Techtronic Industries Corporate Profile Techtronic Industries Co. Ltd. (“TTI” or “the Group”) is a market and innovation leader in power equipment products, floor care appliances, laser and electronic products. We have a powerful portfolio of trusted brands, recognized for setting new standards in innovative design, technical advancements, marketing concepts and speed-to-market. Our portfolio of global brands include Milwaukee®, AEG®, Ryobi® and Homelite® for power equipment products, Royal®, Dirt Devil®, Regina® and Vax® for floor care appliances. TTI products are marketed through home centers, major retailers, full-line tool distributors and other channels in North America, Europe and other select markets. TTI is also the preferred partner of leading OEM brands and private label retail brands in North America and Europe. Headquartered in Hong Kong, the Group recorded sales of HK$22.36 billion in 2005, a collective achievement of its 22,000 staff worldwide. INNOVATION EXECUTION Annual Report 2005 Stock Code: 669 Corporate Profile Techtronic Industries Co. Ltd. (“TTI” or “the Group”) is a market and innovation leader in power equipment products, floor care appliances, laser and electronic products. We have a powerful portfolio of trusted brands, recognized for setting new standards in innovative design, technical advancements, marketing concepts and speed-to-market. Our portfolio of global brands include Milwaukee®, AEG®, Ryobi® and Homelite® for power equipment products, Royal®, Dirt Devil®, Regina® and Vax® for floor care appliances. TTI products are marketed through home centers, major retailers, full-line tool distributors and other channels in North America, Europe and other select markets. TTI is also the preferred partner of leading OEM brands and private label retail brands in North America and Europe. Headquartered in Hong Kong, the Group recorded sales of HK$22.36 billion in 2005, a collective achievement of its 22,000 staff worldwide. Stock Code: 669 Corporate Milestones Corporate Milestones 2005 Acquired Milwaukee®, AEG® and DreBo® electric power tools and accessories brands and businesses. 2004 Acquired Ryobi® brand license in North America for outdoor power equipment. 2005 2003 Acquired Royal® and Dirt Devil® floor care brands and businesses. 2002 2004 Acquired Ryobi® brand license and businesses in Australia and New Zealand for power tool and outdoor power equipment. 2001 Acquired Homelite® brand and businesses for outdoor power equipment. 2003 Acquired Ryboi® brand license and businesses for power tool and outdoor power equipment in Europe. 2000 2002 Acquired Ryobi® power tool brand license and businesses in North America. 1999 2001 Acquired Vax® brand and businesses for floor care products in UK and Australia. 2000 Contents 01 Financial Highlights 02 Chairman’s Statement 1999 08 Management Forum 18 Brands Overview 2003 Launched RIDGID® professional tools for The Home Depot®. 1990 Review of Operations 20 – Power Equipment Products 2001 26 – Floor Care Appliances Partnership with The Home Depot®. 1988 30 – Laser & Electronic Products 1990 Listed on the Stock Exchange of Hong Kong (stock code: 669). 32 Board of Directors 34 Global Management 1987 1988 36 Management’s Discussion and Analysis Opened TTI’s first manufacturing facilities in Dongguan, PRC. 44 Corporate Governance Report 49 Directors’ Report 1985 1987 61 Auditors’ Report Partnership with SEARS®. 62 Financial Statements 1985 70 Notes to the Financial Statements Mr Horst Julius Pudwill & Mr Roy Chi Ping Chung 125 Financial Summary founded TTI. 126 Corporate Information Corporate Milestones Contents 01 Financial Highlights 02 Chairman’s Statement 08 Management Forum 18 Brands Overview Review of Operations 20 – Power Equipment Products 26 – Floor Care Appliances 30 – Laser & Electronic Products 32 Board of Directors 34 Global Management 36 Management’s Discussion and Analysis 44 Corporate Governance Report 49 Directors’ Report 61 Auditors’ Report 62 Financial Statements 70 Notes to the Financial Statements 125 Financial Summary 126 Corporate Information FINANCIAL HIGHLIGHTS 2005 2004 2005 2004 Changes HK$ m HK$ m US$ m US$ m % (As restated) (As restated) Operations Turnover 22,358 16,304 2,866 2,090 +37.1 Gross profit 6,942 4,941 890 633 +40.5 EBITDA 1,989 1,488 255 191 +33.6 Profit attributable to equity holders of the parent 1,019 926 131 119 +10.0 Basic earnings per share (HK / US cents) 73.53 69.28 9.43 8.88 +6.1 Dividend per share (HK / US cents) 18.60 17.00 2.38 2.18 +9.4 Financial position at year end Total assets 20,375 13,903 2,612 1,782 +46.5 Net current assets 4,886 3,823 626 490 +27.8 Equity attributable to equity holders of the parent 6,112 3,454 784 443 +77.0 Capital expenditure 597 312 77 40 +91.6 Net book value per share (HK$ / US$) 4.18 2.55 0.54 0.33 +63.9 TURNOVER BASIC EARNINGS PER SHARE HK$ million HK cents 22,358 73.53 16,304 69.28 13,183 51.56 9,493 33.24 6,101 21.74 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS NET BOOK VALUE PER SHARE OF THE PARENT HK$ HK$ million 1,019 4.18 2005 2005 926 2.55 2004 2004 674 1.90 2003 2003 413 1.42 2002 2002 247 0.97 2001 2001 Techtronic Industries Co. Ltd. Annual Report 2005 1 CHAIRMAN’S STATEMENT Our success is the focused “ combination of market driven innovation and the relentless pursuit of operational excellence, delivering value added solutions to the needs of our customers and end users. Horst Julius Pudwill ” Chairman and Chief Executive Officer 2 Techtronic Industries Co. Ltd. Annual Report 2005 • Record turnover and profit performance • Primary brands achieved double digit growth in aggregate • Milwaukee® and AEG® achieved double digit growth • Innovative new products generated incremental business 2005 was another record year for the Group in both turnover and profits. Our strategies of leading brands, powerful customer partnerships, innovation, and global operational efficiencies provided the platform for our core business growth. The Milwaukee® and AEG® acquisition delivered double digit organic turnover expansion and profit contribution to the Group. This solid foundation and our scale enabled us to respond to market fluctuations and competitive challenges in an effective and flexible manner, keeping our long-term goals on track. Group turnover was HK$22.36 billion, an increase of 37.1% over fiscal year 2004. Importantly, our primary brands delivered double digit growth in aggregate and gross profit margins improved to 31.0% from 30.3% in 2004, despite rising material costs. Net profit was up by 10.0% to HK$1,019 million, though acquisition related DIVIDEND PER SHARE restructuring and interest expenses had negative effects on margins. Basic earnings per (TOTAL) share increased 6.1% to HK73.53 cents. HK cents During the year, we initiated the integration of Milwaukee® and AEG® professional power 18.6 tools into TTI, strengthening our power tool portfolio in terms of brands, products and customers. The ongoing integration process will generate future marketing synergies 17.0 and cost savings as the acquisition benefits from the Group’s lower operational costs and scale advantages. Our commitment to operational excellence delivered financial leverage through process advances and cost reduction initiatives. Working capital 12.5 utilization improved over 2004 as supply chain efficiencies reduced the average inventory to sales by 4 days and tight management controls lowered average 8.0 receivables to sales by 7 days. 5.75 We are pleased to announce the Board is recommending a final dividend of HK12.60 cents 2001 2002 2003 2004 2005 per share. Together with the interim dividend of HK6.00 cents per share, this will give a full year dividend of HK18.60 cents per share, against HK17.00 cents per share in 2004, an increase of 9.4%. Techtronic Industries Co. Ltd. Annual Report 2005 3 CHAIRMAN’S STATEMENT Business Strength Our largest business, Power Equipment Products, expanded 49.1% over prior year and our major brands improved their positions in key markets. We had strong underlying end user demand for our products during the year. Innovative products were the drivers in power tools, including the Milwaukee® V28™ lithium ion power tools, RIDGID®’s new line of pneumatic tools, and the expansion of the One+™ line under the Ryobi® brand. The outdoor power equipment business also delivered growth with successful product introductions within existing categories and by entering new market categories, including the gasoline high-pressure washer and cultivator and the electric log splitter. Our leading brands in Power Equipment Products, which include Milwaukee®, AEG®, Ryobi® and Homelite®, are recognized and trusted brands across a broad customer base, from professional contractors to DIY (Do-It-Yourself) consumers. Milwaukee® and AEG® will allow geographic expansion beyond our core. We continued to enhance the value of our brands with a focus on expanded markets, innovative marketing, product development, and efficient supply chain management. The addition of AEG® to our existing business has significantly strengthened our distribution and marketing reach across Europe. The Floor Care Appliances business delivered solid brand performance in the competitive environment of North America. Total business had an increase of 11.0%, though heavily affected by lower OEM demand in the second half as a result of our strategic shift to our own Dirt Devil® and Vax® brands. Executing our strategy in challenging economies, new products delivered over 30% of 2005 turnover and our brands are leaders in the large TURNOVER BY geographic markets of Germany and the UK. The North American business expanded in PRINCIPAL ACTIVITY 2005 with Dirt Devil® increasing its market position as a leading brand with consumers and high volume retailers. Our business is competitively positioned to face rising input 3% costs and market price competition with streamlined North American operations, 20% innovative new products and marketing support, and an aggressive best cost focused supply chain.