American Patents LLC v. Mediatek, Inc. et al

Western District of Texas, txwd-6:2018-cv-00339

Exhibit B (Lenovo Annual Report 2017-18)

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6 EXHIBIT B 6 Lenovo Group Limited | 2017/18 Annual Report Stock Code 992 Different is better 6 ABOUT LENOVO Lenovo (HKSE: 992) (ADR: LNVGY) is a US$45 billion Fortune 500 company with a vision to become the global leader in Intelligent Transformation through smart devices and infrastructure that create the best user experience. Lenovo manufactures one of the world's widest portfolio of connected products, including smartphones (Motorola), tablets, PCs (Thinkpad, Yoga, Lenovo Legion) and workstations as well as AR/VR devices and smart home/office solutions. Lenovo's next generation data center solutions (ThinkSystem, ThinkAgile) are creating the capacity and computing power for the connections that are changing business and society. Lenovo works to inspire the different in everyone and build a smarter future where everyone thrives. Follow us on LinkedIn, Facebook, Twitter, Instagram, Weibo, or visit us at http://www.lenovo.com. 6 Financial Highlights 4 Chairman & CEO Statement 8 Lenovo Management Team 12 Management's Discussion & Analysis 16 Corporate Governance Report 48 Audit Committee Report 102 Compensation Committee Report 110 Sustainability Overview 123 Directors' Report 138 Independent Auditor's Report 162 Consolidated Income Statement 167 Consolidated Statement of Comprehensive Income 168 Consolidated Balance Sheet 169 Consolidated Cash Flow Statement 171 Consolidated Statement of Changes in Equity 172 Notes to the Financial Statements 173 Five-Year Financial Summary 267 Corporate Information 268 6 Different protects better 6 ThinkPad X1 Carbon Tough build quality, industrial yet sexy design." Techaeris X1 Carbon, 6th Generation 6 2018 2017 Year-on-year For the year ended March 31 US$ million US$ million Change Group Results Revenue 45,350 43,035 5% Gross profit 6,272 6,106 3% Gross profit margin (%) 13.8 14.2 (0.4) pts Operating expenses (5,885) (5,434) 8% Expense-to-revenue ratio (%) 13.0 12.6 0.4 pts EBITDA1 1,325 1,581 (16)% Pre-tax income 153 490 (69)% Pre-tax income margin (%) 0.3 1.1 (0.8) pts (Loss)/profit attributable to equity holders of the Company (189) 535 N/A EPS – basic (US cents) (1.67) 4.86 N/A EPS – diluted (US cents) (1.67) 4.86 N/A Interim dividend per share (HK cents) 6.0 6.0 Nil Final dividend per share (HK cents) 2 20.5 20.5 Nil Total dividend per share (HK cents) 26.5 26.5 Nil Cash and Working Capital Bank deposits and cash and cash equivalents 1,932 2,951 (35)% Total borrowings (3,815) (3,037) 26% Net debt (1,883) (86) 2,106% Cash conversion cycle (days) (16) (10) (6) Notes: 1 Excluding "other income - net". 2 Subject to shareholders' approval at the forthcoming annual general meeting. 4 Lenovo Group Limited 2017/18 Annual Report 6 Revenue Analysis by Geography Revenue Analysis by Business Group for the year ended March 31 (US$ million) for the year ended March 31 (US$ million) 43,035 45,350 43,035 45,350 28% 25% 16% 16% 70% 71% 26% 28% 18% 16% 30% 31% 9% 10% 3% 3% 2017 2018 2017 2018 China AP EMEA AG PCSD MBG DCG Others EBITDA1 Profit/(loss) Attributable to for the year ended March 31 (US$ million) Equity Holders of the Company for the year ended March 31 (US$ million) 1,715 817 829 1,581 1,365 1,325 535 838 (128) (189) 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Note: 1 Excluding "other income - net". 2017/18 Annual Report Lenovo Group Limited 5 6 Different travels better 6 The Miix 630 is a mobile user's dream." GottaBeMobile Lenovo Miix 630 Lenovo Miix 630 6 The tech sector continues to be highly competitive and trading conditions remain tough, but we have made progress across the year strategically, operationally and financially. We are confident that Lenovo's future will not only go forward, but also upward as we focus on doing our best every day for every one of customers around the world. Moto Z2 Play 8 6 In fiscal year 17/18, despite a highly competitive global environment, we continued in transforming Lenovo from a single PC hardware business into a multi-business company. Our vision was and is to become the global leader in intelligent transformation. A vision built on our view that Artificial Intelligence (AI) is fundamentally transforming the way we live, work and play. To fuel that vision we introduced our three- Lenovo YOGA 730 wave strategy at the start of FY16/17. The execution of this strategy has enabled us LEADERSHIP IN PCS AND TABLETS to create a sustainable leading position in In PCs and tablets, our first wave, we continue PCs and tablets; build the foundations to to maintain industry leading profitability as we grow a healthy and rounded data center drive a strategy of sustainable leadership. We business; reshape our mobile business for are focusing on where we know we can bring future success and launch multiple new smart innovation and difference to our customers as devices that go beyond our core product set. well as long term returns for shareholders. For As a company we will continue innovating example through high-growth segments such in PCs, smartphones and smart devices such as gaming and workstations – both of which as Smart Display and AR/VR as well as build passed the $1 billion revenue mark this past next generation Data Center solutions. year. Our YOGA products and heartland Think portfolio remain the industry benchmark – winning numerous awards and affording us the "Best Laptop Brand" for the second year running by Laptop Magazine. Equally our unrelenting focus on innovation continues to be applauded. Not least being recognised by the international standard in design, Reddot, with 14 awards overall – 13 for product design and the pinnacle "Best of the Best" award for ThinkPad X1 Tablet. Looking ahead, we see additional opportunities in two further high- growth segments – visuals and the thin-and- light category, as well as in upselling services. Furthermore we announced the joint venture with Fujitsu Client Computing Limited which creates a new opportunity to drive additional growth, scale and competitiveness in the PC market both in Japan and globally. Smart Display 2017/18 Annual Report Lenovo Group Limited 9 6 Chairman & CEO Statement BUILDING THE GROWTH ENGINES OF THE FUTURE In our second wave businesses we continue to make progress in line with our transformation goals. Our mobile business Moto Mods GamePad has faced challenges in what is a highly- competitive market. To address these we Our data center business has achieved have reshaped the business for growth and double-digit year-on-year revenue growth for are focused on strengthening our leading two consecutive quarters, and has improved position and profitability in Latin America; margin quarter-to-quarter for four quarters driving breakthrough in mature markets, consecutively. We have driven this momentum while maintaining healthy growth and by building dedicated data center sales and controlled investment in emerging markets. marketing capabilities; leading with new We have optimized the cost and expense Artificial Intelligence solutions, embracing structure, are refining the product lineup big data analytics and the growing Internet and are replicating the model we operate of Things (IoT); creating a new customer- in markets such as Brazil, where we are centric organizational structure; aggressively number two in the smartphone space, to reengaging our channel partners and global other markets around the world. In addition system integrators with new program and we have strengthened carrier relationships solutions; and by introducing our largest in the important US market where we also data center portfolio in history with our range the Moto Z broadly and continue new ThinkSystem and ThinkAgile brands. to own the value segment with the Moto We refined our Hyperscale business model, G that was cited as "the most important and now have design wins with six out of phone of 2017" by Android Central. More the top 10 global Hyperscale providers. We recently we have integrated our PC and have been recognized as one of the fastest smart devices group with our mobile business ramping hyper-converged company and to create a new Intelligent Devices Group expanded our software defined infrastructure (IDG). This new structure will allow us to portfolio through partnerships with Nutanix, better optimize shared platforms like global VMware, Microsoft and others. Lenovo is the supply chain and global service, as well as second largest OEM supplier to the Top500 accelerate the convergence of computing Supercomputers in the world and we remain and communications technologies to better on track to our goal of becoming the #1 connect our devices, users, applications and Supercomputing OEM by 2020. content. ThinkSystem SR860 10 Lenovo Group Limited 2017/18 Annual Report 6 INVESTING IN EMERGING TECHNOLOGIES IN SUMMARY In FY17/18 we brought many new products The tech sector continues to be highly to market. From the multi-award-winning Star competitive and trading conditions remain Wars Jedi Challenges AR headset, to a Smart tough, but we have made progress across the Display that takes the idea of smart assistant year strategically, operationally and financially. to the next level by adding a visual screen. We are confident that Lenovo's future will not We are partnering with some of the industry's only go forward, but also upward as we focus most exciting companies such as Google and on doing our best every day for every one of Disney to bring our ambitions to life. But our customers around the world. emerging technologies focus goes beyond AR/VR to look at wider "as a service" models Thank you. and big data platform opportunities. More broadly we continue to invest through our Lenovo Capital and Incubator Group (LCIG) into some of the most exciting technologies of tomorrow – with 85 companies invested in and eight independent spin offs. Yang Yuanqing Chairman and Chief Executive Officer ARTIFICIAL INTELLIGENCE DRIVING INTELLIGENT TRANSFORMATION We see a world of technology shaped by intelligence. While the potential for AI technologies across industries is still developing, Lenovo's core technologies in data center computing, PC, mobile and smart devices will make this change happen. As a business we are bringing intelligence to everything we do, from supply chain demand forecasting to customer service solutions that learn to answer the often repeated customer queries online. In the future these AI solutions will be packaged and expanded as we bring them to market for the benefit of industries such as healthcare and retail. Tiny P320 2017/18 Annual Report Lenovo Group Limited 11 6 Yang Yuanqing Gianfranco Lanci Chairman and Corporate President and Chief Executive Officer Chief Operating Officer Qiao Jian Yong Rui Senior Vice President and Senior Vice President and Chief Marketing Officer Chief Technology Officer 12 Lenovo Group Limited 2017/18 Annual Report 6 Gao Lan He Zhiqiang Senior Vice President, Senior Vice President and Human Resources President of Lenovo Capital and Incubator Group Kirk Skaugen Wong Wai Ming Laura Quatela Executive Vice President and Executive Vice President and Senior Vice President and President of the Data Center Chief Financial Officer Chief Legal Officer Group 2017/18 Annual Report Lenovo Group Limited 13 6 Not only do the Lenovo Smart Displays look more attractive, but they're also much better for privacy." Tom's Guide Lenovo Smart Display Smart Display 6 Different inspires better 6 During the fiscal year, the PC and Smart Device business returned to solid revenue growth after BUSINESS REVIEW two years of decline, and saw its profitability improved quarter-on-quarter in its latest three The Group introduced the 3-wave strategy consecutive quarters. The transformation of the at the beginning of fiscal year 2017/18 and second wave Data Center business continued after a year's strong execution, both its full to show strong results; revenue grew 44 percent year revenue and operational profit before year-on-year in fiscal quarter four, the strongest taxation returned back to growth, despite a revenue growth since System x acquisition and highly competitive environment. During the the second consecutive quarter of double-digit fiscal quarter four ended in March 31, 2018, year-on-year growth. In addition, the loss further the Group revenue continued to grow year- narrowed quarter-to-quarter for four consecutive on-year for three consecutive quarters led by quarters. While its Mobile business faced challenges continued strength in PCSD and Data Center in a highly competitive market during the year, the Groups. The first wave PC business continued Group has reshaped its strategy to significantly to deliver solid profitability and cash flow to reduce losses going forward by focusing on the Group, which provided a solid base to fuel profitable markets, continue strengthening in the growth needs of the second wave strategy Latin America and North America, and reducing in Data Center and Mobile businesses and expenses. The Group's Capital and Incubator Group investment needs for the third wave strategy in Device + Cloud strategy. Star Wars TM Jedi Challenges Revenue by Business Group (%) 3% 10% (3%) (9%) 71% (70%) 16% (18%) PCSD MBG DCG Others 16 Lenovo Group Limited 2017/18 Annual Report 6 As the world moves into the smart IoT era, Lenovo has successfully transformed from a single business focused on PC hardware into a multiple-device company with various smart devices available. Mirage Solo with Daydream continued to invest in AI (Artificial Intelligence), IoT For the fiscal year ended March 31, 2018, the (internet of things), big data, and VR/AR (virtual Group's gross profit was US$6,272 million, reality/augmented reality) to support its Device an increase of 3 percent year-on-year, while + Cloud strategy, through which these added gross margin decreased by 0.4 percentage capabilities will both develop new businesses and point year-on-year to 13.8 percent, mainly due strengthen existing ones. to increased component costs especially in memory. Operating expenses increased by 8 As the world moves into the smart IoT era, Lenovo percent year-on-year to US$5,885 million, and has successfully transformed from a single business the expense-to-revenue ratio was 13.0 percent, focused on PC hardware into a multiple-device worsened by 0.4 percentage point year-on-year. company with various smart devices available. However if the one-off items are excluded, the For one, the Group teamed up with Disney and expense- to-revenue ratio in the previous fiscal launched its first Augmented Reality device – "Star year would have been 13.6 percent versus the Wars: Jedi Challenge" – in fiscal quarter three and 12.9 percent this fiscal year, an improvement in was the clear number one AR headset vendor in operating efficiency as the Group further optimized the quarter. The Group will continue to invest in cost structure. The Group's profit before taxation the third wave of Device + Cloud and Infrastructure was US$153 million for the fiscal year under + Cloud strategy to capture next generation review. Excluding the severance expenses of opportunities offered by new technologies. US$101 million and disposal gain on Wuhan R&D Moreover, as Lenovo enhances customer centricity, property of US$61 million in the fiscal year, the there is greater emphasis on software and Group's operational profit before taxation was services the Group provides to enhance customer US$193 million, almost double the US$97 million experience. As a result the Group's software and a year ago. The new US tax legislation enacted services revenue showed strong year-on-year on December 22, 2017 effectively reduced the US growth and has exceeded a billion US dollar during corporate tax rate to 21% starting from January 1, the fiscal year under review. 2018. As a result, the Group recorded a one-time non-cash write-off charge of US$400 million on the For the fiscal year ended March 31, 2018, the deferred income tax assets, which resulted in a loss Group's consolidated revenue grew 5 percent attributable to equity holders of US$189 million year-on-year to US$45,350 million. Revenue of against a US$535 million profit recorded in the the Group's PC and Smart Device business was previous year. The Group's view is that the lowered US$32,379 million, representing a year-on-year tax rate in the US will benefit its operations there increase of 8 percent. Revenue of the Data Center over time. business increased 8 percent year-on-year to US$4,394 million. Revenue of the Mobile business decreased 6 percent year-on- year to US$7,241 million. Meanwhile, revenue of other goods and services was US$1,336 million. 2017/18 Annual Report Lenovo Group Limited 17 6 Management's Discussion & Analysis PERFORMANCE OF PRODUCT BUSINESS In driving towards a customer-centric business, GROUPS the PCSD group collaborated with the investment During the fiscal year ended March 31, 2018, companies under the LCIG (Lenovo Capital and Lenovo continued to balance between growth and Incubator Group) to make devices smarter and profitability in its PC and Smart Device business, provide convenience to customers. For example, and the transformation in Data Center started the group collaborated with an AR tracking to show positive momentum. While in Mobile technology provider under the LCIG investment business, Lenovo narrowed the loss during the year, portfolio in its AR headset. And in the Lenovo but more work needs to be done to significantly New Retail stores opened in China beginning of reduce the loss going forward. 2018, the group has partnered with several of its portfolio companies to provide over 400 different PC AND SMART DEVICE BUSINESS GROUP IoT smart products. The New Retail stores use (PCSD) AI technologies to provide retail efficiency and During the fiscal year under review, the PC market prompt service delivery which would guarantee continued to show signs of stabilization thanks customer satisfaction. to continued commercial refresh and stabilizing consumer demand. The Group continued its For the fiscal year ended March 31, 2018, revenue strategy to prioritize profitability and to drive of the Group's PCSD business was US$32,379 premium-to-market revenue growth in its PC million, representing approximately 71 percent business, which led to product mix improvements. of the Group's total revenue, an increase of 8 As a result of its strong execution, the Group percent year-on-year. Most notably, PCSD saw during the fiscal year returned to solid revenue its year-on-year revenue grow the most in fiscal growth of 8 percent year-on-year after two years quarter four, when it grew 16 percent. PCSD of decline. In addition, profitability improved revenue growth exceeded shipments growth driven quarter-on-quarter in the past three fiscal quarters by innovative products and better product mix. during the year and returned to 5 percent pre-tax The business group recorded a pre-tax profit of profit margin in fiscal quarter four despite US$1,459 million, down 2 percent year-on-year increases in component costs. In commercial PC, mainly due to the higher costs from the increased the Group continued to gain share in shipment component prices during the year. Pre-tax profit and revenue during the fiscal year, and accounted margin was 4.5 percent, down 0.5 percentage point for 60 percent of its PC unit mix versus 57 percent year-on-year. prior year, according to industry estimates. Within commercial, the Group continued to grab share in DATA CENTER BUSINESS GROUP (DCG) the Workstation segment, growing at 31 percent The Group's previous transformation investments in year-on-year in revenue. In consumer PC, the building sales capability, strengthening the channel Group continued to focus on premium segments, and product solution capabilities, started to bring in particular the Gaming PC saw around 91 percent strong positive momentum to the business during year-on-year growth in revenue during the fiscal the fiscal year under review, most notably in the year, with increased momentum in the Legion second half of the fiscal year. As a result of these gaming brand. The Gaming PC and Workstation efforts, the Group's full year revenue returned product categories each reached billion-dollar scale back to growth and losses narrowed year-on-year. in the fiscal year. The Group also had initial success Moreover, the losses improved quarter-on-quarter in its new Smart Device, the AR product "Star every quarter in the fiscal year. The revenue in Wars: Jedi Challenge", and grabbed the number second half of the fiscal year also reached the one AR headset vendor during fiscal quarter three highest level since the System x acquisition and after its release, according to industry estimates. saw 29 percent year-on-year growth. 18 Lenovo Group Limited 2017/18 Annual Report 6 YOGA 530 Within the segments, the Group during the fiscal Within the geographies, the Data Center Group year saw strong double-digit revenue growth in continued to see strong revenue year-on-year its Hyperscale business. The Hyperscale business growth in North America and EMEA (Europe, had undergone significant business transformation Middle-East and Africa) for four consecutive to improve in-house design and manufacturing quarters and profitability improvements. China capabilities, as well as improving the customer mix, also returned to growth with double-digit revenue as such the margin of this business has improved year-on-year growth in the second half of the fiscal significantly. The Hyperscale business now has year with profitability improvement. design wins with 6 out of the top 10 largest hyperscaler customers in the world. In its Software For the fiscal year ended March 31, 2018, revenue Defined Infrastructure segment, the Group saw of the Data Center business was US$4,394 million, its revenue grew triple-digit during the fiscal year increasing 8 percent year-on-year and representing as the Group's strategic partnership with leading approximately 10 percent of the Group's total hyperconverged software providers continued to revenue. The loss from the Data Center business thrive. The Group does not have the hindrance of further narrowed, more notably in the second half legacy infrastructure, making the Group the perfect of fiscal year, owing to the strong execution of the partner to lead in the transition to a software transformation strategy to lead in the transition defined infrastructure. While in High Performance to cloud enterprise solutions. Hence, the Group Computing (HPC) segment, the group solidified its recorded an operational loss before taxation number two position globally in the HPC Top 500 of US$305 million, excluding the non-cash M&A List and is fast closing the gap with the number related accounting charges during the year, which one player. The Group also won 5 HPC "Readers' was an improvement from the US$343 million loss Choice Award" at end of 2017 including best last fiscal year. HPC server and best HPC storage as a testimony of the Group's relentless pursuit of innovation, quality and reliability in its products. For one, the Group announced the ThinkSystem SD650 Direct Water Cooled Server, which helps control some of most powerful supercomputers in the world and exemplifies innovation leadership in HPC technology. 2017/18 Annual Report Lenovo Group Limited 19 6 Management's Discussion & Analysis MOBILE BUSINESS GROUP (MBG) LENOVO CAPITAL AND INCUBATOR GROUP The Group's Mobile business faced challenges in (LCIG) AND OTHERS some emerging markets, but continued to gain Lenovo Capital and Incubator Group's mission is share in its core market in Latin America, where to invest and build the Group's next-generation IT it grew 40 percent year-on-year in shipment, capabilities in AI, IoT, Big Data and VR/AR across while improved profitability during the fiscal year. various sectors such as manufacturing, healthcare Shipments in North America grew 57 percent and transportation. During the fiscal year, the year-on-year driven by initial success in mainstream Group's portfolio companies continued to support models with carrier expansion during the fiscal the core business to bring intelligence, contents year, though more work is needed to sharpen the and services to the devices. For example, the Group competitiveness in the high-end segment. partnered with one of the portfolio companies in AR tracking technology in its AR headset. Another In emerging markets, slower brand transition in is the Group's investment in facial recognition and EMEA emerging areas and the severe competition deep learning processor to help differentiate its in Asia Pacific emerging markets impacted the devices. Moreover, Lenovo continued to enhance overall shipments performance for the year under and differentiate its next-generation devices by review. Thus, the Group's worldwide smartphone partnering with leading best-in-class vendors, such shipments for the fiscal year declined by 7 percent as Google and Disney. As of the year-end under year-on-year. In China, the Group has already review, the Group has invested in 85 companies to significantly scaled back its operations there as help the Group build the next-generation smart the market there started to decline and remain solutions. crowded, but continued to refine its product and channel strategy to seek healthy growth there. The Group also made progress in its Software and Services business to enhance customer In light of the challenges in some emerging experience and provide total intelligent solution, markets, the Group has reshaped its strategy going which saw revenue grew double-digit year-on-year forward to significantly reduce losses by focusing and exceeded one billion US dollar mark during on profitable markets, simplifying business and the fiscal year under review. LCIG continued to reducing expenses going forward. gain traction as a big data solution provider, winning orders from key customers, and as an Mobile business revenue was US$7,241 million, IoT connectivity solution provider, winning new representing approximately 16 percent of the partners and customers. Group's total revenue, decreasing 6 percent year-on-year for the fiscal year ended March 31, 2018. Operational loss before taxation, excluding non-cash M&A related accounting charges, for the period under review was US$463 million, which was an improvement from the US$566 million loss previous fiscal year. 20 Lenovo Group Limited 2017/18 Annual Report 6 The Group established an AI Lab in March 2017, In Data Center business, the Group's transformation and quickly ramped up the staff to build AI actions, including investing in sales capabilities, ecosystem capabilities, and has since set up core strengthening the channel and product solution AI technologies in voice recognition, language capabilities to improve the product mix, showed understanding, machine learning, computer vision encouraging signs of improvement during the and data analytics. year under review. It resumed revenue growth year-on-year in both fiscal quarter three and four, Revenue from the LCIG, and other products such as well as improved profitability. The profitability as consumer electronic businesses from previous improvement was the result of better customer acquisitions was US$1,336 million, representing mix and more efficiency in in-house design and approximately 3 percent of the Group's total manufacturing. revenue. The smartphone market in China started to PERFORMANCE OF GEOGRAPHIES decline during the fiscal year, while competition Performance of each geography includes a remained intense. The Group has significantly combination of PCSD, DCG and MBG businesses. scaled back its smartphone operations in China The profitability figures of geographies disclosed in to be nimble, where it will use tactical strategy the following paragraphs have excluded the impact to address the market opportunities there. The of non-cash M&A related accounting charges for scale back has resulted in shipment and revenue the period under review. decline year-on-year, but the loss also narrowed significantly as a result. CHINA China accounted for 25 percent of the Group's total The PCSD business remained the profit pool revenue. In its PCSD business, the Group continued in China during the fiscal year, while the losses to improve the product mix and drive premium narrowed in DCG in the second half of fiscal year revenue growth to protect profitability, in light of and MBG's loss for the full year also narrowed. a declining China PC market during the year under As such, the Group recorded a pre-tax profit of review. The Group's innovative products including US$558 million and a pre-tax profit margin of 4.8 Millennial and Gaming PCs also helped to drive a percent, improved year-on-year. healthier consumer business. As such, the Group's PCSD revenue was flattish year-on-year against the shipment decline for the full year. The Group remained China's number one player with 36.5 percent market share in the fiscal year. 2017/18 Annual Report Lenovo Group Limited 21 6 Management's Discussion & Analysis AMERICAS (AG) The Group's Moto brand smartphones continued Americas accounted for 31 percent of the Group's to show strong growth in Latin America with 40 total revenue. In its PCSD business, the Group percent shipment growth during the fiscal year and focused on balancing between growth and enjoyed premium brand image during the period, profitability in which its revenue grew faster than which enabled the Group to protect the profitability its shipment volume in AG during the period, there. In North America, the Group successfully driven by improvement in the product mix to expanded its carrier channel to all four major U.S. protect profitability. The Group's AG PC shipment telco partners since fiscal quarter two, and as such decreased by 6 percent year-on-year mainly due saw strong shipment growth during the fiscal year. to a decline in North America as it focused on Its mainstream products such as Moto G and Moto protecting profitability. As a result, North America E delivered strong volume across the region. As PCSD profitability improved in the second half a result, the Group's smartphone shipments grew of fiscal year. And in Latin America, the Group 57 percent year on-year, far outpaced the market continued to see strength with a record market growth in North America. Nevertheless, more work share of 17.4 percent. needs to be done in the breakthrough of high-end smartphone segment in the U.S., which dragged The Group's Data Center business continued the profit performance in the region during the to show positive momentum as a result of period under review. its transformation actions. Its revenue grew by double-digit and profitability improved The Group recorded a profit before taxation of year-on-year during the fiscal year under review. US$72 million in the region and its pre-tax profit Notably, North America DCG saw revenue margin was 0.5 percent in the fiscal year under year-on-year growth for four consecutive quarters. review, against 1.2 percent in the previous fiscal The Group continued to see strength across year, mainly due to the slower progress in its different segments including the Hyperscale, breakthrough in mid to high-end smartphone Software Defined, and High Performance market. Computing segments. 22 Lenovo Group Limited 2017/18 Annual Report 6 ASIA PACIFIC (AP) EUROPE-MIDDLE EAST-AFRICA (EMEA) Asia Pacific accounted for 16 percent of the EMEA accounted for 28 percent of the Group's Group's total revenue. In its PCSD business, the total revenue. During the fiscal year under review, Group gained 1.4 percentage points of shipment the Group saw its PC business in EMEA gaining market share in PCs in Asia Pacific to 17.2 percent positive momentum with margin expansion owing during the fiscal year according to industry to its continued solid performance in Western estimates, driven by targeting high growth areas. Europe. Its PC unit shipments grew 4 percent year-on-year, and reached a record market share of The Group's transformation of its Data Center 21.2 percent. business started to bring revenue growth back in the second half of fiscal year on year-on-year basis, The Group's Data Center business saw growth owing to its previous investments in enhancing return in the region with strong revenue growth capabilities in sales, channel, and product solutions. and profitability improvement during the fiscal year. The Group had initial success in Hyperscale The Group's smartphone business in the region and won the largest Supercomputer project in faced fierce competition during the fiscal year, Europe in Germany and further expanded its High hence the Group readjusted its strategy to focus Performance Computer business footprint to on margin protection. As such, the Group saw several other mature countries in the region. smartphone shipments decline and share loss in the fiscal year. In its smartphone business, the Group adjusted its strategy to focus on the mature markets of EMEA Loss before taxation was US$134 million and in order to focus on profit protection, as such the pre-tax profit margin was negative 1.9 percent smartphone shipment in the region saw a decline during the fiscal year, a decrease from negative 0.9 during the fiscal year under review. percent of previous fiscal year, mainly due to the readjustment of smartphone strategy in the region. The Group incurred US$62 million loss before taxation in EMEA during the fiscal year under review, leading to a pre-tax profit margin of negative 0.5 percent, improved from negative 3.0 percent of previous fiscal year thanks to the improvement from PCSD and Data Center businesses. 2017/18 Annual Report Lenovo Group Limited 23 6 Management's Discussion & Analysis MATERIAL RISKS OF THE GROUP The following are key risks that the Group considers to be of great significance to the Group as it stands today. They have the potential to affect the Group's business adversely and materially. For each risk there is a description of the possible impact of the risk on the Group should it occur, and the mitigation plan to manage the risk. The Group also faces risk and uncertainties in common with other businesses. These have not been set out as key risks below. This list is likely to change over time as different risks take on larger or smaller significance. The size, complexity and spread of the business and the continually changing environment in which the Group operates also mean that the list cannot be an exhaustive list of all significant risks that could affect the Group. Risk Description Key Risk Mitigations Business Risk The Group operates in a highly competitive Continual reviews of competition and market industry which faces rapid changes in market trends. trends, consumer preferences and constantly evolving technological advances in hardware Maintain a competitive position through performance, software features and functionality. commitments to innovate and build a broad It faces aggressive product and price competition product portfolio and grow brand name to from new entrants and existing competitors. differentiate the Group and gain market share and recognition. Execution of clear strategy to protect The industry continues to experience and drive profitability in the core PC business, while consolidation. Failure to respond effectively to continuing to attack the faster growing Mobile and changes in market trends or consumer preferences Data Center businesses. through timely launches of new products, or through competitive prices against the backdrop of global slowdown in the traditional PC market could harm its competitive position. 24 Lenovo Group Limited 2017/18 Annual Report 6 Risk Description Key Risk Mitigations The Group operates globally and as such its The Group has diversified its geographic sources of results could be impacted by global and regional revenue and profit to reduce its dependency on any changes in macro-economic, geopolitical and single country or region. social conditions and regulatory environments. It vigilantly tracks and monitors the developments Adverse economic conditions may result in of the political conditions and legal and regulatory postponements or decreased spending amid changes, and maintains compliance programs. concern over weak economic conditions. In addition, they may contribute to potential supply chain volatility, causing potential product shortages. Increase uncertainty driven by growing concerns over political conditions and changes in regulatory or legal regulations in one or several countries may increase the cost of operations and expose the Group to potential liability. The Group offers products that are complex. The Group adopts a proactive quality management Failure to maintain an effective quality approach, which includes identifying risks management system, including at the Group's throughout all aspects of the business. The Group development and manufacturing facilities and its has a robust internal Quality Management System, supply chain, could have a material adverse effect (QMS) integrated within its business management on its business and operations, brand image and system. The Group is ISO 9001 certified by Bureau customers' loyalty. Veritas (BVC) and in China by the Electronics Standardization Institute, (CESI). It is committed Addressing quality issues can be expensive to maintaining a QMS to ensure it meets customer, and may result in additional warranty, repair, social, legal and environmental responsibilities. replacement and other costs and adversely affecting the Group's financial results. 2017/18 Annual Report Lenovo Group Limited 25 6 Management's Discussion & Analysis Risk Description Key Risk Mitigations Merger & Acquisition Risk As part of the Group's expansion plan, we acquire Drive a rigorous due diligence and financial companies or businesses, enter into strategic forecasting process to ensure assets are alliances and joint ventures and make investments. appropriately valued. The Group faces risk such as economy, political and regulatory uncertainty, market volatility, and other challenges associated with our acquisitions. Our due diligence process may fail to identify significant issues, resulting in an overly optimistic valuation forecasts. We may not fully realise all of the anticipated synergies/benefits, and may result in significant cost and expenses and charges to earnings. The acquisitions affects our liquidity and financial On liquidity and financial implications, see "Financial condition. We may borrow to finance the Risk" on Page 28 for mitigation plan. acquisitions. The debt financings could involve restrictive covenants that could limit the Group's capital-raising activities and operating flexibility. 26 Lenovo Group Limited 2017/18 Annual Report 6 Risk Description Key Risk Mitigations Cyber Attack and Security Risk The Group could be impacted negatively if it The Group will continue to invest in the following: sustains cyber-attacks and other data security breaches that disrupt its operations or damage its a) Continue to develop and maintain a robust reputation. cyber security culture by developing sound policies and processes and by training our The Group manages and stores various proprietary employees to follow vital data protection information and sensitive or confidential data practices relating to its operations. In addition, the Group's cloud computing business routinely processes, b) Enhanced cyber security controls and stores and transmits large amounts of data for information security, product security and its customers, including sensitive and personally privacy awareness. identifiable information. The Group may be subject to attack from hackers and other malicious c) Compliance with mandatory privacy and software programs that attempt to penetrate its security standards and protocols imposed networks and exploit any security vulnerability in by law, regulation, industry standards, or its system and products. contractual obligations. Hardware, operating system software, product d) Policies and processes to ensure hardware, software and applications that the Group operating system software, product software produces or procures from third parties may and applications that the Group produces contain "bugs" that could unexpectedly interfere or procures from third parties protects and with the operation of the system or may present responsibly uses customer data. unidentified security risk. Breaches of the Group's security measures and misappropriation of proprietary information, sensitive or confidential data about the Group and its customers could lead the Group to loss of reputation, disruption in business operations, exposure to potential litigation and liability and result in a loss of revenue and increased cost. The Group is subject to law and regulation in countries where it operates relating to the collection, use, and security of customer, consumer and employee data. The Group needs to conduct normal business activities which includes the collection, use and retention of personal data pursuant to these activities. The Group is required to notify individuals or regulators of a data security breach. 2017/18 Annual Report Lenovo Group Limited 27 6 Management's Discussion & Analysis Risk Description Key Risk Mitigations Financial Risk As the Group operates globally, significant or The Group Treasury department has put in place a prolonged economic instability or financial market financial risk management programme that focuses deterioration may materially and adversely impact on the unpredictability of financial markets and the Group's financial condition. seeks to minimize the potential adverse impact on the Group's financial performance. The Group is exposed to a variety of financial risks, such as foreign currency risk, cash flow risk, credit For more analysis, see "Notes to The Financial risk and liquidity risks. Statements" (pages 197 to 205) Due to the international nature of our business and The Group Tax department carefully monitors continuous changes in local and international tax developments in our business and in the global rules and regulations, the application of such rules tax environment in order to make sure rules and and regulations to our operations and transactions regulations are applied appropriately and risks are involves inherent uncertainty and may affect mitigated where possible. our tax position and the value of tax assets and liabilities carried in the balance sheet. Intellectual property (IP) risk The Group could suffer if it does not develop Take appropriate legal measures to protect know- and protect its own intellectual property or its how and trade secrets, apply for and enforce suppliers are not able to develop or protect patents, and register and protect trademarks and desirable technology or technology licenses. copyrights. The risks include: License IP as appropriate, and monitor its continued validity and value to the Group. • higher business costs as a result of increased licensing demands from patent holders; Obtain IP indemnification from, or otherwise transfer responsibility for IP coverage to suppliers. • loss or diminished value of intellectual property as an asset, as a result of legal Monitor, develop and execute IP litigation and findings of unenforceability and challenges to settlement strategy. title or ownership; Use Lenovo patent portfolio as appropriate to • higher legal costs to defend against claims decrease potential IP exposure. of intellectual property infringement and potential settlements or damages; • product design-around costs and negative impacts to customer or supplier relationships; • Risk of interruption of Lenovo's ability to ship products due to injunctions or exclusion orders in particular countries resulting from adverse judgments in IP infringement cases filed against Lenovo. 28 Lenovo Group Limited 2017/18 Annual Report 6 Risk Description Key Risk Mitigations Supply Risk The Group's supply chain operations could be Utilise cost and operational analysis to understand disrupted by: potential impacts. Ensure broad supplier sourcing (i.e. avoidance of sole/single sources), • Catastrophic events financial/business stability tracking and disaster recovery planning to minimize impact of regional • Unfavorable changes in business, political or catastrophes and ensure adaptation plans in place. economic factors. To focus on the Group's ongoing efforts to optimise The occurrence of any of the above in our own or the efficiency of its supply chain. our suppliers' manufacturing activities and logistic hubs could result in significant losses and harm our revenue, profitability and adversely affect our competitive position, and require substantial expenditures and recovery time in order to fully resume operations. The Group could suffer if it is not able to ensure supply of products, component parts, systems and services during period of shortage and to negotiate for favorable pricing. The shortage and increase in price could harm the business by adversely affecting product availability and profitability. 2017/18 Annual Report Lenovo Group Limited 29 6 Management's Discussion & Analysis Risk Description Key Risk Mitigations Human Capital Risk The Group faces intense competition for skilled Focus human capital initiatives and strategic and experience workers due to fast-changing workforce planning in the areas of talent acquisition, market dynamics and an increasingly diversified development, rewards, and retention to address business landscape. For ongoing success, the challenges proactively and support the business Group must continue to attract, retain and transformation in an environment of intense motivate key talent across the enterprise, and competition. ensure smooth transitions throughout the ongoing business transformation. Drive continuous improvements in competitive reward strategies and evolve compensation and The uncertainty created by changes in immigration benefits programs into a more differentiated policies will affect the Group's talent mobility and model to support an increasingly diverse business international talent acquisition strategy. landscape and employee population. Further invest in employee and leadership development programs to build employee engagement, accelerate the internal movement of top talent, and ensure strength of the leadership pipeline. Proactively review the implications of immigration laws change and carry out contingency planning to mitigate potential impacts. Once new laws and regulatory changes are implemented, we focus to prioritise these changes to align with the Group's workforce strategy. 30 Lenovo Group Limited 2017/18 Annual Report 6 ENVIRONMENT Responsible environmental stewardship is a fundamental Lenovo value. A core element of Lenovo's commitment to good environmental stewardship is complying with all applicable laws and regulations wherever we do business. Compliance is central to Lenovo's Environmental Affairs Policy, which applies to all global operations, employees and contractors performing work on behalf of Lenovo. This policy forms the foundation for Lenovo's ISO 14001-certified Environmental Management System (EMS), which includes processes for evaluating legal and voluntary requirements and ensuring compliance across Lenovo's global development and manufacturing operations for personal computers, workstations, servers, storage, mobile device hardware, and smart devices including monitors and accessories. Compliance is driven by the Global Environmental Affairs (GEA) organization and supported by a global network of Lenovo Environmental Affairs Focal Points (EAFPs), Environmentally Conscious Products Focal Points (ECPs), and external partners. Reliable, established processes with defined roles ensure that Lenovo continues to remain in compliance. The process for ensuring environmental compliance for Lenovo products and locations is shown below. Process for Establishing, Monitoring & Maintaining Compliance Product Inputs GEA and network GEA updates global Organizations integrate Inputs Regional, country, of Geo Focal specifications & requirements into product Information on changes & BU focal points Points monitor communicates identified specs, new product to activities, products monitor their areas of emerging issues requirements to impacted designs & BU operational & requirements from responsibility & provide organizations requirements Environmental FP input to GEA Inputs Standards, specs, & Industry/trade procedures reviewed seminars & and updated as required publications, by change &/or annually regulatory tracking at a minimum services, etc. Inputs Location FP updates documents Organizations integrate FPs communicate Contracted Environmental & communicates requirements into changes and provide consultancies FP monitors identified requirements operational procedures. training where needed emerging issues to impacted FP assures permitting organizations requirements met. Location 2017/18 Annual Report Lenovo Group Limited 31 6 Management's Discussion & Analysis Lenovo advances its commitment to compliance through internal and external audits of its own facilities and those of its suppliers. The environmental and health and safety management systems at both its manufacturing and development sites are subjected to internal audits. All in-house manufacturing sites are audited internally to ISO 14001 and OHSAS 18001 standards annually, and audited externally at least once every three years. Lenovo's Robust EMS Ensures Environmental Compliance FY2017/18 FY2016/17 FY2015/16 FY2014/15 FY2013/14 Total monetary value of significant environmental fines 0 0 0 0 0 Number of environmental fines paid 0 0 0 0 0 Total number of non-monetary environmental performance- related sanctions 0 0 0 0 0 Climate, environmental and sustainability risks are included in Lenovo's official Enterprise Risk Management (ERM) process. The ERM evaluation template includes environmental, social, governance and other risk categories. Annually, each business unit is required to identify risks, assess their impacts on Lenovo's strategy execution and develop risk mitigation plans. In addition, Lenovo conducts a Significant Environmental Aspect evaluation at least annually as part of Lenovo's ISO 14001 EMS. This process evaluates Lenovo's significant or material environmental aspects and includes a consideration of risks and opportunities. Under the EMS, once the significant environmental aspects are identified, objectives and targets are established along with KPIs addressing key impacts in the areas of site operations, product and global supply chain. Progress on objectives and targets is monitored and measured. Results regarding Lenovo's FY 2017/18 objectives and targets, as well as other facets of its environmental performance, will be published in the 2017/18 Sustainability Report. 32 Lenovo Group Limited 2017/18 Annual Report 6 STAKEHOLDERS Lenovo actively manages its relationships with customers, employees, suppliers, investors, regulators, members of the communities in which it operates, and other stakeholders whose actions can affect the Company's performance and value. Key mechanisms for engaging with stakeholders include: • Customer focus groups, surveys and direct customer interaction • Employee surveys and Lenovo-organized community service events • Supplier audits, conferences and quarterly business reviews • Phone conferences and meetings with industry trade groups on regulatory issues • Ongoing interactions with local communities • Responding to investor, analyst and non-governmental organization (NGO) surveys and inquiries In addition to these and other formal stakeholder interactions, Lenovo engages with individual stakeholder groups on an ad-hoc basis as needed. More information about Lenovo's sustainability programs can be found in the Sustainability Overview on pages 123 to 136 of this Annual Report. TALENT AND CULTURE We Are Lenovo The "We Are Lenovo" cultural principles of Customer Focus, Teamwork and Trust, Entrepreneurship, and Innovation are the heart of Lenovo's talent management practices. "...As we aim higher, ownership and entrepreneurship within the context of One Company are now much needed – in fact, more than ever." – Yuanqing Yang Employee Performance and Compensation Lenovo continues to leverage its performance management and compensation programs to reinforce a strong commitment and customer culture. This approach includes annual goal setting and review, calibration of individual ratings across organizations to ensure a fair assessment, and recognition of individual and team performance. The integration of customer experience metrics into the individual goal setting process and the annual incentive programs helps accelerate the transformation of Lenovo from a product to a customer centric organization. "Our transformation from product centricity to customer centricity has become relevant to every team, every individual, through clear objectives and measurements." – Yuanqing Yang A refresh of the Lenovo Compensation Philosophy in 2017/18 retained the focus on pay for performance and added more flexibility in the design of business specific programs within a consistent One Lenovo Compensation framework. This ensures that top contributors are paid competitively in light of their contributions and relevant market practices. 2017/18 Annual Report Lenovo Group Limited 33 6 Management's Discussion & Analysis Talent Management and Succession Planning Lenovo's 2017-18 annual Organizational and Human Resource Planning (OHRP) process further reflected the Company's transformation from a product centric to customer centric organization. The focus on attracting and promoting top talent to accelerate advances in key technologies and serve new customer segments was seen across all business lines. A significant increase in AI talent was noted for Lenovo Research, as well as within product development groups across the business. Top external female senior leadership new hires within DCG were noted as key wins. "We should all feel excited about the once-in-life-time opportunities that Lenovo has, in this AI age." – Yuanqing Yang Talent Acquisition Lenovo's long-term talent acquisition strategy remains steadily focused on building the employer brand and investing in the attraction of next generation talent for future growth. Training and Development At Lenovo our commitment to developing employees begins with New Employee Orientation and continues throughout their career with the Company. Every employee is responsible for creating and maintaining an Individual Development Plan (IDP), which includes an assessment of strengths and skill gaps, and actions needed for future development and career growth. We have enhanced our management and leadership development program to provide support for managers during their leadership progression at Lenovo by offering specific training experiences at key points in their careers. Instructor-led professional development courses and forums are made available throughout the year, in addition to rich online learning resources provided on demand via our global learning management system. Besides formal training, Lenovo's 70-20-10 approach to employee development recognizes that employees learn through three distinct types of experiences: on-the-job training and assignments (70%), developmental coaching and mentoring relationships (20%), and coursework and training (10%). Lenovo also places a high priority on executive development, bringing senior leaders together once a year to share best practices, learn from external experts and drive strategic alignment across the enterprise through Global Leadership Meeting (GLT) and Lenovo Executive Accelerator Program (LEAP). BRAND BUILDING Lenovo continued to build its brand presence globally, once again being listed among Interbrand's 100 best global brands. The brand statement 'Different is better' resonates with audiences globally and is helping to establish Lenovo's unique point of view. For us 'Different is better' means that we provide distinctive technology through a global business model that is differentiated in the market by its scale and diversity. Our innovations are sought by customers who share our mindset: by consumers who want to stand out from the crowd, by businesses that are driving disruption, and by pioneers in every discipline who are seeking to tackle the world's biggest problems. We also are approaching culture with a different point of view. Campaigns like Motorola's tech/life balance campaign, which questions how users can bring control back to their smartphone relationships, helped to drive relevant conversations among consumers. Lenovo ranked in NetBase' Top 100 brand love list for its enthusiastic social community, who actively engaged online in campaigns like the retro ThinkPad launch that solidify the strong connections that consumers have to Lenovo's products. The 'Different is better' mindset is shaping our approach to every touchpoint – from service and support to talent recruitment. The brand ethos is driving us to define our advantages for employees and customers and to continue proving why Lenovo is the different and better choice. 34 Lenovo Group Limited 2017/18 Annual Report 6 FINANCIAL HIGHLIGHT RESULTS 2018 2017 For the year ended March 31 US$'000 US$'000 Revenue 45,349,943 43,034,731 Gross profit 6,272,131 6,105,516 Gross profit margin 13.8% 14.2% Operating expenses (5,885,408) (5,433,168) Operating profit 386,723 672,348 Other non-operating expenses – net (233,521) (182,421) Profit before taxation 153,202 489,927 (Loss)/profit for the year (126,775) 530,441 (Loss)/profit attributable to equity holders of the Company (189,323) 535,084 (Loss)/earnings per share attributable to equity holders of the Company (US cents) – Basic (1.67) 4.86 – Diluted (1.67) 4.86 EBITDA* 1,324,723 1,581,086 Profit before taxation excluding restructuring charges and disposal gains on properties ("Operational performance") 192,502 96,135 Dividend per ordinary share (HK cents) – Interim dividend 6.0 6.0 – Proposed final dividend 20.5 20.5 * Excluding "other income – net" 2017/18 Annual Report Lenovo Group Limited 35 6 Management's Discussion & Analysis For the year ended March 31, 2018, the Group achieved total sales of approximately US$45,350 million. Loss attributable to equity holders for the year was approximately US$189 million, as compared with profit attributable to equity holders of US$535 million reported last year. This is mainly attributable to the write off of deferred income tax assets of US$400 million, pursuant to the Tax Cuts and Jobs Act enacted by the government of United States ("US") on December 22, 2017, with the US corporate tax rate reduced for tax years beginning after December 31, 2017. Gross profit margin for the year was 0.4 points down from 14.2 percent reported last year. Basic and diluted loss per share were US1.67 cents, as compared with basic and diluted earnings per share of US4.86 cents reported last year. The Group adopts geographical segments as the reporting format. Geographical segments comprise China, AP, EMEA and AG. Analyses of sales by segment are set out in Business Review section. 2018 2017 Revenue Adjusted Revenue Adjusted from external pre-tax from external pre-tax For the year ended customers income/(loss) customers income/(loss) March 31 US$'000 US$'000 US$'000 US$'000 China 11,525,321 557,641 11,794,773 539,137 AP 7,156,293 (133,664) 7,011,595 (65,155) EMEA 12,481,897 (62,383) 11,187,313 (336,666) AG 14,186,432 71,746 13,041,050 157,452 45,349,943 433,340 43,034,731 294,768 Operating expenses analyzed by function for the years ended March 31, 2018 and 2017 are as follows: 2018 2017 For the year ended March 31 US$'000 US$'000 Other income – net 301 10,891 Selling and distribution expenses (2,833,253) (2,680,631) Administrative expenses (1,757,319) (1,851,990) Research and development expenses (1,273,729) (1,361,691) Other operating (expenses)/income – net (21,408) 450,253 (5,885,408) (5,433,168) 36 Lenovo Group Limited 2017/18 Annual Report 6 Operating expenses for the year increased by 8 percent as compared with last year. During the year, the Group recorded gain of US$61 million on monetizing the Wuhan R&D property, while in last year, the Group recorded gain of US$553 million on monetizing certain non-core assets and disposal of a joint venture. The Group announced resource actions and incurred severance costs of US$101 million (2017: US$146 million) to further enhance efficiency and competitiveness in view of industrial challenges. The Group has also reduced the advertising and promotional expenses by US$47 million compared with last year. Other income in last year mainly represented net gain on disposal of an available-for-sale financial asset of US$12 million. The Group recorded a net exchange loss of US$56 million (2017: US$111 million) for the year. Key expenses by nature comprise: 2018 2017 For the year ended March 31 US$'000 US$'000 Depreciation of property, plant and equipment and amortization of prepaid lease payments (148,177) (155,583) Amortization of intangible assets (443,809) (432,996) Employee benefit costs, including (3,222,012) (3,173,774) – long-term incentive awards (199,779) (180,892) – severance and related costs (100,775) (146,368) Rental expenses under operating leases (131,858) (123,936) Net foreign exchange loss (55,735) (110,968) Advertising and promotional expenses (842,365) (888,883) Impairment of property, plant and equipment (4,608) (7,303) Gain on disposal of property, plant and equipment, prepaid lease payments and construction-in-progress 50,937 336,172 Gain on disposal of a joint venture – 218,366 Dilution gain of interests in associates and a joint venture 2,499 14,260 Others (1,090,280) (1,108,523) (5,885,408) (5,433,168) 2017/18 Annual Report Lenovo Group Limited 37 6 Management's Discussion & Analysis Other non-operating expenses (net) for the years ended March 31, 2018 and 2017 comprise: 2018 2017 For the year ended March 31 US$'000 US$'000 Finance income 32,145 27,795 Finance costs (263,160) (231,627) Share of (losses)/profits of associates and joint ventures (2,506) 21,411 (233,521) (182,421) Finance income mainly represents interest on bank deposits. Finance costs for the year increased by 14 percent as compared with last year. This is mainly attributable to the interest expense of US$20 million in relation to the 5-Year US$500 million notes, issued in March 2017, bearing annual interest at 3.875%, and the increase in factoring cost of US$43 million, partly offset by the decrease in interest on promissory note issued to Google Inc. of US$41 million. Share of (losses)/profits of associates and joint ventures represents operating (losses)/profits arising from principal business activities of respective associates and joint ventures. FINANCIAL POSITION The Group's major balance sheet items are set out below: 2018 2017 Non-current assets US$'000 US$'000 Property, plant and equipment 1,304,751 1,236,250 Prepaid lease payments 507,628 473,090 Construction-in-progress 382,845 413,160 Intangible assets 8,514,504 8,349,145 Interests in associates and joint ventures 35,666 32,567 Deferred income tax assets 1,530,623 1,435,256 Available-for-sale financial assets 373,077 255,898 Other non-current assets 181,759 122,221 12,830,853 12,317,587 38 Lenovo Group Limited 2017/18 Annual Report 6 Property, plant and equipment Property, plant and equipment comprise mainly the Group's freehold land and buildings, leasehold improvements, plant and machinery and office equipment. Increase of 6 percent is mainly attributable to the Group's further investments in headquarters in China, plant and machinery and office equipment, partly offset by current year depreciation. Prepaid lease payments Prepaid lease payments represent the land use rights in respect of the manufacturing sites and headquarters in China. Increase of 7 percent is mainly due to the land use right acquired for the new headquarters in China. Construction-in-progress Construction-in-progress comprises mainly the Group's investments in headquarters in China, internal use software and research and development laboratories. Intangible assets Intangible assets comprise goodwill and other intangible assets including trademarks and trade names, customer relationships, patent and technology and internal use software. Interests in associates and joint ventures Interests in associates and joint ventures increased by 10 percent, which is mainly brought by additional investments during the year. Deferred income tax assets Deferred income tax assets amounted to US$1,531 million as at current year end, representing an increase of 7 percent over last year, which is mainly attributable to tax losses and temporary differences in relation to provisions and accruals arising in the normal course of business. Pursuant to the Tax Cuts and Jobs Act enacted by the government of the US on December 22, 2017, the US corporate tax rate is reduced for tax years beginning after December 31, 2017. The rate change leads to a write-off of US deferred income tax assets of approximately US$400 million for the year. Available-for-sale financial assets Available-for-sale financial assets increased by 46 percent, which is mainly attributable to additional investments during the year and exchange adjustment. Other non-current assets Other non-current assets amounted to US$182 million as at current year end, representing an increase of 49 percent over last year, which is mainly attributable to the increase of indirect tax recoverable and other construction. 2018 2017 Current assets US$'000 US$'000 Inventories 3,791,691 2,794,035 Trade receivables 4,972,722 4,468,392 Notes receivable 11,154 68,333 Derivative financial assets 24,890 53,808 Deposits, prepayments and other receivables 4,703,335 4,333,351 Income tax recoverable 227,203 199,149 Bank deposits 84,306 196,720 Cash and cash equivalents 1,848,017 2,754,599 15,663,318 14,868,387 2017/18 Annual Report Lenovo Group Limited 39 6 Management's Discussion & Analysis Inventories Inventories increased by 36 percent which is in line with the Group's business growth and more purchases in contemplation of the plan to mitigate the risks of cost increases and supply constraints of key components. Trade receivables and Notes receivable Trade receivables and notes receivable increased by 11 percent, which is in line with increase in business activities during the fourth quarter of current year. Derivative financial assets/liabilities Derivatives relate to foreign currency forward contracts that are designated as hedges for the fair value of recognized assets or liabilities or a firm commitment, or of highly probable forecast transactions. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair values. Deposits, prepayments and other receivables Majority of other receivables of the Group are amounts due from subcontractors for component parts sold in the ordinary course of business. Increase is in line with the increase in business activities and attributable to receivable arising from disposal of a subsidiary holding the Wuhan property. Total equity Total equity amounted to US$4,546 million as at current year end. The increase in total equity is mainly due to the issuance of ordinary shares of US$496 million and perpetual securities of US$150 million, and share-based compensation during the year, mainly offset by dividend paid. 2018 2017 Non-current liabilities US$'000 US$'000 Borrowings 2,648,725 2,966,692 Warranty provision 278,908 280,421 Deferred revenue 583,405 537,428 Retirement benefit obligations 413,482 370,207 Deferred income tax liabilities 230,609 221,601 Other non-current liabilities 333,332 380,557 4,488,461 4,756,906 Borrowings Borrowings (classified as non-current) decreased by US$318 million mainly attributable to the repayment of bank loans during the year. Warranty provision The Group records warranty liabilities at the time of sale for the estimated costs that will be incurred under its basic limited warranty. The specific warranty terms and conditions vary depending upon the product and the country in which it was sold, but generally includes technical support, repair parts and labour associated with warranty repair and service actions. The period ranges from one to three years. The Group revaluates its estimates on a quarterly basis to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. 40 Lenovo Group Limited 2017/18 Annual Report 6 Retirement benefit obligations The Group operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. Deferred income tax liabilities Deferred income tax liabilities comprise withholding tax on undistributed earnings, tax liabilities on upward valuation of intangibles arising from business combination and accelerated tax depreciation. Other non-current liabilities Other non-current liabilities mainly comprise government incentives and grants received in advance and deferred rent for offices. The decrease of 12 percent is mainly due to the recognition of government incentives and grants as income upon fulfilment of certain conditions. 2018 2017 Current liabilities US$'000 US$'000 Trade payables 6,450,792 5,649,925 Notes payable 801,974 835,613 Derivative financial liabilities 62,694 67,285 Other payables and accruals 9,217,764 10,004,614 Provisions 858,475 873,405 Deferred revenue 732,552 586,536 Income tax payable 168,779 246,465 Borrowings 1,166,692 70,003 19,459,722 18,333,846 Trade payables and Notes payable Trade payables and notes payable increased by 12 percent, which is in line with more purchases activities during the fourth quarter of current year. Other payables and accruals Other payables and accruals comprise the allowance for billing adjustments relating primarily to allowance for future volume discounts, price protection, rebates, and customer sales returns. Majority of other payables are obligations to pay for finished goods that have been acquired in the ordinary course of business from subcontractors. The balances decreased mainly driven by the settlement of remaining deferred consideration payable to Google Inc. settled during the year. Provisions Provisions comprise warranty liabilities (due within one year), environmental restorations and restructuring provision. The decrease of 2 percent over last year is due to settlement of severance costs and partly offset by the US$101 million severance provisions during the year. Borrowings Borrowings (classified as current) amounted to US$1,166 million as at current year end. The increment in balance is mainly attributable to drawn down of short term loans during the year. 2017/18 Annual Report Lenovo Group Limited 41 6 Management's Discussion & Analysis CAPITAL EXPENDITURE The Group incurred capital expenditure of US$671 million (2017: US$803 million) during the year ended March 31, 2018, mainly for the acquisition of property, plant and equipment, prepaid lease payments, additions in construction-in-progress and intangible assets. LIQUIDITY AND FINANCIAL RESOURCES At March 31, 2018, total assets of the Group amounted to US$28,494 million (2017: US$27,186 million), which were financed by equity attributable to owners of the Company of US$3,519 million (2017: US$3,223 million), perpetual securities of US$994 million (2017: US$844 million) and other non-controlling interests (net of put option written on non-controlling interest) of US$33 million (2017: US$28 million), and total liabilities of US$23,948 million (2017: US$23,091 million). At March 31, 2018, the current ratio of the Group was 0.80 (2017: 0.81). The Group had a solid financial position. At March 31, 2018, bank deposits, cash and cash equivalents totaled US$1,932 million (2017: US$2,951 million), of which 28.8 (2017: 45.1) percent was denominated in US dollar, 45.6 (2017: 29.0) percent in Renminbi, 6.1 (2017: 6.6) percent in Euro, 7.4 (2017: 5.2) percent in Japanese Yen, and 12.1 (2017: 14.1) percent in other currencies. The Group adopts a conservative policy to invest the surplus cash generated from operations. At March 31, 2018, 99.6 (2017: 78.5) percent of cash are bank deposits, and 0.4 (2017: 21.5) percent of cash are investments in liquid money market funds of investment grade. Although the Group has consistently maintained a very liquid position, banking facilities have nevertheless been put in place for contingency purposes. The Group entered into a 5-Year loan facility agreement with syndicated banks for US$1,200 million, comprising US$800 million as revolving loan facility and US$400 million as term loan facility, on December 18, 2013. The term loan facility has been prepaid. As at March 31, 2018, the revolving loan facility was utilized to the extent of US$800 million (2017: not utilized). The outstanding US$800 million was re- financed and prepaid in April 2018 by a 5-Year revolving loan facility with syndicated banks of US$1,500 million signed on March 28, 2018. In addition, on May 26, 2015, the Group entered into a 5-Year revolving loan facility agreement with a bank for US$300 million. The facility was utilized to the extent of US$300 million as at March 31, 2018 (2017: not utilized). On May 8, 2014, the Group completed the issuance of 5-Year US$1.5 billion notes bearing annual interest at 4.7% due in May 2019 ("Note 2019"); and on June 10, 2015, the Group completed the issuance of 5-Year RMB4 billion notes bearing annual interest at 4.95% due in June 2020 ("Note 2020"). The proceeds have been used for general corporate purposes including working capital and acquisition activities. On March 16, 2017, the Group completed the issuance of 5-Year US$500 million notes bearing annual interest at 3.875% due in March 2022 ("Note 2022"); and completed the issuance of US$850 million perpetual securities in the form of cumulative preferred shares bearing annual dividend at 5.375%, with a performance guarantee from the Company. Moreover, on April 6, 2017, the Group completed the issuance of an additional US$150 million perpetual securities under the same terms. The proceeds have been used for repayment of the outstanding amount under the promissory note issued to Google Inc. and for general corporate purposes including working capital. 42 Lenovo Group Limited 2017/18 Annual Report 6 On March 29, 2018, the Group completed the issuance of 5-Year US$750 million notes bearing annual interest at 4.75% due in March 2023 ("Note 2023"). The proceeds were majorly used to repurchase the principal amount of US$714 million of the Note 2019, and for general corporate purpose including working capital. The Group has also arranged other short-term credit facilities. At March 31, 2018, the Group's other total available credit facilities amounted to US$11,232 million (2017: US$10,710 million), of which US$1,730 million (2017: US$1,584 million) was in trade lines, US$796 million (2017: US$293 million) in short-term and revolving money market facilities and US$8,706 million (2017: US$8,833 million) in forward foreign exchange contracts. At March 31, 2018, the amounts drawn down were US$1,090 million (2017: US$1,086 million) in trade lines, US$8,645 million (2017: US$8,216 million) being used for the forward foreign exchange contracts, and US$70 million (2017: US$70 million) in short-term bank loans. At March 31, 2018, the Group did not have any term bank loan (2017: US$398 million), and the Group's outstanding borrowings represented by short-term bank loans of US$1,166 million (2017: US$70 million) and notes of US$2,649 million (2017: US$2,569 million). When compared with total equity of US$4,546 million (2017: US$4,095 million), the Group's gearing ratio was 0.84 (2017: 0.74). The net debt position of the Group at March 31, 2018 is US$1,883 million (2017: US$86 million). The Group is confident that all the facilities on hand can meet the funding requirements of the Group's operations and business development. The Group adopts a consistent hedging policy for business transactions to reduce the risk of currency fluctuation arising from daily operations. At March 31, 2018, the Group had commitments in respect of outstanding forward foreign exchange contracts amounting to US$8,654 million (2017: US$8,216 million). The Group's forward foreign exchange contracts are either used to hedge a percentage of future transactions which are highly probable, or used as fair value hedges for identified assets and liabilities. CONTINGENT LIABILITIES The Group, in the ordinary course of its business, is involved in various claims, suits, investigations, and legal proceedings that arise from time to time. Although the Group does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on its financial position or results of operations, litigation is inherently unpredictable. Therefore, the Group could incur judgments or enter into settlements of claims that could adversely affect its operating results or cash flows in a particular period. HUMAN RESOURCES At March 31, 2018, the Group had a headcount of more than 54,000 worldwide. The Group implements remuneration policy, bonus, employee share purchase plan and long-term incentive scheme with reference to the performance of the Group and individual employees. The Group also provides benefits such as insurance, medical and retirement funds to employees to sustain competitiveness of the Group. The Company has launched an employee share purchase plan ("Plan") in October 2016. The purpose of the Plan is to facilitate and encourage Lenovo share ownership by the general employee population. Under the Plan, eligible employees will be awarded one matching restricted share unit for every four ordinary shares of the Company purchased through qualified employee contributions. The matching restricted share units are subject to a vesting schedule of up to two years. Executive and non-executive directors and senior management of the Company are not eligible to participate in the Plan. 2017/18 Annual Report Lenovo Group Limited 43 6 Management's Discussion & Analysis FUTURE PROSPECTS The Group's strong execution in its transformation started to show positive results with revenue and operational profit before taxation resumed growth during the fiscal year. Lenovo has a clear vision to drive sustainable, profitable growth going forward. Although the markets the Group participates in remain fiercely competitive, management is confident in its ability to successfully execute the strategy and weather the competition. At the same time, Lenovo continues to invest in emerging technologies and merge smart technologies into its core business. And as the market moves into the smart IoT era, Lenovo sees PC, smartphone and IoT devices as one device portal from which the users can move seamlessly from one to another through the cloud and using smarter tools that make tasks easier. As such, the Group has formed the "Intelligent Devices Group", combining PCSD and MBG together, to speed the convergence of computing and communication technologies in products, to optimize shared platforms such as global supply chain and global service, and to accelerate the smart device + cloud services platform in providing intelligent services to users. Under the new "Intelligent Devices Group", Lenovo will have the structure and business model to be more customer centric, offering customer one-stop solutions to their computing needs right at the edge of the network. The Group will continue to leverage its excellence in branding, operational efficiency and supply chain management to bring best-in-class devices to customers. Moreover, the Group aims to expand business through services or subscriptions model, offering customer a total solution when purchasing devices. The Group remains confident in its core PC business, and aims to grow premium to market in revenue without compromising on profitability. Lenovo will leverage industry consolidation opportunities, and drive growth in the high-growth segments such as gaming PCs and workstations. The Group's iconic commercial brand, ThinkPad, celebrated its 25th anniversary with 125 million units shipped since its launch, will continue to drive growth in the ongoing commercial PC refresh. With Smart Devices, Lenovo continues to invest in and develop next-generation smart capabilities, and has now entered the go-to-market phase to bring more innovative products to the market, i.e. Mirage Solo standalone VR headset with Google's Daydream launched in early May 2018, as well as AI-enabled devices in smart home and smart office coming soon. With smartphone, the Group will continue to strengthen its core markets in Latin America and North America, focus on profitable markets, and cut expenses to significantly reduce the loss in this business. The Group's long-term vision is to build an ecosystem around its devices and generate a healthy business model that comprises of a mixture of hardware, software and services revenues. 44 Lenovo Group Limited 2017/18 Annual Report 6 In the Data Center business, the Group's transformation has been well executed and starting to see positive results in steering the business into a world-class next-generation IT solution provider. The next- generation IT products and solutions such as software defined solutions, high-performance computing and hyperscale now represent a much larger mix of the DCG revenue in fiscal quarter four. The Group will continue to drive growth in these segments, as well as profitability improvement for overall DCG business. Lenovo also seeks to strengthen various industrial solutions such as those for 5G Telecom and IoT. In Hyperscale, the Group continues to leverage its world-class in-house design and manufacturing capabilities, and bring compelling offerings to the global hyperscalers. And in software defined data center, the Group will continue to partner with the best-in-class software vendors to give customers the flexibility. In high-performance computing, Lenovo aims to further narrow the gap with the number one vendor in the global Top 500 HPC List. And in the customer-centric model, the Group will also strengthen its attach rates in storage, networking, and services; so as to offer a more compelling total solution and build a long-term business relationship with customers. The Group will continue to build on its solid foundation with its strong organizational structure and product portfolio, while also enhancing its sales capabilities, strengthening channel management, and driving growth in high-growth segments. The Group now has the most compelling products in its history under the ThinkSystem and ThinkAgile brands to drive profitable growth in the future, coupled with the fast time-to-market product rollout, industry-leading product reliability and the increasingly capable sales force. The Group continues to invest in AI, IoT, Big Data and VR/AR with sizable investments over time. With that, the Group is building capabilities in Device + Cloud and Infrastructure + Cloud in order to capture the growth in the smart IoT era. The Group has incorporated its AI core capabilities, such as voice recognition, language understanding and machine learning to strengthen its supercomputer, edge computing, and cloud computing capabilities. Thomson Reuters named Lenovo a Top 100 Global Tech Leader in 2018 for its outstanding performance in the areas of innovation, environmental impact and corporate social responsibility, demonstrating Lenovo's innovation capabilities and focus on sustainability. And most recently, Laptop Magazine named Lenovo the Best Laptop Brand 2018 for the second year, as well as won 14 iF Annual Design Awards for products like "Star Wars: Jedi Challenge" and Mirage Solo VR headset. Looking forward, market conditions remain challenging in the short term. However, the Group now has a stronger organization with sharper customer focus and more compelling business model across all its businesses. Coupled with strong execution, the Group remains confident it can build leading positions in every business the Group enters and drive profitable growth that, in turn, creates better value for shareholders. 2017/18 Annual Report Lenovo Group Limited 45 6 MANUFACTURING AND SUPPLY CHAIN OPERATIONS Manufacturing Operations Lenovo's manufacturing business model combines both Company-owned manufacturing capabilities with original design manufacturer (ODM) partnerships and joint-venture manufacturing. This hybrid model provides a competitive advantage which enables us to bring new innovations to market more efficiently while ensuring greater control over both product development and supply chain operations. Lenovo's manufacturing operation is global, which allows us to tailor our products to regional markets. All Lenovo global manufacturing locations are ISO 9001 (Quality), ISO 14001 (Environmental) and OHSAS 18001 (Health and Safety) certified. As required by these globally accepted standards, objectives and targets are implemented annually at each Lenovo manufacturing facility to ensure continual improvement and a safe and healthy work environment for our employees. In addition, Lenovo encourages its suppliers to achieve OHSAS 18001 certification through voluntary initiatives. Occupational Health and Safety Providing a safe and healthy working environment for all Lenovo employees is essential to the Company's productivity and values. The Company's Global Occupation Health and Safety (OHS) organization has established world-class standards for employee workplace safety through our Occupational Safety and Health Management System that delivers health and safety programs and processes throughout our global manufacturing footprint. We accomplish this through education, prevention, checks and controls that are vital to achieving the Company's objectives for innovation, productivity and continual improvement. New facilities are quickly and fully integrated into our system and measured to our demanding health and safety standards. All Lenovo global manufacturing locations are OHSAS 18001 certified by Bureau Veritas, a leading independent certification body. Countries with health & safety-certified (OHSAS 18001) Lenovo manufacturing locations Brazil China India Japan Mexico U.S.A. Lenovo is committed to continually improving the sustainability performance of its manufacturing organizations, and utilizes programs and tools of the Responsible Business Alliance (RBA) for guidance. Lenovo ensures compliance with the RBA Code of Conduct by conducting regular occupational health, safety and environmental assessments at all internal global manufacturing locations and key outsourced manufacturing suppliers to provide high levels of regulatory and external management systems compliance. 2017/18 Annual Report Lenovo Group Limited 127 6 Sustainability Overview Supply Chain Operations Lenovo expects its suppliers to not only provide the highest quality parts, products and services, but also to conduct business ethically, responsibly and sustainably. Our top 100 suppliers, which constitute most of our procurement spend, are measured across 25 key sustainability indicators. First and foremost, suppliers are contractually required through purchase order terms and conditions and other formal agreements to comply with all legal, regulatory and various additional sustainability requirements. They are required to implement and maintain documented quality and environmental management systems that meet ISO 9001/14001 requirements, follow all laws regarding environmental and workplace conditions, comply with restricted materials requirements and provide necessary declarations. Lenovo implements the RBA Code of Conduct contractually with our suppliers. Lenovo's own Supplier Code of Conduct is also contractually executed with suppliers and incorporates the RBA code as a component. The RBA code covers elements of labor, environmental and health concerns. In particular, it addresses child labor, forced labor, working hours, overtime, time off, recruitment fees and flow-down of requirements upstream to all levels. Lenovo strives to directly validate compliance of 95 percent of its Tier 1 suppliers and 50 percent of its Tier 2 suppliers by procurement spend with formal self-assessments and independent third-party audits. Regarding supplier environmental impacts, Lenovo's Corporate Environmental Standards policy requires the procurement team to identify areas of environmental risk based on specific criteria and then conduct prescribed actions to ensure risk is mitigated. Suppliers with the highest risk are audited before use and on a regular schedule. Additionally, suppliers are required to report their policy goals, GHG emissions, water usage, waste generation and renewable energy use annually and are tracked on their reduction efforts. Lenovo recognizes the importance of concerns regarding the sourcing of materials containing tin, tantalum, tungsten and gold (3T/G), and cobalt. When sourced from regions experiencing political and social conflict, which may include the Democratic Republic of the Congo or surrounding countries, these materials are referred to as "conflict minerals." We fully support the efforts of the RBA, the Responsible Minerals Assurance Process (RMAP), NGOs and governmental bodies to solve this complex issue, and have supported these efforts with our RBA membership dues since 2006 and direct participation in RBA programs. Also, Lenovo has formally joined the Responsible Minerals Initiative (RMI) to focus on conflict materials beyond 3T/G. 128 Lenovo Group Limited 2017/18 Annual Report 6 Lenovo's activities regarding conflict minerals include: An industry-leading Conflict Minerals Policy validated by independent third-party review, as well as a specific Cobalt Policy Engaging suppliers through formal contracts and directly validating their due diligence efforts via independent third-party RBA audits Participating in RMAP conflict mineral conferences and smelter work groups Holding regular education sessions for employees, publishing quarterly newsletters and providing supplier training as needed Extensively employing the RBA Conflict Minerals Reporting Template (CMRT) for Reasonable Country of Origin Inquiry (RCOI) efforts across 95 percent of our procurement spend and our supply chain Utilizing RMAP to audit and certify smelters as being conflict-free compliant Reporting the program status to Lenovo's Chief Sustainability Executive Publicly reporting our conflict minerals report, the smelters and refiners in our supply chain and their country of location and our list of suppliers 2017/18 Annual Report Lenovo Group Limited 129 6 Sustainability Overview Supplier Diversity The aims of Lenovo's Supplier Diversity Program are to expand our diverse supplier base, strengthen economic development and create a competitive advantage for all involved. Diverse suppliers are a natural part of our business strategy and these suppliers are an integral part of our productivity, quality, service and innovation. Through our Supplier Diversity Program we are committed to maximizing the inclusion of diverse suppliers in our business relationships by identifying opportunities, developing and incubating relationships, creating processes that encourage diverse supplier integration, and building on the Company's already strong culture of inclusion – The Lenovo Way. To increase diversity in our business relationships, Lenovo seeks to include the following suppliers: HUB Zone business Woman-owned Minority-owned Service-disabled veteran-owned Supplier LGBT-owned Diversity Small disadvantaged business Veteran-owned Persons with a disability-owned Small business Lenovo partners with a variety of national and regional organizations, such as the National Minority Supplier Development Council (NMSDC) and the Women's Business Enterprise National Council (WBENC), to facilitate supplier identification and program development. Lenovo currently conducts more than US$120 million in business annually with small and/or certified diverse suppliers in the United States. For more information, please visit our Supplier Diversity website at www.lenovo.com/supplierdiversity. THE ENVIRONMENT Lenovo's long-term, comprehensive approach to environmental management encompasses everything from site operations and product design to recycling and product end-of-life management. Lenovo's Environmental Affairs Policy, which applies to all operations and forms the foundation of Lenovo's Environmental Management System (EMS), provides the backbone for Lenovo's strategy. The Environmental Affairs Policy is available at www.lenovo.com/environment. Lenovo's approach to managing environmental risk and ensuring compliance is described in the Management Discussion & Analysis section on page 31. Lenovo also acts to ensure compliance in its supply chain with a risk-based approach to supplier auditing, including required audits for those organizations whose operations potentially present significant environmental risks. Lenovo also requires that its suppliers comply with the RBA Code of Conduct and verify this compliance through third-party audits. Regarding Lenovo's own Supplier Code of Conduct, compliance is enforced contractually. 130 Lenovo Group Limited 2017/18 Annual Report 6 Climate Change Climate change has been identified as a significant environmental risk and opportunity for Lenovo and is evaluated as part of the processes described below. 1) As part of Lenovo's Enterprise Risk Management system process, at least annually climate change risks are evaluated and incorporated as needed into a prioritized list of overall risks to the Company. 2) As part of Lenovo's ISO 14001 Environmental Management System (EMS), at least annually environmental risks including climate change are evaluated and assigned a quantified score for use in establishing objectives and targets under the EMS. 3) Climate change is also considered as part of Lenovo's Sustainability Reporting Materiality Assessment process. The foundation of Lenovo's climate change strategy is Lenovo's Climate and Energy Policy, which supports the conclusions as presented by the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC) – "Climate Change 2014." Lenovo concurs with the findings and agrees that specific actions are needed to stabilize atmospheric greenhouse gas (GHG) levels and hold global average temperatures to acceptable increases. The actions supported by Lenovo include reducing global emissions by 40-to-70 percent between 2010 and 2050 and attaining zero emissions by 2100. These actions align with the global scientific community's generally accepted recommendations for maintaining global warming below two degrees Celsius over the 21st century relative to pre-industrial levels. Lenovo's climate change strategy receives input from the very highest levels of our organization. Lenovo's Executive Committee and Board of Directors directed Lenovo to establish a second-generation Scope 1 and 2 GHG emissions reductions goal. This new goal was officially released in FY15/16 and calls upon Lenovo to reduce our Scope 1 and 2 GHG emissions by 40 percent by 2020 relative to our FY09/10 adjusted baseline. This second-generation target for GHG emission reductions aligns with our customers' and investors' expectations and follows the latest scientific findings of climate science. In support of this goal, in May 2015 the Lenovo Board of Directors recommended that Lenovo achieve 30 megawatts of direct renewable generation by 2020. LENOVO GLOBAL GHG EMISSION TARGET 40% reduction compared to FY 2009/10 baseline 2009 2020 2017/18 Annual Report Lenovo Group Limited 131 6 Sustainability Overview While we have demonstrated good progress during the early stages of GHG reduction and renewable energy commitments, we are keenly aware there is still much to be done. In light of growth, we realize that accomplishing our goals moving forward will be a significant challenge. With a continued focus on energy efficiency, Lenovo's global teams continue to work to identify and implement energy reduction, renewable energy and carbon offset opportunities that provide the most cost-effective path to meeting our second- generation targets. In FY17/18, Lenovo started assessing a path forward for our third-generation targets after 2020. We are reviewing and evaluating the Science Based Targets initiative's methodology to determine the best approach for Lenovo to support science based reduction pathways for limiting global temperature rise. In addition to our work to address these high-level corporate goals, Lenovo also has established more detailed climate change-related goals as part of Lenovo's EMS. For FY 2017/18, Lenovo had the following global targets in place related to climate change: • New products must show improved energy efficiency relative to the previous generation of the product. • Ensure select products are compliant with preferred voluntary energy standards. • Continue to support external development of product carbon footprint (PCF) methodologies and standards. • Ensure product carbon footprints are published for all new Lenovo products. • Begin calculating PCFs for a representative sample of newly released servers by January 31, 2018. • Specified organizations will establish global action plans to reduce combined Scope 1 and Scope 2 GHG emissions by 40 percent by March 31, 2020, relative to FY 2009/10. The plan will be reviewed and updated annually, at a minimum. • Achieve a four percent reduction in our global CO2e emissions by the end of FY 2017/18 relative to previous fiscal year. • Require climate change reduction targets for at least 75 percent of Lenovo direct suppliers. • Engage with global transportation carriers to ensure they have climate change reduction targets and/ or programs. Results of Lenovo's programs to address these targets will be reported in Lenovo's FY 2017/18 Sustainability Report. In addition, Lenovo responded to the 2017 CDP climate change survey and received an A-, placing Lenovo in the leadership category. Lenovo's annual climate change report, including a climate change risk and opportunities analysis, is publicly available at www.cdp.net. For additional details on Lenovo's GHG emissions inventory and management, see Lenovo's climate change web pages at www.lenovo.com/climate and Sustainability Reports at www.lenovo.com/sustainability. 132 Lenovo Group Limited 2017/18 Annual Report 6 Transport and Packaging Lenovo considers transport and packaging to be among its significant environmental aspects. Emissions arise from different types of transportation and distribution activities throughout Lenovo's value chain, including emissions from product transport and the business travel of Lenovo employees. Lenovo works closely with its partners to ship products in the most environmentally responsible manner, supports green logistics initiatives such as Green Freight Asia, and encourages employees to utilize technology to reduce travel. New packaging made from bamboo Packaging can affect transportation emissions in addition and sugar cane fiber is 100 percent to the environmental impacts of resource use and disposal. biodegradable and lighter than previous Lenovo continually improves its packaging to reduce size and packaging materials weight and utilize more environmentally friendly materials as part of its Environmentally Conscious Product Program. Company-wide transport and packaging objectives and targets are established annually and published in Lenovo's Sustainability Report, along with results of the reporting year's objectives and targets. Waste and Water Lenovo is committed to reducing and recycling waste and conserving water. Lenovo tracks waste metrics and works to identify and implement opportunities to reduce waste quantities. Lenovo operations generate minimal quantities of hazardous waste. Lenovo tracks and monitors water consumption and discharge in its operations even though it does not have any wet processes; water is used only for human consumption and sanitation. Lenovo developed a water risk map for Lenovo's sites in a scope of our EMS. Details on performance relative to waste and water are available in Lenovo's Sustainability Report. For additional details on Lenovo's waste and water inventory, see Lenovo's Sustainability Reports and website: www.lenovo.com/waterandwaste. Lenovo's waste and water data are all third-party verified by Bureau Veritas to a reasonable level of assurance. Please see verification statements at www.lenovo.com/waterandwaste. Environmentally Conscious Products Program Lenovo's Environmentally Conscious Products Program is included in its EMS and incorporates an expectation for continual improvement. Lenovo's commitment to product environmental leadership is reflected in its environmental policy which includes product-specific commitments related to responsible materials usage, energy efficiency and recycling. Lenovo's product environmental standards and specifications require the designers of all Lenovo IT products to consider certain environmentally conscious design practices to facilitate and encourage reuse and recycling and to minimize resource consumption. Lenovo's priority is to use environmentally preferable materials whenever applicable. Lenovo continues to drive innovation in the use of recycled content materials, and in FY2017/18 we released our first product made with closed-loop post-consumer recycled content (CL-PCR), the V410z All-in-One desktop. This product includes 12 percent net by weight post-consumer recycled content sourced from waste electronic and electrical equipment (WEEE) materials. This was followed by the release of the ThinkVision T22v-10 monitor with 45 percent net by weight CL-PCR. Lenovo is working to increase our use of CL-PCR to help close the loop on product lifecycles. 2017/18 Annual Report Lenovo Group Limited 133 6 Sustainability Overview Take Back and Recycling Includes developing and Lenovo offers product take-back and recycling Product offering tools such as programs for both consumer and business Lenovo Efficiency Mode energy customers in most major markets where it does (LEM), which helps servers efficiency operate at peak efficiency business, with many of those programs free to the when the OS is running consumer. For business customers, Lenovo's Asset Recovery Service (ARS) provides customizable Includes identifying solutions including computer take-back, data Product hotspots for targeted destruction, refurbishment and recycling services. emissions reductions on carbon high-volume mainstream footprint OUR PEOPLE products in each Lenovo believes its employees are its most valuable business unit strategic assets and that a strong company Includes refining culture is a key differentiator. Lenovo is a global Product packaging design to company with an incredible amount of diversity. packaging increase pallet density Because of our diversity, it makes good business sense to honor our employees' differences and Includes efforts to steadily Environmentally increase the percentage leverage their life experiences to better serve our preferred of recycled plastic used customers. Lenovo goes beyond diversity with a materials in manufacturing Lenovo focus on creating an inclusive environment with the products intended outcome of each employee feeling valued, respected, and a sense of belonging. The foundation of our respect for employees is our commitment to non-discrimination and a work environment free from harassment regardless of race, color, religion, gender, gender identity or expression, national origin, ethnicity, sexual orientation, sex, age, disability, veteran status or any other characteristic protected by law. Lenovo's "Commitment to Diversity and Non-discrimination" policy documents and formalizes Lenovo's commitments to ensuring equal opportunity and maintaining a diverse workforce. We are also an Affirmative Action – Equal Opportunity Employer in the United States. Lenovo's employee-related standards, policies and benefits are designed to be best-in-class, attracting and retaining top talent and enabling them to achieve their full potential. 134 Lenovo Group Limited 2017/18 Annual Report 6 A well-trained and educated workforce is particularly important to Lenovo, since we operate in a technology industry that is continually changing and innovating. As such, training and education is a key focus area to ensure that our business is successful. Being a successful employer and hiring/retaining employees is critical to Lenovo's business success. Our human resource efforts and initiatives are designed to ensure that Lenovo is a desirable place to work. Our ability to hire, train and retain employees successfully ensures that we are making the correct investments in our human capital. Lenovo measures its employment success across five key elements: compensation and benefits; work-life balance; performance and recognition; development and career opportunities; and retention. In 2017 we made substantial changes to our recognition and rewards programs to more closely align them with our strategic goals. We also implemented more classes and career development initiatives for employees to enhance career development. Lenovo understands that an unhealthy or dangerous workplace could have significant negative implications for its employees, the quality of its products, and the Company's standing as a legally compliant and responsible corporate citizen. With this in mind, Lenovo's Occupational Health and Safety (OHS) organization is committed to ensuring the implementation of an effective health and safety management system. Please see the Manufacturing and Supply Chain Operations section for more information. SOCIAL INVESTMENTS Through generous support of science, technology, engineering and math (STEM) education initiatives and diversity, Lenovo is making a difference in our communities. Most notably, Lenovo aims to increase access to technology for diverse populations through partnerships with organizations like the Boys & Girls Clubs of America, the Smithsonian Center for Learning and Digital Access and NAF, the nonprofit that leads the Lenovo Scholar Network. Now in its fourth year, the Lenovo Scholar Network offers more than 5,000 students at 118 public high schools across the United States the opportunity to learn to develop mobile applications. Lenovo and NAF created the annual Mobile App Development Competition in 2014 to engage underserved high school students in STEM, while also providing entrepreneurial and technology skills needed to pursue careers in computer science, programming and engineering. In the 2017-18 school year, more than 80 percent of schools that joined the competition are offering mobile app development to students for the very first time. In addition to STEM education, Lenovo engages with local communities and provides relief in times of natural disasters. Following the unprecedented natural disasters of 2017, Lenovo donated more than $1M USD in disaster aid and recovery for impacted communities. 2017/18 Annual Report Lenovo Group Limited 135 6 Sustainability Overview Employee Engagement in the Community In addition to its philanthropic initiatives, Lenovo empowers employees to give back to their communities through volunteerism. The company grants employees in North America 32 hours of annual paid time off for volunteerism, and offers a 50 percent match for their charitable donations. Since 2005, North America employees have volunteered over 100,000 hours, and Lenovo and its employees have contributed almost $20 million to charitable causes. In April 2017, Lenovo launched its first-ever global service event, engaging 2,000 employees around Global Week of Service Project in China the world in local volunteerism. Employees gave more than 10,000 hours in volunteer service focused on STEM education and the environment. For more information about social investments, please see Lenovo's Sustainability Report. 136 Lenovo Group Limited 2017/18 Annual Report 6 DIRECTORS' REPORT Directors' Report 138 Independent Auditor's Report 162 Consolidated Income Statement 167 Consolidated Statement of Comprehensive Income 168 Consolidated Balance Sheet 169 Consolidated Cash Flow Statement 171 Consolidated Statement of Changes in Equity 172 Notes to the Financial Statements 173 Five-Year Financial Summary 267 Corporate Information 268 2017/18 Annual Report Lenovo Group Limited 137 6 Directors' Report The directors of Lenovo Group Limited (the "Company") submit their report together with the audited consolidated financial statements of the Company and its subsidiaries (collectively the "Group") for the year ended March 31, 2018. PRINCIPAL BUSINESS AND GEOGRAPHICAL ANALYSIS OF OPERATIONS The principal activity of the Company is investment holding. The activities of its principal subsidiaries are set out in note 37 to the financial statements. Details of the analyses of the Group's performance for the year by operating segment are set out in note 5 to the financial statements. BUSINESS REVIEW A discussion and analysis of the activities as required by Schedule 5 to the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), including a fair review of the business and a discussion of the principal risks and uncertainties facing the Group, particulars of important events affecting the Group that have occurred since the end of the financial year 2017, and an indication of likely future development in the Group's business, can be found in the "Five-Year Financial Summary", "Chairman & CEO Statement", "Management's Discussion & Analysis" and "Sustainability Overview" sections of this annual report. These discussions form part of this directors' report. RESULTS AND APPROPRIATIONS The results of the Group for the year are set out in the consolidated income statement on page 167 of this annual report. The state of affairs of the Group and of the Company as at March 31, 2018 is set out in the consolidated balance sheet on pages 169 and 170 of this annual report and the Company balance sheet in note 31(a) to the financial statements respectively. The consolidated cash flows of the Group for the year are set out in the statement on page 171 of this annual report. An interim dividend of HK6.0 cents (2017: HK6.0 cents) per share, amounting to a total of approximately HK$666.5 million (approximately US$85.4 million) (2017: approximately HK$666.5 million (approximately US$85.9 million)), was paid to shareholders during the year. The Board has resolved to recommend the payment of a final dividend of HK20.5 cents per share for the year ended March 31, 2018 (2017: HK20.5 cents). Subject to shareholders' approval at the forthcoming annual general meeting of the Company to be held on July 5, 2018 ("AGM"), the proposed final dividend will be payable on July 18, 2018 to the shareholders whose names appear on the register of members of the Company on July 12, 2018. For the purposes of determining shareholders' eligibility to attend and vote at the AGM, and entitlement to the proposed final dividend, the register of members of the Company will be closed. Details of such closures are set out below: (i) For determining shareholders' eligibility to attend and vote at the AGM: Latest time to lodge transfer documents for registration 4:30 p.m. on June 26, 2018 Closure of register of members From June 27 to July 5, 2018 Record date June 27, 2018 138 Lenovo Group Limited 2017/18 Annual Report 6 RESULTS AND APPROPRIATIONS (continued) (ii) For determining shareholders' entitlement to the proposed final dividend: Latest time to lodge transfer documents for registration 4:30 p.m. on July 11, 2018 Closure of register of members July 12, 2018 Record date July 12, 2018 During the above closure periods, no transfer of shares will be registered. To be eligible to attend and vote at the AGM, and to qualify for the proposed final dividend, all properly completed transfer documents accompanied by the relevant share certificates must be lodged for registration with the Company's share registrar, Tricor Abacus Limited, at Level 22, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than the aforementioned latest times. FIVE-YEAR FINANCIAL SUMMARY A summary of the results for the year and of the assets and liabilities of the Group as at March 31, 2018 and for the last four financial years are set out on page 267 of this annual report. DISTRIBUTABLE RESERVES As at March 31, 2018, the distributable reserves of the Company amounted to US$776,657,000 (2017: US$713,824,000). BANK BORROWINGS Particulars of bank borrowings as at March 31, 2018 are set out in note 27 to the financial statements. DONATIONS Charitable and other donations made by the Group during the year amounted to US$1,788,000 (2017: US$2,150,000). SHARE CAPITAL Pursuant to the subscription agreement dated September 29, 2017 (the "Subscription Agreement") entered into between the Company as issuer and Union Star Limited as subscriber (the "Subscriber"), the Company allotted and issued 906,136,890 shares to the Subscriber at a subscription price of HK$4.31 per share on November 17, 2017 (the "Share Issuance"). Upon completion of the Share Issuance, the Company has 12,014,791,614 shares in issue. Save for the Share Issuance, no shares were issued during the year. Details of movement of share capital of the Company during the year are set out in note 29 to the financial statements. DEBENTURES ISSUED The Company issued US$750,000,000 4.750% notes due 2023 on March 29, 2018 under the medium term note programme established by the Company on February 15, 2018. The notes were listed on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"). Details of the notes are set out in note 27 to the financial statements. The proceeds of the issues amounting to about US$750,000,000, save for the repurchase of the Company's outstanding US$1,500,000,000 4.700% notes due 2019, the remaining was used for the Company's working capital and general corporate purposes. 2017/18 Annual Report Lenovo Group Limited 139 6 Directors' Report EQUITY-LINKED AGREEMENTS Pursuant to the Subscription Agreement, the Company issued and the Subscriber subscribed for 90,613,689 units of bonus warrants (the "Bonus Warrants") at the initial exercise price of HK$5.17 per Bonus Warrant on November 17, 2017. The exercise in full of the subscription rights attaching to the Bonus Warrants will result in the issue of 90,613,689 shares of the Company. As at March 31, 2018, all the units of Bonus Warrants remained outstanding. For further details of the Bonus Warrants, please refer to note 12 to the financial statements, and also the Company's announcements dated September 29, 2017 and November 17, 2017 and circular dated October 16, 2017 in relation to, among other things, issuance of the Bonus Warrants. Save as disclosed above and the "Long-Term Incentive Program" and the "Employee Share Purchase Plan" as disclosed in the Compensation Committee Report and note 29 to the financial statements, no equity- linked agreements were entered into by the Company during the year or subsisted at the end of the year. SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES Particulars of the Company's principal subsidiaries, associates and joint ventures as at March 31, 2018 are set out in notes 37 and 18 to the financial statements respectively. 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. MAJOR CUSTOMERS AND SUPPLIERS During the year, the Group sold less than 11% of its goods and services to its five largest customers. The percentages of purchases for the year attributable to the Group's major suppliers are as follows: The largest supplier 14% Five largest suppliers combined 52% None of the directors of the Company, their close associates or any shareholder (which to the knowledge of the directors own more than 5% of the number of issued shares of the Company) had an interest in the major suppliers noted above. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES During the year ended March 31, 2018, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company's listed securities, except that the respective trustee of the long-term incentive program and the employee share purchase plan of the Company purchased a total of 106,257,377 shares from the market for award to employees upon vesting. Details of these program and plan are set out under sections headed "Long-Term Incentive Program" and "Employee Share Purchase Plan" in the Compensation Committee Report on page 114 and page 117 respectively of this annual report. 140 Lenovo Group Limited 2017/18 Annual Report 6 DIRECTORS The directors during the year and up to the date of this report are: Chairman and Executive Director Mr. Yang Yuanqing Non-executive Directors Mr. Zhu Linan Mr. Zhao John Huan Independent Non-executive Directors Dr. Tian Suning Mr. Nicholas C. Allen Mr. Nobuyuki Idei Mr. William O. Grabe Mr. William Tudor Brown Ms. Ma Xuezheng Mr. Yang Chih-Yuan Jerry Mr. Gordon Robert Halyburton Orr In accordance with article 107 of the Company's articles of association, Mr. Yang Yuanqing, Mr. Zhao John Huan, Mr. Nicholas C. Allen and Mr. William Tudor Brown will retire by rotation at the AGM and, being eligible, have offered themselves for re-election. The Company has received from each of the independent non-executive directors an annual confirmation of his/her independence pursuant to rule 3.13 of the Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules"). The Nomination and Governance Committee has duly reviewed the independence of each of these directors. The Company considered that all independent non-executive directors meet the independence guidelines set out in rule 3.13 of the Listing Rules and are independent in accordance with the terms of the guidelines. The list of directors who have served on the boards of directors of the subsidiaries of the Company during the year ended March 31, 2018 or during the period from April 1, 2017 to the date of this report is available on the Company's website (http://www.lenovo.com/ww/lenovo/list_direct.html). BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT Honorary Chairman Mr. Liu Chuanzhi, 74, has been the Honorary Chairman and Senior Advisor of the Company since November 3, 2011. Mr. Liu is the founder of the Group and held the positions of executive director, non- executive director and chairman of the Board at different times from 1993 until his resignation from the Board on November 3, 2011. As our Honorary Chairman, Mr. Liu is not a director or an officer of the Company or of any subsidiary of the Company, and does not have any management role in the Company or any of its subsidiaries. He obtained his graduate certificate from the Radar Navigation Department of People's Liberation Army Institute of Telecommunication Engineering () (now known as Xidian University) in China in 1967 and has substantial experiences in corporate management. Mr. Liu is the chairman of the board and executive director of Legend Holdings Corporation (HKSE listed), a company holding substantial interests in the issued shares of the Company. 2017/18 Annual Report Lenovo Group Limited 141 6 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors Chairman and executive director Mr. Yang Yuanqing, 53, is the Chairman of the Board, Chief Executive Officer and an executive director of the Company. He is also a director and a shareholder of Sureinvest Holdings Limited which holds interests in the issued shares of the Company. Mr. Yang assumed the duties of chief executive officer of the Company on February 5, 2009. Prior to that, he was the chairman of the Board from April 30, 2005. Before taking up the office as chairman, Mr. Yang was the chief executive officer and has been an executive director of the Company since December 16, 1997. Mr. Yang has nearly 30 years of experience in IT industry. Under his leadership, Lenovo has been China's best-selling PC brand since 1997 and is the leading PC vendor, one of the major players in global smartphone and x86 server markets. Mr. Yang holds a master's degree from the Department of Computer Science at the University of Science and Technology of China. Mr. Yang is currently a director of Baidu, Inc. (NASDAQ listed). Mr. Yang is also a guest professor at the University of Science and Technology of China and a member of the International Advisory Council of Brookings Institute. Non-executive directors Mr. Zhu Linan, 55, has been a non-executive director of the Company since April 30, 2005. Mr. Zhu graduated with a master's degree in electronic engineering from Shanghai Jiao Tong University and has more than 20 years of management experience. He was previously a senior vice president of the Group. Mr. Zhu is currently an executive director, president and member of executive committee of Legend Holdings Corporation (HKSE listed), a company holding substantial interests in the issued shares of the Company and he also serves as director of its various members. He is a non-executive director of CAR Inc. (HKSE listed). He was previously a non-executive director of Peak Sport Products Co., Limited (HKSE listed). Mr. Zhao John Huan, 55, has been a non-executive director of the Company since November 3, 2011. Mr. Zhao holds a master's degree in business administration from the Kellogg School of Management at Northwestern University, dual master's degrees in electric engineering and physics from Northern Illinois University and a bachelor's degree in physics from Nanjing University. He is currently an executive director, executive vice president and member of executive committee of Legend Holdings Corporation (HKSE listed), a company having substantial interests in the issued shares of the Company and the chairman and president of Hony Capital Limited. In addition, he currently holds the following positions: non-executive director of China Glass Holdings Limited, the chairman of the board, executive director and chief executive officer of Best Food Holding Company Limited, chairman of the board and non-executive director of Hospital Corporation of China Limited (all HKSE listed) and the deputy chairman of Shanghai Environment Group Co., Ltd. and a non-executive director of Shanghai Jin Jiang International Hotels Development Co., Ltd. (both listed on the Shanghai Stock Exchange), a non-executive director of Zoomlion Heavy Industry Science and Technology Co., Ltd. (HKSE and Shenzhen Stock Exchange listed). Mr. Zhao was previously a director of Wumart Stores, Inc., New China Life Insurance Company Ltd., CSPC Pharmaceutical Group Limited and Chinasoft International Limited (all HKSE listed), Fiat Industrial S.p.A. (MTA Italian Stock Exchange listed) and the deputy chairman of Shanghai Chengtou Holding Co., Ltd. (Shanghai Stock Exchange listed). 142 Lenovo Group Limited 2017/18 Annual Report 6 BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors Dr. Tian Suning, 54, has been an independent non-executive director of the Company since August 2, 2007. He is the founder and chairman of a Chinese focused private equity fund China Broadband Capital Partners, L.P.. He is currently an independent director of Shanghai Pudong Development Bank Co., Ltd. (Shanghai Stock Exchange listed) and an executive chairman of the holding company of AsiaInfo. He is also an independent non-executive director of Taikang Insurance Group Inc. (formerly Taikang Life Insurance Company Ltd.). From 1993 till 1999, he was co-founder and chief executive officer of AsiaInfo Holdings LLC (formerly listed on NASDAQ). He was previously a non-executive director of Huayi Tencent Entertainment Company Limited (formerly known as China Jiuhao Health Industry Corporation Limited) (HKSE listed), an independent non-executive director of MasterCard Incorporated (NYSE listed) and a vice chairman of PCCW Ltd. (HKSE listed) between 2005 and 2007. Dr. Tian holds a Ph.D. in natural resource management from Texas Tech University and a M.S. degree in ecology from Chinese Academy of Sciences. Mr. Nicholas C. Allen, 63, has been an independent non-executive director of the Company since November 6, 2009. Mr. Allen received a bachelor of arts degree in economics/social studies from Manchester University, United Kingdom. He is a fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. Mr. Allen has extensive experience in accounting and auditing and was a partner of PricewaterhouseCoopers until his retirement in June 2007. Mr. Allen is an independent non-executive director and the chairman of the board of directors of Link Real Estate Investment Trust (HKSE listed) and an independent non-executive director of CLP Holdings Limited (HKSE listed). He was previously an independent non-executive director of Hysan Development Company Limited (HKSE listed) and VinaLand Limited (London Stock Exchange AIM listed). Mr. Nobuyuki Idei, 80, has been an independent non-executive director of the Company since September 28, 2011. Mr. Idei is the founder and chief executive officer of Quantum Leaps Corporation, an executive advisory company. Until retiring in June 2005, for more than a decade, Mr. Idei held a wide variety of leadership positions at Sony Corporation (Tokyo Stock Exchange, Osaka Securities Exchange, NYSE and London Stock Exchange listed), including chairman and group chief executive officer. He was also the chairman of Sony's advisory board from June 2005 to June 2012. Mr. Idei currently serves on the boards of directors of FreeBit Co., Ltd. and Monex Group, Inc. (both Tokyo Stock Exchange listed) and Stripe International Inc.. Mr. Idei is also the chairman of the National Conference on Fostering Beautiful Forests in Japan. Mr. Idei holds a bachelor's degree in political science and economics from Waseda University in Tokyo. He has served on the boards of directors of Nestlé S.A., Electrolux, General Motors Company, Accenture plc and Baidu, Inc. and also served in a number of other advisory positions including as counselor to the Bank of Japan, vice chairman of Nippon Keidanren (Japan Business Federation) and chairman of the IT Strategy Council, an advisory committee to Japan's Prime Minister. Mr. William O. Grabe, 80, has been an independent non-executive director of the Company since February 8, 2012 and was appointed as the lead independent director of the Company on May 23, 2013. Before that, he was a non-executive director of the Company since May 17, 2005. Mr. Grabe is currently a director of the following listed companies: Gartner Inc. and QTS Realty Trust, Inc. (both NYSE listed). He was previously an independent director of Compuware Corporation and a director of Covisint Corporation. Mr. Grabe is an advisory director of General Atlantic LLC. He formerly served as a managing director of General Atlantic LLC and has been associated with General Atlantic Group since 1992. Prior to that, he served as a corporate vice president and officer of IBM. 2017/18 Annual Report Lenovo Group Limited 143 6 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors (continued) Mr. William Tudor Brown, 59, has been an independent non-executive director of the Company since January 30, 2013. Mr. Brown is a Chartered Engineer and holds an MA (Cantab) Degree in electrical sciences from Cambridge University. He is a fellow of the Institution of Engineering and Technology and a fellow of the Royal Academy of Engineering. He was awarded as Member of the Order of the British Empire (MBE) on June 15, 2013. Mr. Brown was one of the founders of ARM Holdings plc ("ARM") (London Stock Exchange and NASDAQ listed). During the years with ARM, he held a broad range of leadership positions including engineering director, chief technical officer, executive vice president for global development, chief operating officer and president. He had responsibility for developing high-level relationships with industry partners and governmental agencies and for regional development. He also served as a director of ARM from October 2001 to May 3, 2012. Before joining ARM, he was the principal engineer at Acorn Computers Ltd., working exclusively on the ARM research & development programme since 1984. Mr. Brown is currently an independent non-executive director of Semiconductor Manufacturing International Corporation (HKSE listed) and a director of Marvell Technology Group Ltd. (NASDAQ listed). He was previously an independent non-executive director of P2i Limited and Xperi Corporation (NASDAQ listed). He also served on the UK Government Asia Task Force until May 2012. Ms. Ma Xuezheng, 65, was re-designated as an independent non-executive director of the Company on November 7, 2013. Prior to that, she was a non-executive Vice Chairman of the Company since 2007. Before becoming a non-executive director, she was an executive director and the chief financial officer of the Company at different times between 1997 and 2007 and held directorship in various subsidiaries of the Company. She is currently managing partner of Boyu Capital Advisory Company Limited and a non-executive director of the Securities and Futures Commission following her resignation from the Main Board and GEM Listing Committees of the HKSE on November 14, 2013. In addition, she is also a non-executive director of Unilever N.V. (NYSE and Euronext Amsterdam listed) and Unilever PLC (NYSE and London Stock Exchange listed). She was formerly a non-executive director of Wumart Stores, Inc. and STELUX Holdings International Limited (HKSE listed) and an independent non-executive director of Standard Chartered Bank (Hong Kong) Limited. Ms. Ma holds a bachelor of arts degree from Capital Normal University. Mr. Yang Chih-Yuan Jerry, 49, has been an independent non-executive director of the Company since November 6, 2014. Prior to that, he was the board observer of the Company since February 20, 2013. He holds a master's degree and a bachelor's degree of science in electrical engineering from Stanford University, where he is serving on the University's Board of Trustees beginning in October 2017. He was previously on Stanford's Board of Trustees from 2005 through 2015 including being a vice chair. Mr. Yang co-founded Yahoo! Inc. (NASDAQ listed) and served as its chief executive officer from June 2007 to January 2009. He also served as a member of the board of directors of Yahoo! Inc. until January 17, 2012. During such appointment, Mr. Yang focused on corporate strategy and technology vision. Mr. Yang was also instrumental in building strategic business partnerships, international joint ventures and recruiting key talent. Mr. Yang also served as a director of Yahoo! Japan Corporation (Tokyo Stock Exchange listed) from January 1996 to January 2012, an independent director of Cisco Systems, Inc. (NASDAQ listed) from July 2000 to November 2012. Mr. Yang is currently an independent director of Workday Inc. and Alibaba Group Holding Limited (both NYSE listed). 144 Lenovo Group Limited 2017/18 Annual Report 6 BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors (continued) Mr. Gordon Robert Halyburton Orr, 55, was re-designated as an independent non-executive director of the Company on September 1, 2016. Prior to that, he was a non-executive director of the Company since 2015. He holds a Master of Arts degree in Engineering Science from Oxford University, United Kingdom and a Master of Business Administration degree from Harvard University. Mr. Orr joined McKinsey & Company ("McKinsey") in 1986 and held a broad range of senior positions in McKinsey until his retirement in August 2015. During the years with McKinsey, he was Greater China Managing Partner and subsequently Senior Partner (1999-2015), Managing Partner of McKinsey Asia (2008- 2014) and Member of McKinsey's global Operating Committee (2008-2015). He also served on McKinsey's Global Shareholder's Board (2003-2015) and chaired the Governance and Risk Committee. In the past 20 years, Mr. Orr has served a broad range of clients in Asia, with primary focus on China and technology related sectors across Asia. Mr. Orr is currently an independent non-executive director of Swire Pacific Limited (HKSE listed). He is also a board member of the China-Britain Business Council. Biography of senior management Mr. Gianfranco Lanci, 63, joined the Group in April 2012 and is currently the Corporate President and Chief Operating Officer of the Company responsible for the principal operations of all the Group's five geographies, and the Intelligent Device Group, which includes the Company's PC, Smart Devices and Mobile Device businesses. Before taking up the office as Corporate President, Mr. Lanci was Chief Operating Officer and Executive Vice President of the Company and President of the PC Group, EMEA and AP. Mr. Lanci has substantial experience across the PC business, including leadership roles at Texas Instruments and Acer. He was appointed as President of Acer Inc. in 2005 and in 2008 became Chief Executive Officer and President. Under his leadership, he led Acer to the number two position globally and number one in EMEA while recording record profitability for three consecutive years. He holds a degree in engineering from the Politecnico of Turin. Ms. Gao Lan, 52, joined the Group in 2009 and is currently the Senior Vice President of Human Resources of the Company, responsible for human resources, organizational development, global talent, compensation and benefits, as well as nurturing the Company's culture. Prior to this, Ms. Gao held several Vice President roles leading the HR functions of many teams, including Emerging Markets Group, APLA & China Geography, People & Organization Capability and HR Strategy & Operations. Before joining the Group, Ms. Gao held senior positions in HR in various multinational companies. Ms. Gao holds a bachelor degree of science from Nankai University, a master degree of philosophy from Cambridge University in the UK, studied human resource management at the Western Management Institute of Beijing and completed the Leadership Excellence for Business HR Program at Stanford University in the US. Mr. He Zhiqiang, 55, joined the Group in 1986 and is currently the Senior Vice President of the Company and President of Lenovo Capital and Incubator Group. This group is responsible for driving innovation through investment in startups, spinning off new businesses and exploring new technologies. Prior to that, Mr. He held various leadership positions in the Group including the President of the Ecosystem and Cloud Services Business Group and was the Chief Technology Officer overseeing Lenovo's Research & Technology initiatives and systems. Mr. He holds a bachelor's degree in computer communication from Beijing University of Posts and Telecommunications and a master's degree in computer engineering from the Institute of Computing Technology of the Chinese Academy of Sciences. 2017/18 Annual Report Lenovo Group Limited 145 6 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of senior management (continued) Ms. Qiao Jian, 50, joined the Group in 1990 and is currently the Senior Vice President and Chief Marketing Officer of the Company, overseeing Lenovo's global brand, marketing, communications and customer engagement efforts. Before that, Ms. Qiao was Co-President of the Mobile Business Group focusing on Lenovo's Mobile business in China. Prior to that, Ms. Qiao was the Senior Vice President of Human Resources. Ms. Qiao held various senior positions in the Group including Senior Vice President of Strategy and Planning and Vice President of Human Resources in China – both before and after the acquisition of IBM's PC Division. Ms. Qiao has extensive experience in strategy, marketing and branding and human resources. She holds a bachelor's degree in management science from Fudan University and holds an EMBA from the China Europe International Business School. Ms. Laura G. Quatela, 60, joined the Group in October 2016 as a Senior Vice President and the Chief Legal Officer responsible for the Group's legal, IP, litigation, corporate governance and government relations matters globally. Before joining the Group, Ms. Quatela had a 15-year career with Eastman Kodak Company ("Kodak") holding a broad range of leadership positions including Chief Intellectual Property Officer, General Counsel, Senior Vice President, Co-Chief Operating Officer and President of the company. She had responsibility for heading Kodak's OLED business, licensing technology and patents and leading Kodak's consumer film, photographic paper, retail photo kiosk and event imaging businesses. Prior to joining Kodak, Ms. Quatela worked for Clover Capital Management, Inc., SASIB Railway GRS, and Bausch & Lomb. In private law practice, she was a defense litigator specializing in mass tort cases. Ms. Quatela is a graduate of Denison University, B.A., International Politics and Case Western Reserve University School of Law, J.D., where she sponsors the Women in Law and Leadership Conference and was inducted into the Society of Benchers. Ms. Quatela is conversant in Mandarin. Dr. Yong Rui, 48, joined the Group in November 2016 as a Senior Vice President and Chief Technology Officer of the Company, overseeing Lenovo's corporate technical strategy, research and development directions, and the Lenovo Research organization. Before joining the Group, Dr. Rui had an 18-year career with Microsoft, where he held various leadership roles in R&D strategy, basic research, technology incubation and product development, most recently as Deputy Managing Director of Microsoft Research Asia. Dr. Rui is a world-class technologist in computer science, and a Fellow of the ACM, IEEE, IAPR, and SPIE. He received his BS from Southeast University, his MS from Tsinghua University, and his PhD from University of Illinois at Urbana-Champaign (UIUC). Mr. Kirk Skaugen, 47, joined the Group in November 2016 as an Executive Vice President of the Company and the President of the Data Center Group. In this capacity he leads the end-to-end data center business including strategic planning, architecture, hardware and software engineering, supply chain and procurement, quality, customer service, and the sales and marketing across Lenovo DCG's five geographies. Mr. Skaugen worked at Intel for 24 years where in his most recent positions he led the Data Center Group and Client Computing Group as senior vice president. Within the Data Center Group at both Intel and now Lenovo, his responsibilities included server, storage, cloud and hyperscale computing, high performance computing, networking, communications infrastructure and Internet of Things businesses. As head of Client Computing, Mr. Skaugen was responsible for Intel's largest revenue and profit contributor including Intel's PC, tablet, and phone businesses. He has also served as general manager of Intel's Asia Pacific Solutions Group responsible for software, system integrator and CIO relationships across the Asia region. Mr. Skaugen holds a bachelor of science in electrical engineering from Purdue University. 146 Lenovo Group Limited 2017/18 Annual Report 6 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (x) Employee benefits (continued) (i) Pension obligations (continued) Past service costs are recognized immediately in the income statement. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are due and are reduced by employer's portion of voluntary contributions forfeited by those employees who leave the scheme prior to vesting fully. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available. The Group's contributions to local municipal government retirement schemes in connection with retirement benefit schemes in the Mainland of China ("Chinese Mainland") are expensed as incurred. The local municipal governments in the Chinese Mainland assume the retirement benefit obligations of the qualified employees. (ii) Post-employment medical benefits The Group operates a number of post-employment medical benefit schemes, the largest being in the United States. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized as other comprehensive income/expense in the period in which they arise. The obligations of these schemes in the United States are valued annually by independent qualified actuaries. (iii) Long-term incentive program The Group operates a long-term incentive program to recognize employees' individual and collective contributions, and includes two types of awards, namely share appreciation rights and restricted share units ("Long-term Incentive Awards"). The Company reserves the right, at its discretion, to pay the award in cash or ordinary shares of the Company. The fair value of the employee services received in exchange for the grant of the Long-term Incentive Awards is recognized as employee benefit expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the Long-term Incentive Awards granted, including any market performance conditions (for example, an entity's share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability and sales growth targets); and including the impact of non-vesting conditions. Non-market performance and service conditions are included in assumptions about the number of Long-term Incentive Awards that are expected to become exercisable/ vested. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. 194 Lenovo Group Limited 2017/18 Annual Report 6 Notes to the Financial Statements 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) (d) Revenue recognition (continued) The Group sells products to channels. Sales through channels are primarily made under agreements allowing for volume discounts, price protection and rebates, and marketing development funds. The Group monitors the channel inventory level with reference to historical data. Revenue recognition is also impacted by the Group's ability to estimate volume discounts, price protection and rebates, marketing development funds. The Group considers various factors, including a review of specific transactions, historical experience, market and economic conditions and channel inventory level when calculating these provisions and allowances. Revenue from sales of goods is recognized when both ownership and risk of loss are effectively transferred to customer, which are generally occurred upon shipment. For certain transactions, risk of loss associated with goods-in-transit is retained by the Group, in which the Group books revenue upon delivery of products and defers the amounts of revenue based on the estimated days-in-transit at the end of each month. The days-in-transit is estimated based on the Group's weighted average estimated time of shipment arrival. Cost of in-transit products is deferred in deposits, prepayment and other receivables in the balance sheet until revenue is recognized. The estimates of days-in-transit are reviewed semi-annually. (e) Retirement benefits Pension and other post-retirement benefit costs and obligations are dependent on various assumptions. The Group's major assumptions primarily relate to discount rate, expected return on assets, and salary growth. In determining the discount rate, the Group references market yields at the balance sheet date on high quality corporate bonds. The currency and term of the bonds are consistent with the currency and estimated term of the benefit obligations being valued. The expected return on plan assets is based on market expectations for returns over the life of the related assets and obligations. The salary growth assumptions reflect the Group's long- term actual experience and future and near-term outlook. Actual results that differ from the assumptions are generally recognized in the year they occur. (f) Fair value of derivatives and other financial instruments The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. The Group has used discounted cash flow analyses for various available-for-sale financial assets that are not traded in active markets. 208 Lenovo Group Limited 2017/18 Annual Report 6 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) (g) Fair value of identifiable assets and liabilities acquired through business combinations The Group applies the acquisition method to account for business combinations, which requires the Group to record assets acquired and liabilities assumed at their fair values on the date of acquisition. Significant judgment is used to estimate the fair values of the assets and liabilities acquired, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives and other assumptions. 5 SEGMENT INFORMATION Management has determined the operating segments based on the reports reviewed by the LEC, the chief operating decision-maker, that are used to make strategic decisions. The LEC considers business from a geographical perspective. The Group has four geographical segments, China, Asia Pacific ("AP"), Europe-Middle East-Africa ("EMEA") and Americas ("AG"), which are also the Group's reportable operating segments. The LEC assesses the performance of the reportable operating segments based on a measure of adjusted pre-tax income/(loss). This measurement basis excludes the effects of non-recurring expenditure such as restructuring costs from the operating segments. The measurement basis also excludes the effects of unrealized gains/(losses) on financial instruments. Certain interest income and expenditure are not allocated to segments, as this type of activity is driven by the central treasury function, which manages the cash position of the Group. Supplementary information on segment assets and liabilities presented below is primarily based on the geographical location of the entities or operations which carry the assets and liabilities, except for entities performing centralized functions for the Group the assets and liabilities of which are not allocated to any segment. 2017/18 Annual Report Lenovo Group Limited 209 6 Notes to the Financial Statements 5 SEGMENT INFORMATION (continued) (a) Segment revenue and adjusted pre-tax income/(loss) for reportable segments 2018 2017 Revenue Adjusted Revenue Adjusted from external pre-tax from external pre-tax customers income/(loss) customers income/(loss) US$'000 US$'000 US$'000 US$'000 China 11,525,321 557,641 11,794,773 539,137 AP 7,156,293 (133,664) 7,011,595 (65,155) EMEA 12,481,897 (62,383) 11,187,313 (336,666) AG 14,186,432 71,746 13,041,050 157,452 Segment total 45,349,943 433,340 43,034,731 294,768 Unallocated: Headquarters and corporate expenses (26,675) (57,160) Restructuring costs (100,775) (159,481) Finance income 15,258 18,263 Finance costs (219,177) (207,563) Impairment of an available-for-sale financial asset – (1,005) Gain on disposal of available-for-sale financial assets 15 11,575 Dividend income from available-for-sale financial assets 286 321 Share of (losses)/profits of associates and joint ventures (2,506) 21,411 Gain on disposal of a joint venture – 218,366 Gain on disposal of property, plant and equipment, prepaid lease payments and construction-in-progress 50,937 336,172 Dilution gain of interests in associates and a joint venture 2,499 14,260 Consolidated profit before taxation 153,202 489,927 210 Lenovo Group Limited 2017/18 Annual Report 6 5 SEGMENT INFORMATION (continued) (b) Segment assets for reportable segments 2018 2017 US$'000 US$'000 China 8,868,706 7,754,296 AP 3,817,436 3,497,366 EMEA 3,347,797 3,282,761 AG 6,936,707 6,633,117 Segment assets for reportable segments 22,970,646 21,167,540 Unallocated: Deferred income tax assets 1,530,623 1,435,256 Derivative financial assets 24,890 53,808 Available-for-sale financial assets 373,077 255,898 Interests in associates and joint ventures 35,666 32,567 Unallocated bank deposits and cash and cash equivalents 313,366 1,075,639 Unallocated inventories 911,506 823,619 Unallocated deposits, prepayments and other receivables 1,808,182 1,829,387 Income tax recoverable 227,203 199,149 Other unallocated assets 299,012 313,111 Total assets per consolidated balance sheet 28,494,171 27,185,974 2017/18 Annual Report Lenovo Group Limited 211 6 Notes to the Financial Statements 5 SEGMENT INFORMATION (continued) (c) Segment liabilities for reportable segments 2018 2017 US$'000 US$'000 China 4,927,436 4,884,148 AP 1,725,803 1,631,624 EMEA 1,584,893 1,569,619 AG 3,032,107 3,375,555 Segment liabilities for reportable segments 11,270,239 11,460,946 Unallocated: Deferred income tax liabilities 230,609 221,601 Derivative financial liabilities 62,694 67,285 Unallocated borrowings 3,815,417 2,966,692 Unallocated trade and notes payables 4,592,569 4,249,522 Unallocated other payables and accruals 3,378,036 3,570,065 Unallocated provisions 374,589 237,907 Unallocated other non-current liabilities 29,074 25,070 Income tax payable 168,779 246,465 Other unallocated liabilities 26,177 45,199 Total liabilities per consolidated balance sheet 23,948,183 23,090,752 (d) Analysis of revenue by significant category Revenue from external customers are mainly derived from the sale of personal technology products and services. Breakdown of revenue by business group is as follows: 2018 2017 US$'000 US$'000 PC and Smart Device Business Group ("PCSD") (Note) 32,378,666 30,075,953 Mobile Business Group ("MBG") 7,240,927 7,707,448 Data Center Group ("DCG") 4,394,360 4,068,488 Others 1,335,990 1,182,842 45,349,943 43,034,731 Note: PCSD consists of core PC business as well as slate tablets, detachables, gaming and other smart devices. 212 Lenovo Group Limited 2017/18 Annual Report 6 5 SEGMENT INFORMATION (continued) (e) Other segment information Additions to Depreciation and non-current assets amortization Finance income Finance costs (Note) 2018 2017 2018 2017 2018 2017 2018 2017 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 China 139,075 197,306 169 225 4,014 3,818 178,028 174,458 AP 143,158 131,623 1,256 1,344 10,941 6,958 33,441 62,392 EMEA 163,297 183,927 334 147 10,986 4,925 22,497 38,818 AG 292,992 229,250 15,128 7,816 18,042 8,363 81,802 141,348 Total 738,522 742,106 16,887 9,532 43,983 24,064 315,768 417,016 Note: Other than financial instruments and deferred income tax assets; and excluding other non-current assets. The total of non-current assets other than financial instruments, deferred income tax assets and post-employment benefit assets (there are no rights arising under insurance contracts) located in China and other countries is approximately US$4,245,626,000 (2017: US$3,880,145,000) and US$6,681,527,000 (2017: US$6,746,288,000) respectively. 6 OTHER INCOME – NET 2018 2017 US$'000 US$'000 Impairment of an available-for-sale financial asset – (1,005) Gain on disposal of available-for-sale financial assets 15 11,575 Dividend income from available-for-sale financial assets 286 321 301 10,891 2017/18 Annual Report Lenovo Group Limited 213 6 36 RETIREMENT BENEFIT OBLIGATIONS (continued) (c) Additional information on post-employment benefits (pension and medical) (continued) The amounts recognized in the consolidated income statement are as follows: Pension Medical 2018 2017 2018 2017 US$'000 US$'000 US$'000 US$'000 Current service cost 14,516 15,950 315 412 Past service cost (1,141) (1,908) – – Interest cost 11,051 10,157 965 790 Interest income (5,287) (5,862) (103) (105) Curtailment gains (2,700) (326) – (13) Total expense recognized in the consolidated income statement 16,439 18,011 1,177 1,084 37 PRINCIPAL SUBSIDIARIES The following includes the principal subsidiaries directly or indirectly held by the Company and, in the opinion of the directors, are significant to the results of the year or form a substantial portion of the net assets of the Group. The directors consider that giving details of other subsidiaries would result in particulars of excessive length. Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Held directly: Chinese Mainland HK$175,481,300 100% 100% Manufacturing and (Lenovo (Beijing) Limited) 1 distribution of IT (wholly foreign-owned enterprise) products and provision of IT services Chinese Mainland HK$10,000,000 100% 100% Distribution of IT products (Lenovo (Shanghai) Co., Ltd.)1 and provision of IT (wholly foreign-owned enterprise) services Held indirectly: Chinese Mainland US$265,000,000 51% 51% Manufacturing and (LCFC (Hefei) Electronics distribution of IT Technology Co., Ltd.)1 products (wholly foreign-owned enterprise) 2017/18 Annual Report Lenovo Group Limited 259 6 Notes to the Financial Statements 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Lenovo (Asia Pacific) Limited Hong Kong HK$3,042,972,340.42 100% 100% Investment holding and distribution of IT products Chinese Mainland HK$5,000,000 100% 100% Provision of IT services (Beijing Lenovo Software Limited) 1 and distribution of IT (wholly foreign-owned enterprise) products Lenovo (Australia & New Zealand) Australia AUD45,860,993.40 100% 100% Distribution of IT products Pty Limited Lenovo (Belgium) BVBA Belgium EUR1,317,700,834.94 100% 100% Investment holding and distribution of IT products Lenovo (Canada) Inc. Canada CAD10,000,000 100% 100% Distribution of IT products Lenovo Computer Limited Hong Kong HK$2 100% 100% Procurement agency and distribution of IT products Lenovo (Danmark) ApS Denmark DKK126,000 100% 100% Distribution of IT products Lenovo (Deutschland) GmbH Germany EUR25,100 100% 100% Distribution of IT products Lenovo Enterprise Solutions Singapore SGD55,958,592 100% 100% Manufacturing and (Singapore) Pte. Ltd. wholesaling of computers, computer hardware and peripheral equipment Lenovo Enterprise Solutions Ltd. Japan JPY50,000,000 100% 100% Distribution of IT products Lenovo (France) SAS France EUR1,837,000 100% 100% Distribution of IT products 260 Lenovo Group Limited 2017/18 Annual Report 6 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Lenovo HK Services Limited Hong Kong HK$2 100% 100% Provision of business planning, management, global supply chain, finance, and administration support services Lenovo Global Technology Hong Kong US$123,001 100% 100% Investment holding (Asia Pacific) Limited and distribution of IT products Lenovo Global Technology HK Hong Kong US$1 100% 100% Procurement agency Limited and distribution of IT products Lenovo Global Technology Hong Kong US$1 100% 100% Distribution of IT products (Hong Kong) Distribution Limited Lenovo (Hong Kong) Limited Hong Kong HK$74,256,023 100% 100% Distribution of IT products Chinese Mainland HK$31,955,500 100% 100% Manufacturing and (Lenovo (Huiyang) Electronic distribution of IT Industrial Co., Ltd.)1 products (wholly foreign-owned enterprise) Lenovo (India) Private Limited India INR8,607,471,514 100% 100% Manufacturing and distribution of IT products Chinese Mainland RMB643,966,800 100% 100% Manufacturing and (Lenovo Information Products distribution of IT (Shenzhen) Co. Ltd.)1 products (limited liability company (wholly-owned entity)) 2017/18 Annual Report Lenovo Group Limited 261 6 Notes to the Financial Statements 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Lenovo (Israel) Ltd. Israel ILS1,000 100% 100% Distribution of IT products Lenovo (Italy) S.r.l Italy EUR100,000 100% 100% Distribution of IT products Lenovo (Japan) Ltd. Japan JPY100,000,000 66.64% 66.64% Distribution of IT products Lenovo Korea LLC Korea KRW3,580,940,000 100% 100% Distribution of IT products Lenovo Mexico, S. de R.L. de C.V. Mexico MXN226,308,454 100% 100% Distribution of IT products Chinese Mainland RMB187,500,000 100% 100% Manufacturing and (Lenovo Mobile Communication distribution of IT Technology Ltd.)1 products and provision (foreign-investment enterprise of IT services wholly-owned entity) Chinese Mainland RMB10,000,000 – 100% R&D of mobile software (Lenovo Mobile Communication Software (Wuhan) Limited)1 (foreign-investment enterprise wholly-owned entity) Chinese Mainland RMB60,000,000 100% 100% Manufacturing of mobile (Motorola (Wuhan) Mobility products Technologies Communication Company Limited)1 (formerly known as "Lenovo Mobile Communication (Wuhan) Limited")1 (foreign-investment enterprise wholly-owned entity) Lenovo PC HK Limited Hong Kong HK$2,377,934,829.50 100% 100% Procurement agency ordinary and and distribution of IT HK$1,000,000 products non-voting deferred 262 Lenovo Group Limited 2017/18 Annual Report 6 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Lenovo PC International Limited Hong Kong HK$4,758,857,785 100% 100% Intellectual properties Lenovo (Schweiz) GmbH Switzerland CHF2,000,000 100% 100% Manufacturing and distribution of IT products Lenovo (Singapore) Pte. Ltd. Singapore SGD1,971,231,035.94 100% 100% Manufacturing and wholesaling of computers, computer hardware and peripheral equipment Lenovo (South Africa) (Pty) Limited South Africa RAND100 100% 100% Distribution of IT products Lenovo (Spain), S.L. Spain EUR37,475,456.40 100% 100% Distribution of IT products Lenovo (Sweden) AB Sweden SEK200,200 100% 100% Distribution of IT products Chinese Mainland RMB263,407,660 100% 100% Manufacturing and (Lenovo Systems Technology distribution of IT Company Limited)1 products ()) (limited liability company (wholly-owned entity)) Lenovo Technology (United Kingdom) United Kingdom GBP8,629,510 100% 100% Distribution of IT products Limited Lenovo Technology B.V. Netherlands EUR20,000 100% 100% Distribution of IT products Lenovo Technology Sdn. Bhd. Malaysia MYR1,000,000 100% 100% Selling and distribution of computer hardware, software and peripherals and services 2017/18 Annual Report Lenovo Group Limited 263 6 Notes to the Financial Statements 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Lenovo Tecnologia (Brasil) Ltda Brazil BRL4,424,321,818 100% 100% Manufacturing and distribution of IT products Lenovo (Thailand) Limited Thailand THB243,000,000 100% 100% Distribution of IT products as well as mobile phone, smart phone and tablet, server and storage Lenovo (United States) Inc. United States US$1 100% 100% Distribution of IT products Lenovo (Venezuela), SA Venezuela VEB3,846,897 100% 100% Distribution of IT products Chinese Mainland RMB10,000,000 100% 100% Provision of IT services (Lenovo (Xian) Limited) 1 and distribution of IT (Chinese-foreign equity joint venture) products LLC "Lenovo (East Europe/Asia)" Russia RUB1,910,000 100% 100% Distribution and marketing of IT products Medion AG Germany EUR48,418,400 79.83% 79.83% Retail and service business for consumer electronic products Motorola Mobility Comércio de Brazil BRL756,663,401 100% 100% Developer, owner, Produtos Eletronicos Ltda. licensor and seller of communications hardware and software Motorola Mobility International United States – 100% 100% Holding company Sales LLC 264 Lenovo Group Limited 2017/18 Annual Report 6 37 PRINCIPAL SUBSIDIARIES (continued) Place of incorporation/ Issued and fully Company name establishment paid up capital Percentage of issued capital held Principal activities 2018 2017 Motorola Mobility LLC United States – 100% 100% Developer, owner, licensor and seller of communications hardware and software NEC Personal Computers, Ltd. Japan JPY500,000,000 66.64% 66.64% Manufacturing and distribution of IT products Chinese Mainland US$760,822,799.24 100% 100% Investment management (Shenzhen Lenovo Overseas Holdings Limited)1 (wholly-foreign owned enterprise) Stoneware, Inc. United States US$861,341.25 100% 100% Development and distribution of IT products Chinese Mainland RMB50,000,000 100% 100% Provision of repair (Sunny Information Technology services for computer Service, Inc.)1 hardware and software (Chinese-foreign equity joint venture) systems Notes: (i) All the above subsidiaries operate principally in their respective places of incorporation or establishment. (ii) All the Chinese Mainland subsidiaries and Motorola's subsidiaries are limited liability companies. They have adopted December 31 as their financial year end date for statutory reporting purposes. For the preparation of the consolidated financial statements, financial statements of these Chinese Mainland subsidiaries and Motorola's subsidiaries for the years ended March 31, 2017 and 2018 have been used. (iii) Medion AG is a publicly traded German stock corporation listed on the Frankfurt am Main stock exchange. The percentage of issued capital held is equivalent to approximately 86.51% (2017: 86.51%) excluding treasury shares. (iv) In November 2017, the Company entered into an equity interest transfer and framework agreement in relation to disposal of 100% equity interest in (Lenovo Mobile Communication Software (Wuhan) Limited) to a third party. (v) The company whose English name ends with a "1" is a direct transliteration of its Chinese registered name. 2017/18 Annual Report Lenovo Group Limited 265 6 Notes to the Financial Statements 38 NON-ADJUSTING POST BALANCE SHEET EVENT On May 2, 2018, the Company completed the acquisition of 51% in Fujitsu Client Computing Limited and its subsidiary, Shimane Fujitsu Limited (together "FCCL"), pursuant to the sales and purchase agreement and joint venture agreement dated November 2, 2017. FCCL is principally engaged in manufacturing and distribution of PC products. Immediately following completion, the Company, Fujitsu Corporation ("Fujitsu"), and Development Bank of Japan ("DBJ") respectively owns 51%, 44%, and 5% of the interest in FCCL. Pursuant to the joint venture agreement, both the Company and Fujitsu are respectively granted call and put options which entitle the Company to purchase from Fujitsu and DBJ, or Fujitsu and DBJ to sell to the Company, 49% interest in FCCL. Both options will be exercisable following the fifth anniversary of the date of completion. The estimated total consideration for the business combination activity comprises: (i) JPY17.85 billion, on the assumption that FCCL has zero net debt and normalized working capital, payable in cash on completion, minus 51% of (a) the net debt and (b) the working capital adjustment; and (ii) JPY2.55 billion to JPY12.75 billion performance-adjusted consideration based on business performance to March 31, 2020, payable in cash after March 31, 2020. 39 APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on May 24, 2018. 266 Lenovo Group Limited 2017/18 Annual Report 6 Five-Year Financial Summary CONDENSED CONSOLIDATED INCOME STATEMENT 2018 2017 2016 2015 2014 US$'000 US$'000 US$'000 US$'000 US$'000 Revenue 45,349,943 43,034,731 44,912,097 46,295,593 38,707,129 Profit/(loss) before taxation 153,202 489,927 (276,851) 970,967 1,014,195 Taxation (279,977) 40,514 132,276 (134,364) (196,725) (Loss)/profit for the year (126,775) 530,441 (144,575) 836,603 817,470 (Loss)/profit attributable to: Equity holders of the Company (189,323) 535,084 (128,146) 828,715 817,228 Perpetual securities holders 53,680 1,872 – – – Other non-controlling interests 8,868 (6,515) (16,429) 7,888 242 (126,775) 530,441 (144,575) 836,603 817,470 (Loss)/earnings per share attributable to equity holders of the Company Basic (US cents) (1.67) 4.86 (1.16) 7.77 7.88 Diluted (US cents) (1.67) 4.86 (1.16) 7.69 7.78 CONDENSED CONSOLIDATED BALANCE SHEET 2018 2017 2016 2015 2014 US$'000 US$'000 US$'000 US$'000 US$'000 Non-current assets 12,830,853 12,317,587 11,966,613 11,889,352 4,956,545 Current assets 15,663,318 14,868,387 12,966,776 15,507,158 13,400,548 Total assets 28,494,171 27,185,974 24,933,389 27,396,510 18,357,093 Non-current liabilities 4,488,461 4,756,906 6,146,880 5,841,997 1,870,051 Current liabilities 19,459,722 18,333,846 15,760,260 17,448,392 13,462,322 Total liabilities 23,948,183 23,090,752 21,907,140 23,290,389 15,332,373 Net assets 4,545,988 4,095,222 3,026,249 4,106,121 3,024,720 2017/18 Annual Report Lenovo Group Limited 267 6 Corporate Information HONORARY CHAIRMAN PRINCIPAL BANKERS Mr. Liu Chuanzhi Bank of China BNP Paribas BOARD OF DIRECTORS Citibank, N.A. Chairman and Executive Director DBS Bank Ltd. Mr. Yang Yuanqing INDEPENDENT AUDITOR Non-executive Directors PricewaterhouseCoopers Mr. Zhu Linan Certified Public Accountants Mr. Zhao John Huan 22nd Floor, Prince's Building, Central, Hong Kong Independent Non-executive Directors Dr. Tian Suning SHARE REGISTRAR Mr. Nicholas C. Allen Tricor Abacus Limited Mr. Nobuyuki Idei Level 22, Hopewell Centre, Mr. William O. Grabe 183 Queen's Road East, Hong Kong Mr. William Tudor Brown Ms. Ma Xuezheng AMERICAN DEPOSITARY RECEIPTS Mr. Yang Chih-Yuan Jerry (Depositary and Registrar) Mr. Gordon Robert Halyburton Orr Citibank, N.A. 14th Floor, 388 Greenwich Street, CHIEF FINANCIAL OFFICER New York, NY 10013, USA Mr. Wong Wai Ming STOCK CODES COMPANY SECRETARY Hong Kong Stock Exchange: 992 Mr. Mok Chung Fu, Eric American Depositary Receipts: LNVGY REGISTERED OFFICE WEBSITE 23rd Floor, Lincoln House, Taikoo Place, www.lenovo.com 979 King's Road, Quarry Bay, Hong Kong 268 Lenovo Group Limited 2017/18 Annual Report 6 www.lenovo.com This report is printed on environmentally friendly paper manufactured from elemental chlorine-free pulp Printed on chemistry free plate system and soy ink