HTC 2013 Annual Report Download - page 67

FINANCIAL STATUS, OPERATING RESULTS AND RISK MANAGEMENT FINANCIAL STATUS, OPERATING RESULTS AND RISK MANAGEMENT
130 131
2. Risk factors
The following describes identified risks and related mitigating measures.
(1) Interest, forex, and inflation rate risks and mitigating measures
Impact on HTC profitability:
Item 2013
(NT$1,000 or %)
Net Interest Income
Net Forex Income
Net Interest Income as percentage of Net Revenue
Net Interest Income as percentage of Earnings Before Tax
Net Forex Income as percentage of Net Revenue
Net Forex Income as percentage of Earnings Before Tax
545,950
423,562
0.27%
-279.05%
0.21%
-216.50%
Note: Calculation is based on HTC consolidated financial numbers
Working capital required to support the expansion of HTC business operations has over recent years
been supplied exclusively from internal finances. As the corporation has not taken out long-term loans,
fluctuations in interest rates have had no effect on the Company's liabilities. HTC is prudent in its
financial policies, and our asset allocation decisions prioritize security and fluidity, with most funds kept
in time deposit accounts. In 2013, HTC interest income totaled NT$550 million.
HTC's revenues are denominated primarily in US dollars (USD) and euros (EUR). Manufacturing costs
are denominated primarily in US dollars. Forex fluctuations have the potential to impact HTC revenues,
operating costs and operating profits. Apart from efficient management of the quality and payment cycles
of its foreign currency denominated accounts receivable, HTC uses forward exchange contracts to minimize
its forex risk. At the close of 2013, financial derivatives held by HTC related to exchange risk were valued at
USD391 million, EUR79 million, GBP14 million, JPY3,755 million, CNH 622.5 million and CAD9.5 million. Fair
value of the derivatives changes as a result of forex fluctuations. A decrease of 1% in the quoted exchange
rate of any one of the abovementioned currencies against the NT dollar would result in a derivatives holding
benefit to HTC of approximately NT$181 million.
During 2013, the euro appreciated against the NT dollar from 1:38 to 1:41. The US dollar depreciated from 1:29.1
against the NT dollar to approximately 1:30. Net exchange income earned during 2013 totaled NT$423.5
million. Under effective management by the Company, negative effects of exchange rate fluctuations
on profits in recent years have been minimal.
Inflation in Taiwan was approximately 0.79% in 2013. Inflation rates in North American and European
markets were also relatively negligible. Overall, inflation had no significant impact on HTC profits.
(2) Risks associated with high-risk/ high-leveraged investment; lending, endorsements, guarantees for
other parties and financial derivative transactions
HTC does not engage in high-risk ventures or highly leveraged investments. Loaning of funds takes
place only between HTC subsidiaries. All such arrangements must be reviewed and approved by the
board of directors in accordance with the Operational Procedures for Fund Lending and Rules for
Endorsements and Guarantees. HTC engages in derivative products trading only to mitigate forex risks
arising from foreign currency assets and liabilities. All derivative trading is conducted according to
stipulations written in the Procedures for Acquisition or Disposal of Assets.
(3) Future R&D plans and anticipated R&D expenditures
The Company's R&D programs for the most recent fiscal year primarily focus on research and
development of applications related to the user experience and mobile data services, and on providing
product-related technical support and after-sales service.
In addition to further developing its existing smartphone product line, the Company will continue to
research and develop technologies that enhance the user experience, such as wide-angle front camera
technologies that allow users to have an ever-more perfect self-shooting experience by enabling the
lens to image a broader background. The Duo Camera boasts a depth sensor that enables a wide
range of beautiful images and better user experiences. The high efficiency, low distortion headphone
amplifiers and built-in speakers make the sound even more stunning. Developing and enhancing all
new Smart Sensor Hub provide users new and more intuitive user experiences and provide more health
information by improving fitness and sport application through the full integration with BlinkFeed.
HTC is also exploring dual card, dual mode capabilities that permit dual card users to answer incoming
calls whether surfing the Internet or downloading information, while the phone smoothly juggles all
the necessary systems. Through HTC's advanced technologies users will continue to enjoy richer, more
personalized mobile phone experiences. In addition, through more open developing functions and
environments (HTCDev), developers from all over the world can utilize the powerful hardware/software
functions of HTC smartphone such as strong computing processor, best camera and sound effects,
smart sensor, best Sense and BlinkFeed to develop applications that enable users to have more and
best user experiences.
Since its founding, HTC has poured resources into fostering research and development talent and into
technological innovation. At present R&D personnel account for 30% of HTC's employees worldwide,
while investment in R&D resources equals 4-5% of operating income. In the future, HTC will continue to
break new ground in the smart handheld device industry and further streamline the user experience in
order to strengthen the company's long-term competitiveness.
(4) Effects of domestic / foreign government policies and regulations on HTC finances and response
measures
The Financial Supervisory Committee (FSC) of the Executive Yuan has required all listed companies
in Taiwan to prepare financial statements in accordance with the International Financial Reporting
Standards (IFRSs) starting from January 1, 2013. Starting from 2013, HTC has prepared financial
statements in accordance with IFRSs.