity and Note 23, Issued share capital and share premium, in the Consolidated Financial Statements for a specification of shareholders’ equity. 6 Provisions EURm 2012 2011 At January 1 Transfers to participations 438 118 330 108 At December 31 556 438 The provision recognized for participations in group companies relates to the Company’s share in the equity deficit since the Company has assumed liability for the obligations of these group companies. Refer to Note 1, Participations in group companies, in the Company Financial Statements for the participations provided for at December 31, 2012. 7 Current loans from group companies EURm 2012 2011 Intercompany cash pool liability Other current loans from group companies 993 691 1 096 – 1 684 1 096 Total loans from group companies The intercompany cash pool liability carries an interest rate of 1 month LIBOR + 2.5%. Other current loans from group companies consist of short-term loans from Nokia Siemens Networks Finance B.V. with interest rates of 6.6% to 7.2%. 124 Nokia Siemens Networks Notes to the Company Financial Statements 8 Other liabilities EURm 2012 2011 Accrued tax liabilities Other liabilities – 35 4 51 Total 35 55 At December 31, 2012, other liabilities include EUR 14 million of accrued interest expense for intercompany loans, a charge of EUR 11 million for share-based compensation (refer to Note 25, Share based compensation in the Consolidated Financial Statements) and EUR 7 million of intercompany accounts payable. At December 31, 2011 other liabilities consisted mainly of intercompany accounts payable. 9 Audit fees The following table presents the aggregate fees for professional services and other services rendered by PricewaterhouseCoopers: EURm 2012 2011 2010 Audit fees Audit-related fees Tax fees 10.2 1.4 1.6 10.9 2.3 2.1 9.6 1.2 1.2 Total 13.2 15.3 12.0 The fees listed above relate to the procedures provided to the Company and its consolidated group companies by PricewaterhouseCoopers Accountants N.V., the Netherlands, the external auditor as referred to in Section 1(1) of the Dutch Accounting Firms Oversight Act (Dutch acronym: Wta), and by other Dutch and foreign-based PricewaterhouseCoopers firms, including their tax services and advisory groups. The total fees of PricewaterhouseCoopers Accountants N.V., the Netherlands, charged to the Company and its consolidated group entities amounted to EUR 0.1 million for each year presented. 10 Guarantees At December 31, 2012 Nokia Siemens Networks B.V. and Nokia Siemens Networks Oy act as the guarantors for the following: –Restated EUR 1 350 million forward starting credit facility (‘FSCF’) –European Investment Bank loan (EUR 150 million) –Nordic Investment Bank loan (EUR 80 million) At December 31, 2012 Nokia Siemens Networks B.V. acts as the guarantor for the following: –Commercial paper program in Finland (EUR 500 million), launched in 2010, EUR 82 million issued at December 31, 2012 –Finnish pension loan guarantee facility (EUR 132 million) At December 31, 2012 EUR 600 million term loan was outstanding under the restated EUR 1 350 million FSCF (EUR 613 million outstanding under the EUR 2 000 million revolving credit facility at December 31, 2011) and all financial covenants are satisfied. The European Investment Bank and the Nordic Investment Bank loans and the Finnish pension loan guarantee facility include similar covenants to the restated EUR 1 350 million FSCF. All the financial covenants are satisfied at December 31, 2012. Refer to Note 34, Financial and capital risk management, in the Consolidated Financial Statements. Nokia Siemens Networks B.V. issued BW2: Article 403 section 1b.C.C.2 statements to third parties for its Dutch wholly-owned subsidiaries, Nokia Siemens Networks Finance B.V. and Nokia Siemens Networks Nederland B.V. Commitments and contingencies not included in the statement of financial position The Company forms a tax group for Dutch corporate income tax purposes with Nokia Siemens Networks Finance B.V. and Nokia Siemens Networks Nederland B.V. The Company is the head of the fiscal unity and therefore is the relevant tax payer for the Dutch corporate income tax due for the tax group. Under the Dutch Collection of State Taxes Act, the Company and its group members that are joined in the tax group for corporate income tax purposes are still responsible that the relevant corporate income tax due of the tax group is paid by the Company. In the event this is not the case, the Company and its group members could be jointly and severally liable for the corporate income taxes payable by the tax group. Annual Report 2012 125 Notes to the Company Financial Statements NOKIA SIEMENS NETWORKS B.V. Board of Directors Statement of Signatures Espoo/Munich March 17, 2013 Jesper Ovesen (Chairman) Louise Pentland Timo Ihamuotila Peter Y. Solmssen Joe Kaeser Juha Äkräs Barbara Kux 126 Nokia Siemens Networks Other information Proposed profit appropriation Pursuant to Article 34 of the Articles of Association, distribution of profits can only be made following the adoption of the annual accounts which show that such a distribution is possible. The profits shall be at the free disposal of the general meeting. However, the Company may only make distributions to shareholders to the extent that its equity exceeds the total amount of its issued share capital and the reserves to be maintained pursuant to law. In addition, a loss may only be applied against reserves maintained pursuant to the law to the extent permitted by law. Distributions of any other reserves or distributions to ordinary shares shall not take place until the cumulative preference share premium, cumulative preference shares profit reserves and unrecognized cumulative preference dividends have been fully distributed to the holders of the cumulative preference shares. Proposed appropriation of result The annual general meeting of the shareholders and the Board of Directors approve the allocation of the results. In a tie voting regarding a proposal to distribute or reserve profits, the profits concerned shall be reserved. This is in accordance with the Articles of Association. Subsequent events Refer to Note 35, Subsequent events, in the Consolidated Financial Statements. Annual Report 2012 127 Independent auditor’s report To: the General Meeting of Shareholders of Nokia Siemens Networks B.V. Report on the financial statements We have audited the accompanying financial statements 2012 of Nokia Siemens Networks B.V., The Hague as set out on pages 61 to 126. The financial statements include the consolidated financial statements and the company financial statements. The consolidated financial statements comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement, the statements of comprehensive income, changes in shareholders’ equity and cash flows for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory information. The company financial statements comprise the company statement of financial position as at 31 December 2012, the company income statement for the year then ended and the notes, comprising a summary of accounting policies and other explanatory information. Directors’ responsibility The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and as issued by the International Accounting Standards Board and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the directors’ report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the directors are responsible for such internal control as they determine is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 128 Nokia Siemens Networks Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Nokia Siemens Networks B.V. as at 31 December 2012, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and as issued by the International Accounting Standards Board and with Part 9 of Book 2 of the Dutch Civil Code. Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Nokia Siemens Networks B.V. as at 31 December 2012, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirement under Section 2: 393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the directors’ report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2: 392 sub 1 at b-h has been annexed. Further we report that the directors’ report, to the extent we can assess, is consistent with the financial statements as required by Section 2: 391 sub 4 of the Dutch Civil Code. Amsterdam, 17 March 2013 PricewaterhouseCoopers Accountants N.V. C.J. van Zelst RA Glossary 2G (Second Generation Mobile Communications): 2G cellular telecom networks were commercially launched on the GSM (Global System for Mobile Communications) standard. 2G introduced data services for mobile, starting with SMS text messages. EICC (Electronic Industry Citizenship Coalition): A coalition of companies targeting at improving social, economic, and environmental conditions in the global electronics supply chain through use of a standardized code of conduct. 3G (Third Generation Mobile Communications): The third generation of mobile communications standards designed for carrying both voice and data. Flexi Zone: A number of Flexi small cells which can be meshed together in a zone which collectively act as a single but distributed macro cell. 4G (Fourth Generation Mobile Communications): The fourth generation of mobile communications standards (like Long-Term Evolution, LTE) optimized for data and providing true broadband Internet access for mobile devices. GeSI (Global e-Sustainability Initiative): An initiative to further promote and support sustainable development in the information and communications technology sector. Base station: A network element in a mobile network responsible for radio transmission and reception to or from a mobile device. GSM (Global System for Mobile Communications): A digital system for mobile communications that is based on a widely accepted standard and typically operates in the 900 MHz, 1800 MHz and 1900 MHz frequency bands. Customer Experience Management (CEM) Software suite used to manage and improve the customer experience, based on customer, device and network insights. HSPA (High-Speed Packet Access): A wideband code division multiple access feature that refers to both 3GPP high-speed downlink packet access and high-speed uplink packet access. CEM on Demand: An intelligent portal offering a single entry point to customer centric insight and actions, even down to the individual customer. Insight is based on key performance indicators linking to prioritized actions with the most impact on the business and customer experience. IP Multimedia Subsystems (IMS): Architectural framework designed to deliver IP based multimedia services on telco networks. Standardized by 3GPP. Cloud (computing): The use of computing resources – hardware and software – that are delivered as a service over a network, typically the Internet. Liquid Applications: Applications which can be hosted on an IT server blade attached directly to a base station. CDMA (Code Division Multiple Access): A digital cellular technology that uses spreadspectrum techniques. Liquid Core: A product suite enabling dynamic capacity allocation across the different core network functions. Annual Report 2012 129 Glossary 130 LTE (Long-Term Evolution): The fourth generation of mobile communications designed to provide high-speed broadband over a flat, all-IP network. Subscription: The contract between a mobile phone subscriber and the network carrier for its mobile phone services. Operations Support Systems (OSS): The software systems handling management, assurance and fulfillment for both networks and services. TETRA (Terrestrial Trunked Radio): A professional mobile radio and two-way transceiver specification. Packet Core (or Evolved Packet Core, EPC): A framework for providing voice and data services over a network. TD-LTE (Time Division Long-term Evolution): An alternative standard for LTE mobile broadband networks. Radio Access Network (RAN): A mobile telecommunications system consisting of switching centers, radio base stations and transmission equipment. WCDMA (Wideband Code Division Multiple Access): A third generation mobile wireless technology that offers high data speeds to mobile and portable wireless devices. Subscriber: The term used to refer to a person that has an account with a mobile network carrier. Wi-Fi: A technology that allows an electronic device to exchange data wirelessly (using radio waves) over a computer network, including high-speed Internet connections. Subscriber Data Management (SDM): Technology providing unified management of network subscriber data. WiMAX (Worldwide Interoperability for Microwave Access): A technology of wireless networks that operates according to the 802.16 standard of the Institute of Electrical and Electronics Engineers (IEEE). Nokia Siemens Networks Annual Report 2012 131 132 Nokia Siemens Networks Mailing address Nokia Siemens Networks Oy P.O. Box 1 FI-02022 Nokia Siemens Networks Finland Visiting address Nokia Siemens Networks Oy Karaportti 3 02610 Espoo Finland +358 (0)7140 04000 nokiasiemensnetworks.com Registered address Nokia Siemens Networks B.V. Werner von Siemensstraat 7 2712 PN Zoetermeer The Netherlands Designed by Further™ furthercreative.co.uk This report has been printed in the UK by Pureprint Group, a CarbonNeutral® company, using their environmental printing technology. Vegetable based inks were used throughout. The cover and text pages 1–60 of the report have been printed on Amadeus 50 Gloss which is made from 50% post-consumer waste, and 50% virgin wood fibre. Text pages 61-132 have been printed on paper produced from pulps sourced from fully sustainable forests and has been made without the use of elemental chlorine (ECF). Both manufacturing mills and printer are FSC® certified and have been accredited with ISO14001 environmental management system Copyright © 2013 Nokia Siemens Networks. All rights reserved. Nokia is a registered trademark of Nokia Corporation, Siemens is a registered trademark of Siemens AG. www.nokiasiemensnetworks.com