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HKSE : 303
40 Years of Excellence
Annual Report 2016

Table of contents

  • Page 1
    HKSE : 303 40 Years of Excellence Annual Report 2016

  • Page 2
    ... Holdings Limited are listed on The Stock Exchange of Hong Kong Limited (HKSE: 303). Contents 1 2 6 Financial Highlights Letter to Shareholders Management Discussion and Analysis Financial Review Review of Operations Products and Services Overview Year in Review Sustainability Investor Relations...

  • Page 3
    ...game. 1991 Changed our name to "VTech Holdings Limited" and listed on the London Stock Exchange. Introduced the world's first fully digital 900MHz cordless telephone in the US. 1985 1983 Introduced our first PC range, the Laser 100, based on custom integrated circuit (ASIC) chips designed in-house...

  • Page 4
    .... 2000 Acquired Lucent Technologies' consumer phone business, with the right to use the AT&T brand in connection with the manufacture and sale of wireline telephones and accessories. Introduced ErisStation, our first conference phone, with four wireless microphones. 2015 Go! Go! Smart Animals Zoo...

  • Page 5
    ... 15 16 0 12 13 14 15 16 12 13 14 15 16 Gross profit (US$ million) Gross profit margin (%) Profit attributable to shareholders of the Company (US$ million) Net profit margin (%) VTech Holdings Limited Annual Report 2016 1

  • Page 6
    ... the cyber-attack on VTech's Learning Lodge in November 2015 added to the decline in sales and profitability. Looking at the Group's product lines, strength in standalone electronic learning products, commercial phones, other telecommunication products and contract manufacturing services was offset...

  • Page 7
    ... on total retail sales in the combined toy categories of Toddler Electronic Learning, Toddler Figures, Playsets and Accessories, Preschool Electronic Learning, Electronic Entertainment excluding Tablets and Walkers for the 12 months ending December 2015 VTech Holdings Limited Annual Report 2016 3

  • Page 8
    ... in certain product categories and excellent customer service. The new manufacturing building for CMS that commenced operations in July 2015 has increased capacity by 25% to accommodate future demand. Canada, the UK and Australia. VTech excels in technology and engineering, whereas LeapFrog has an...

  • Page 9
    ...higher sales of commercial phones and other telecommunication products. Global product launches, new sales channels and geographic expansion will help to maintain the momentum in baby monitors. Sales of CAT-iq handsets will continue to increase based on the shift from PSTN (Public Switched Telephone...

  • Page 10
    ... Operating profit for the year ended 31 March 2016 was US$202.3 million, a decrease of US$17.8 million or 8.1% compared with the previous financial year. It was mainly due to the decrease in gross profit, which offset the decrease in total operating expenses. 6 VTech Holdings Limited Annual Report...

  • Page 11
    ... share, which is estimated to be US$62.8 million. 80 60 42.0 40 2016 US cents Dividend per share 2015 US cents 20 Interim Final* 12 13 14 15 16 17.0 25.0 42.0 17.0 61.0 78.0 0 Total * Final dividend proposed after the end of the reporting period VTech Holdings Limited Annual Report 2016...

  • Page 12
    ... management's effort to improve stock management. As at 31 March 2016 and 2015 All figures are in US$ million unless stated otherwise 2016 285.4 15.5% 93 days 2015 290.2 14.8% 96 days Stocks Average stocks as a percentage of Group revenue Turnover days 8 VTech Holdings Limited Annual Report...

  • Page 13
    ... from Kenny Precision Products (Shenzhen) Company Limited to extend the vertical integration of VTech CMS, and secure the supply of high precision metal tooling and parts. In addition, the Group has acquired 100% of the outstanding common stock of LeapFrog subsequent to the financial year 2016 for...

  • Page 14
    ... Review of Operations North America Europe 47.3 % US$878.3 million 2.4% year-on-year 42.9 % US$795.9 million 2.0% year-on-year Group Revenue by Region Other Regions Asia Pacific US$53.3 million 5.8% year-on-year 2.9 % 6.9 % US$129.0 million 9.7% year-on-year 10 VTech Holdings Limited...

  • Page 15
    ... commercial phones and other telecommunication products, baby monitors posted the strongest growth, driven by good sell-through of video models and additional product placements. Sales of commercial phones also rose, supported by demand for VTech's new range of four-line small business phone systems...

  • Page 16
    ..., toddler and preschool learning products, as well as Switch & Go Dinos, recorded sales declines. However, there was growth in the Toot-Toot family of products and Little Love, while Kidizoom Action Cam and Flipsies brought additional revenue. In the financial year 2016, VTech won four "2015 Grand...

  • Page 17
    ..., Taiwan and Hong Kong only partially compensated for lower sales in Australia, Japan and China. In Australia, the Group successfully replaced all Telstra branded phones with VTech branded phones across all channels during the financial year 2016, while gaining more placements for its range of baby...

  • Page 18
    ... preschool globally 1 NO. supplier of electronic learning toys from infancy through toddler and preschool in the US 1 NO. infant and toddler toy manufacturer in France, the UK and Germany 1 Electronic Learning Products products shipped in FY2016 49 million selling VTech branded ELPs in 25...

  • Page 19
    ...Go! Go! Smart Family Baby Amaze / Little Love Platform Products Platform products consist of various devices for children, with cartridges, expansion packs and/or downloadable content to enrich play experience. Touch & Learn Activity Desk Deluxe TM VTech Holdings Limited Annual Report 2016 15

  • Page 20
    Products and Services Overview NO. cordless phones manufacturer globally 1 Telecommunication Products handsets shipped in FY2016 33.5 million selling VTech TEL products 76 countries TEL Products Revenue in Last 5 Years US$ million 800 706.3 As % of Group Revenue TEL Products Revenue by ...

  • Page 21
    ...a wide range of products that cater to various needs of home users, making life more comfortable. Safe&Sound Baby Monitor Baby Soother Other Product Categories Integrated Access Device Wireless Monitoring System CareLine CAT-iq 2.0 Certified Handset VTech Holdings Limited Annual Report 2016 17

  • Page 22
    ...gures are in US$ unless stated otherwise North America Europe FY2015 27.9% FY2016 192.5 million 4.9% year-on-year 334.0 million 14.3% year-on-year 31.2% Other Regions Asia Pacific 0.6 million 20.0% year-on-year 52.1 million 7.0% year-on-year 18 VTech Holdings Limited Annual Report 2016

  • Page 23
    ... VTech CMS's ability to offer DFM (Design for Manufacture), ï¬,exible services and manufacturing know-how in a number of product categories is the key to its continued growth and success. Design for Manufacture Manufacturing Know-how Flexible Services VTech Holdings Limited Annual Report 2016...

  • Page 24
    ... on total retail sales in the combined toy categories of Toddler Electronic Learning, Toddler Figures, Playsets and Accessories, Preschool Electronic Learning, Electronic Entertainment excluding Tablets and Walkers for the 12 months ending December 2015 20 VTech Holdings Limited Annual Report 2016

  • Page 25
    ... conference phone with four wireless microphones won the "2015 Communications Solutions Product of the Year Award" presented by TMC, a global integrated media company. Award-winning Baby Monitors The Group started selling VTech branded baby monitors in the UK, with the Full Colour Video and Audio...

  • Page 26
    ... in companies that meet globally recognised corporate responsibility standards Environmental, Social and Governance Reporting Guide set out in Appendix 27 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited 22 VTech Holdings Limited Annual Report 2016

  • Page 27
    ...process Workplace Quality Enhance our good staff relations through various communication channels and staff activities Foster a continuous learning environment and encourage employees to develop and advance their careers in VTech Respect the labour and human rights of all our employees with clearly...

  • Page 28
    ... is our number one objective. Our baby monitor series and wireless monitoring system with UltraLow-Energy (ULE) standard are the principal examples. VTech also uses its global leadership position in electronic learning products to develop high-quality and innovative educational products that inspire...

  • Page 29
    ... requirement in a sustainable manner, VTech has functional teams comprising individuals from different product lines and departments across the organisation. Our environmental policy is reviewed annually to ensure that it is relevant and up to date. VTech Holdings Limited Annual Report 2016 25

  • Page 30
    ... sites, to determine goals and targets, discuss new projects, and review project progress on improvement of workplace and employees related issues based on the feedback from our people. VTech recognises open communications is an important element in achieving effective workplace management system...

  • Page 31
    ... a sense of belonging while they are living in our dormitories are very important for our people. We have continuously upgraded the dormitories, food laboratory and recreational facilities at our manufacturing sites in FY2016. VTech Trailwalker Team VTech Holdings Limited Annual Report 2016 27

  • Page 32
    ...year in recognition of our continuous contribution to the Hong Kong community. Our voluntary team in Liaobu, Dongguan, China was also presented with the breakthrough award by the local Community Healthcare Centre in 2015. Toys donation for China remote area 28 VTech Holdings Limited Annual Report...

  • Page 33
    ... to redistribute the surplus food for people in need, raise the awareness of climate change impact in the local community and encourage green lifestyle across the Company. Earth Hour Pledge Caring Company Sowers Action Challenging 12 Hours 2015 VTech Holdings Limited Annual Report 2016 29

  • Page 34
    ...Investor Relations VTech aims to develop long-term relationships with shareholders and investors. The Group approaches this by communicating with both institutional and retail investors on a regular basis, to ensure they have a comprehensive picture of VTech's business strategies, current operations...

  • Page 35
    ... Policy aims to ensure full compliance with the requirements regarding the disclosure of inside information under the Securities and Futures Ordinance and the Listing Rules. Investors visiting VTech booth at the Hong Kong Electronics Fair (Autumn Edition) VTech Holdings Limited Annual Report 2016...

  • Page 36
    ...of VTech Holdings Limited are listed on The Stock Exchange of Hong Kong Limited. The Company is a constituent of the Hang Seng High Dividend Yield Index, Hang Seng Corporate Sustainability Benchmark Index and FTSE4Good Index. Share Information Board lot: 100 shares Issued shares as at 31 March 2016...

  • Page 37
    ... the new code provisions in the revised Code relating to the risk management and internal control effective from 1 January 2016. The key corporate governance principles and practices of the Company are set out below. Independence of Independent Non-executive Directors The Board has received...

  • Page 38
    ... for corrective actions; reports made under the Whistleblowing Policy; respective audit plans of the internal and external auditors; training and continuous professional development of Directors and senior management; 2015 Sustainability Report; updates on the new changes to the Code and revised...

  • Page 39
    ... activities. The Risk Management and Sustainability Committee has developed a framework for the management and control of risks in the Group. Risks are being more formally identified and recorded in a risk register (the "Risk Register") for key operations. VTech Holdings Limited Annual Report 2016...

  • Page 40
    ... of the Group's system of internal control over financial, operational and compliance issues, risk management process, information systems security and effectiveness of financial reporting and compliance with the Listing Rules, and took into consideration the Company's responses to cyber attack and...

  • Page 41
    ...community may at any time make a request for publicly available Company information by email to [email protected], by post addressed to the Company's principal office address, via the contact form on the Company's website or through the Company's share registrar. Model Code of Securities...

  • Page 42
    ... University, USA and an MBA degree from Harvard Business School. Mr. TIEN is the Chairman and founder of the G2000 Group which started its business back in 1979. Before starting up G2000, he worked with Macy's Department Store in New York, USA. Mr. TIEN is an active member in Hong Kong community...

  • Page 43
    ... Board of Governors of Crofton House School in Vancouver. Europe Gilles SAUTIER, aged 60, European Chief Executive Officer, joined the Group in 2000 and is responsible for Electronic Learning Products in UK, France, Belgium, Holland, Luxembourg, Spain, Germany, Australia, Mexico and Latin America...

  • Page 44
    ... Board with effect from the conclusion of the 2016 AGM. Brief biographical details of Directors and senior management are set out on pages 38 to 39 of this Annual Report. Principal Activity The principal activity of the Group is design, manufacture and distribution of consumer electronic products...

  • Page 45
    ... corporations (within the meaning of Part XV of the SFO) which were recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO or otherwise notified to the Company and the Stock Exchange pursuant to the Model Code. VTech Holdings Limited Annual Report 2016...

  • Page 46
    ... electronic learning products with its well-known brand name "LeapFrog". Management Contracts No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year ended 31 March 2016. Securities...

  • Page 47
    ... and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. KPMG Certified Public Accountants 8th Floor, Prince's Building 10 Chater Road Central, Hong Kong 17 May 2016 VTech Holdings Limited Annual Report 2016 43

  • Page 48
    ... Director PANG King Fai Director The notes and principal accounting policies on pages 46 to 68 form part of these financial statements. Details of dividends payable to shareholders of the Company attributable to the profit for the year are set out in note 5. 44 VTech Holdings Limited Annual Report...

  • Page 49
    ...- (0.4) (0.4) - - - - 4.8 181.4 - - - (1.5) (1.5) 179.9 (153.2) (42.7) - - 376.0 181.4 4.8 (5.2) 0.2 (1.5) (1.7) 179.7 (153.2) (42.7) (1.0) 1.4 525.0 The notes and principal accounting policies on pages 46 to 68 form part of these financial statements. VTech Holdings Limited Annual Report 2016 45

  • Page 50
    ... Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ("the Listing Rules"). A summary of the significant accounting policies adopted by the Group is set out below. The IASB has issued the...

  • Page 51
    ...at the end of the reporting period. On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to profit or loss when the profit or loss on disposal is recognised. VTech Holdings Limited Annual Report 2016 47

  • Page 52
    ... respective period of the leases. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the termination takes place. 48 VTech Holdings Limited Annual Report 2016

  • Page 53
    ...direct labour and an appropriate share of production overheads incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less estimates of costs of completion and selling expenses. When stocks...

  • Page 54
    .../credited to employee share-based compensation expense in the current year, with a corresponding adjustment to Shares Held for Share Purchase Scheme. S Employee Benefits The Group operates a number of defined contribution retirement schemes throughout the world, including Hong Kong, and a defined...

  • Page 55
    .... Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods...

  • Page 56
    ... 2016, approximately 12% (2015: 13%) of the Group's revenue is derived from a single external customer. Such revenue is attributable to the North America segment. Details of concentrations of credit risk of the Group are set out in note 20(a). 11(a) 11(b) 52 VTech Holdings Limited Annual Report...

  • Page 57
    ... Kwong Independent Non-executive Directors William FUNG Kwok Lun (iii) Michael TIEN Puk Sun (iii) Patrick WANG Shui Chung (iv) WONG Kai Man (v Discretionary bonuses US$ million 2.0 1.5 1.8 - - - - 5.3 2015 Total US$ million 3.0 2.0 2.3 - - - - 7.3 VTech Holdings Limited Annual Report 2016 53

  • Page 58
    ...of this Annual Report fell within the following bands: 2016 Individuals US$ 256,001 - 320,000 321,001 - 385,000 385,001 - 449,000 449,001 - 513,000 513,001 - 577,000 577,001 - 641,000 705,001 - 769,000 769,001 - 833,000 - 3 1 - 1 1 1 - 7 54 VTech Holdings Limited Annual Report 2016 2015 Individuals...

  • Page 59
    ... end of the reporting period. At a meeting held on 19 May 2015, the Directors proposed a final dividend of US61.0 cents per ordinary share for the year ended 31 March 2015, which was estimated to be US$153.2 million at the time calculated on the basis of the ordinary shares in issue as at 31 March...

  • Page 60
    ...-occupied properties Note: (i) Included in leasehold land payments is the amount of US$3.0 million (2015: US$3.0 million) paid for the acquisition of certain sites in the PRC. 2016 US$ million 5.0 (0.2) 4.8 4.8 2015 US$ million 5.1 (0.1) 5.0 5.0 2 56 VTech Holdings Limited Annual Report 2016

  • Page 61
    ...the operations in the PRC expire 5 years after the relevant accounting year end date. The tax losses arising from the operations in the United States expire up to 20 years after the relevant accounting year end date, depending on the relevant jurisdictions. VTech Holdings Limited Annual Report 2016...

  • Page 62
    ... comprise: 2016 2015 US$ million US$ million Raw materials Work in progress Finished goods 96.4 28.8 160.2 285.4 99.6 32.6 158.0 290.2 The majority of the Group's sales are on letter of credit and on open credit with varying terms of 30 to 90 days. Certain open credit sales are covered by credit...

  • Page 63
    ... the terms of the sales. A provision is recognised for expected return claims, which included cost of repairing or replacing defective goods, loss of margin and cost of materials scrapped, based on past experience of the level of repairs and returns. VTech Holdings Limited Annual Report 2016 59

  • Page 64
    ...1.6 - 0.1 1.7 1.9 (1.2) The above sensitivity analysis is based on the assumption that changes in actuarial assumptions are not correlated and therefore it does not take into account the correlations between the actuarial assumptions. 1.7 3.5 0.7 2.4 60 VTech Holdings Limited Annual Report 2016

  • Page 65
    ... period applicable under the French Subplan shall not be less than 2 years following the date of the award and a further 2 years sales restriction period as calculated from the date of the Awarded Shares being transferred to the eligible French employees. VTech Holdings Limited Annual Report 2016...

  • Page 66
    ... of the Company (as approved by the annual general meeting of the Company from time to time) and hold such new shares in trust for the selected participants (not being connected persons of the Company) under the Share Purchase Scheme. During the financial year, no new shares were issued under the...

  • Page 67
    ... policy adopted for share-based payments in note (S). The hedging reserve comprises the effective portion of the cumulative net change in fair value of hedging instruments used in cash flow hedges pending subsequent recognition of the hedged cash flows. VTech Holdings Limited Annual Report 2016...

  • Page 68
    ...credit risk. The Group's five largest customers, in aggregate accounted for approximately 32.2% (2015: 31.5%) of the Group's revenue during the year. The Group manages these risks by monitoring credit ratings and limiting the aggregate risk to any individual counterparty. In addition, credit risk is...

  • Page 69
    ... and financial liabilities were US$5.5 million (2015: US$6.6 million) and US$0.6 million (2015: US$1.1 million) respectively. At 31 March 2016 and 31 March 2015, the fair values of all forward foreign exchange contracts were categorised as Level 2. VTech Holdings Limited Annual Report 2016 65

  • Page 70
    ... customer data was safe from further attack. In addition, the Company has taken steps to report the incidents to a number of governmental authorities and law enforcement authorities in various jurisdictions. 66 VTech Holdings Limited Annual Report 2016 Approved and authorised for issue by the Board...

  • Page 71
    ... Limited VTech Electronics (Australia) Pty Limited Incorporated/established and operating in Canada: VTech Technologies Canada Ltd. Incorporated/established and operating in France: VTech Electronics Europe S.A.S. Incorporated/established and operating in Germany: VTech Electronics Europe GmbH VTech...

  • Page 72
    ..., income and expenses. Notes 17 and 20 contain information about the assumptions and their risk factors relating to pension scheme obligations and fair value of financial instruments. Other key sources of estimation uncertainty are as follows: 68 VTech Holdings Limited Annual Report 2016

  • Page 73
    ... per share (US cents) 1,784.5 211.6 (19.7) 191.9 77.0 2013 US$ million 1,858.0 225.6 (24.1) 201.5 80.6 2014 US$ million 1,898.9 228.0 (24.2) 203.8 81.3 2015 US$ million 1,879.8 221.7 (23.6) 198.1 78.9 2016 US$ million 1,856.5 203.1 (21.7) 181.4 72.2 VTech Holdings Limited Annual Report 2016 69

  • Page 74
    ... TIEN Puk Sun (Chairman) William FUNG Kwok Lun WONG Kai Man Risk Management and Sustainability Committee Allan WONG Chi Yun (Chairman) PANG King Fai Andy LEUNG Hon Kwong WONG Kai Man Shereen TONG Ka Hung CHANG Yu Wai Company Secretary CHANG Yu Wai 70 VTech Holdings Limited Annual Report 2016

  • Page 75
    ... Group of Companies Head Office VTech Holdings Limited 23rd Floor, Tai Ping Industrial Centre Block 1, 57 Ting Kok Road Tai Po, New Territories Hong Kong Tel: (852) 2680 1000 Fax: (852) 2680 1300 Website: www.vtech.com Email: [email protected] VTech Telecommunications (Shenzhen) Limited...

  • Page 76
    (Incorporated in Bermuda with limited liability) 23rd Floor, Tai Ping Industrial Centre, Block 1 57 Ting Kok Road, Tai Po, New Territories, Hong Kong Tel: (852) 2680 1000 Fax: (852) 2680 1300 Email: [email protected] www.vtech.com