UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of
1934
For the month of November 2015
Commission File Number 001-34798
SMART
TECHNOLOGIES INC.
3636 Research Road N.W.
Calgary, Alberta
Canada T2L 1Y1
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form
20-F x Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T
Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):
THIS REPORT ON FORM 6-K SHALL BE DEEMED FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE COMMISSION) AND INCORPORATED BY REFERENCE INTO THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-181530) OF SMART TECHNOLOGIES INC. FILED WITH THE COMMISSION, AND TO BE A PART THEREOF FROM THE
DATE ON WHICH THIS REPORT IS FURNISHED TO THE COMMISSION, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS THE REGISTRANT SUBSEQUENTLY FURNISHES TO OR FILES WITH THE COMMISSION.
DOCUMENTS FILED AS PART OF THIS FORM 6-K
In connection with its announcement of financial results for the quarter ended September 30, 2015, SMART
Technologies Inc. is filing the following documents:
Managements discussion and analysis;
Interim consolidated financial statements; and
Certificates of the principal executive and financial officers.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SMART TECHNOLOGIES INC. |
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By: |
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/s/ Matt Sudak |
Name: |
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Matt Sudak |
Title: |
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Vice President, Legal, General Counsel, and Corporate Secretary |
Date: Friday November 5, 2015
2
Exhibit Index
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99.1 |
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Managements Discussion and Analysis for the three and six months ended September 30, 2015 |
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99.2 |
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Interim consolidated financial statements of SMART Technologies Inc. for the three and six months ended
September 30, 2015 and 2014 |
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99.3 |
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Rule 13a-14(a)/15d-14(a) Certification of principal executive officer of SMART Technologies Inc. |
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99.4 |
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Rule 13a-14(a)/15d-14(a) Certification of principal financial officer of SMART Technologies Inc. |
3
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Q2
2016 |
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Second Quarter Report
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for the three and six months ended
September 30, 2015 |
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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following interim managements discussion and analysis (MD&A) should be read in conjunction with our unaudited interim consolidated financial statements and the
accompanying notes of SMART Technologies Inc. (the Company) for the three and six months ended September 30, 2015 and our audited consolidated financial statements and accompanying notes, MD&A and Annual Report on Form 20-F for
the fiscal year ended March 31, 2015. The consolidated financial statements have been presented in United States (U.S.) dollars and have been prepared in accordance with accounting principles generally accepted in the United States
of America (GAAP). Unless the context otherwise requires, any reference to the Company, SMART Technologies, SMART, we, our, us or similar terms refers to SMART
Technologies Inc. and its subsidiaries. Because our fiscal year ends on March 31, references to a fiscal year refer to the fiscal year ended March 31 of the same calendar year. For example, when we refer to fiscal 2016, we mean our fiscal
year ended March 31, 2016. Unless otherwise indicated, all references to $ and dollars in this discussion and analysis mean U.S. dollars. Certain amounts in our MD&A may not add up due to rounding. All
percentages, however, have been calculated using unrounded amounts. Unless otherwise noted, this MD&A is presented in millions.
is a registered trademark in Canada, the United States and in member countries of the European Union. SMART Board®, SMART Response®, SMART Notebook®, SMART Notebook Advantage, SMART Meeting Pro®, kapp®, kapp iQ, LightRaise®, SMART Table®, SMART Podium, SMART Exchange®, SMART Document Camera, SMART Sync, Bridgit®, SMART Room System, SMART
amp, smarttech, the SMART logo and all SMART taglines are marks, common law or registered, of SMART Technologies Inc. in the United States of America (the United States) and/or other countries. All third-party product and
company names are for identification purposes only and may be trademarks of their respective owners.
The following
table sets forth the period end and period average exchange rates for U.S. dollars expressed in Canadian dollars that are used in the preparation of our unaudited interim consolidated financial statements and this MD&A. These rates are based on
the closing rates published by the Bank of America.
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Period End Rate |
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Period Average Rate |
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Year-ended March 31, 2015 |
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1.2677 |
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1.1387 |
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Monthly Fiscal 2016 |
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April |
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1.2013 |
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1.2366 |
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May |
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1.2449 |
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1.2176 |
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June |
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1.2389 |
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1.2339 |
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July |
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1.3003 |
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1.2814 |
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August |
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1.3203 |
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1.3141 |
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September |
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1.3422 |
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1.3262 |
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Monthly Fiscal 2015 |
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April |
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1.0943 |
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1.0995 |
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May |
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1.0846 |
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1.0894 |
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June |
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1.0665 |
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1.0833 |
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July |
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1.0902 |
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1.0725 |
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August |
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1.0878 |
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1.0924 |
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September |
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1.1163 |
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1.0999 |
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This MD&A includes forward-looking statements that reflect our current views with respect to
future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the technology product industry and business, demographic and other matters in general. Statements that
include the words expanding, expect, increase, intend, plan, believe, project, estimate,
anticipate, may, will, continue, further, seek and similar words or statements of a future or forward-looking nature identify forward-looking statements for purposes of the
applicable securities laws or otherwise. In particular and without limitation, this MD&A contains forward-looking statements pertaining to general market conditions, our strategy and prospects, including expectations of the education and
enterprise markets for our products, our plans and objectives for future operations, productivity enhancements and cost savings, our future financial performance and financial condition, the addition of new products to our portfolio and enhancements
to current products, our industry, opportunities in the education and enterprise markets and licensing opportunities, working capital requirements, our acquisition strategy, regulation, exchange rates and income tax considerations.
All forward-looking statements address matters that involve risks, uncertainties and assumptions. Accordingly, there are or will be
important factors and assumptions that could cause our actual results and other circumstances and events to differ materially from those indicated in these statements. These risk factors and assumptions include, but are not limited to, the
following:
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our ability to maintain sales to the education market that is in decline; |
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sales of our new products may not be sufficient to offset the decline in the education market; |
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our ability to successfully manufacture, distribute and market kapp; |
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competition in our industry; |
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our ability to successfully execute our strategy to grow in the enterprise market; |
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our ability to successfully execute our strategy to monetize software; |
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possible changes in the demand for our products; |
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shifts in product mix from interactive whiteboards to interactive flat panels; |
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difficulty in predicting our sales and operating results; |
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our substantial debt could adversely affect our financial condition; |
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our ability to raise additional funds, manage cash flow, foreign exchange risk and working capital; |
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changes to our business model; |
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our ability to enhance current products and develop and introduce new products; |
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the potential negative effect of product defects; |
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reduced spending by our customers due to changes in the spending policies or budget priorities for government funding;
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our ability to establish new relationships and to build on our existing relationships with our resellers and distributors;
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the potential negative effect of disruptions of certain business functions provided by third parties; |
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the potential negative effects of system failures or cybersecurity attacks; |
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our ability to attract, retain and motivate qualified personnel; |
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the continued service and availability of a limited number of key personnel; |
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the reliability of component supply and product assembly and logistical services provided by third parties;
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the development of the market for interactive learning and collaboration products; |
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our ability to grow our sales in foreign markets; |
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our ability to manage risks inherent in foreign operations; |
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our ability to manage our systems, procedures and controls; |
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the potential of increased costs related to future restructuring and related charges; |
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our ability to protect our brand; |
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our ability to achieve the benefits of strategic partnerships; |
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our reliance upon a strategic partnership with Microsoft; |
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our ability to successfully obtain patents or registration for other intellectual property rights or protect, maintain and enforce such
rights; |
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third-party claims of infringement or violation of, or other conflicts with, intellectual property rights by us; and
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our ability to manage, defend and settle litigation. |
Overview
SMART Technologies Inc. is one of the leading
providers of technology solutions that are redefining the way the world works and learns. SMART solutions include large-format interactive displays, collaboration software and services that enable highly-interactive, engaging and productive
teaching, learning and work experiences in schools and workplaces around the world. SMART is differentiated by complete, integrated solutions that are easy to use while focused on freeing people from their desks and computer screens to make
collaboration and learning digitally more natural and engaging. We introduced the worlds first interactive whiteboard in 1991, and we remain the global leader in the interactive display market with over 3.1 million interactive displays
shipped to date. Our award-winning solutions are the result of more than 20 years of technological innovation supported by our core intellectual property. In the education market, we have transformed teaching and learning in over 2.8 million
classrooms worldwide, reaching over 69 million students and teachers based on an assumed average classroom size of 24 students. In the enterprise market, we have improved the way people work and collaborate worldwide, enabling them to be more
productive and reduce costs.
We offer a number of interactive display products, including SMART Board
interactive whiteboards and interactive flat panels, the kapp digital capture board, the kapp iQ multi-way whiteboard, and LightRaise interactive projectors. By touching the surface of a SMART interactive display, the user can control computer
applications, access the Internet and our learning content ecosystem, write in digital ink, and save and distribute work. Our interactive displays serve as the focal point of a broad classroom and meeting-room technology platform and are augmented
with a range of modular and integrated interactive technology products and solutions, including hardware, software and content created by both our user community and professional content developers. kapp is a modern replacement for traditional
dry-erase boards and flip charts that enables users to capture and digitally share information in high-quality formats. kapp iQ is an ultra HD display with a built-in whiteboard that enables multi-way inking between any combination of devices from
anywhere in the world. Our collaborative learning solutions for education combine collaboration software with a comprehensive line of interactive displays and other hardware, accessories and services that further enhance learning. Our enterprise
solutions facilitate collaborative decision making with industry-leading interactive displays, intuitive software and other high-quality components, including cameras, microphones and speakers.
Reportable Segments
Effective April 1, 2015, the Company completed a reorganization which merged the existing Education and Enterprise sales and customer service teams into the new Solutions business unit, and
established separate sales and customer service teams dedicated to the Companys new line of products in the kapp business unit. Certain functions that were previously distinct to the individual Education and Enterprise segments were
centralized at the corporate level. As a result of only the sales and customer service teams being dedicated to a specific business unit, no discrete financial information is available on a business unit basis. The existing NextWindow
segment no longer earns revenue or incurs expenses as it enters the final stage of its wind down. The Company no longer has individual business units that meet the criteria of an operating
segment, and is now organized and managed as a single reportable operating segment. For more information about changes in our segment reporting, please see Note 12Segment Disclosure in our interim financial statements.
Highlights
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Revenue decreased by $64 million from $267 million in the first six months of fiscal 2015 to $202 million in the first six months of fiscal
2016. Adjusted Revenue decreased by $32 million from $234 million in the first six months of fiscal 2015 to $202 million in the first six months of fiscal 2016. Gross margin percentage was 47% in the first six months of fiscal 2015 compared to 36%
in the first six months of fiscal 2016. Adjusted Gross Margin percentage was 40% in the first six months of fiscal 2015 compared to 36% in the first six months of fiscal 2016. Adjusted EBITDA decreased by $12 million from $22 million in the
first six months of fiscal 2015 to $9 million in the first six months of fiscal 2016. |
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On October 9, 2015, the Company announced cost reduction initiatives as a result of its financial outlook update and strategic review. The
Company is expected to incur restructuring costs of approximately $4 million, all of which are related to employee terminations. The initiatives are expected to be substantially completed by the third quarter of fiscal 2016.
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Results of Operations
Revenue
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Three months ended September 30, |
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Six months ended September 30, |
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2015 |
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2014 |
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Change |
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2015 |
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2014 |
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Change |
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Revenue |
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$ |
103.6 |
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$ |
129.2 |
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(19.8 |
)% |
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$ |
202.3 |
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$ |
266.7 |
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(24.1 |
)% |
Adjusted Revenue(1) |
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$ |
103.6 |
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$ |
113.1 |
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(8.4 |
)% |
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$ |
202.3 |
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$ |
234.2 |
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(13.6 |
)% |
Revenue by geographic location |
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North America |
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$ |
60.7 |
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$ |
79.2 |
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(23.4 |
)% |
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$ |
132.6 |
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$ |
165.9 |
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(20.1 |
)% |
Europe, Middle East and Africa (EMEA) |
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35.3 |
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36.1 |
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(2.0 |
)% |
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60.0 |
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68.7 |
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(12.7 |
)% |
Rest of World |
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7.6 |
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14.0 |
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(45.8 |
)% |
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9.7 |
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32.1 |
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(69.7 |
)% |
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$ |
103.6 |
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$ |
129.2 |
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(19.8 |
)% |
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$ |
202.3 |
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$ |
266.7 |
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(24.1 |
)% |
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Adjusted Revenue(1) by geographic location |
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North America |
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$ |
60.7 |
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$ |
69.1 |
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(12.2 |
)% |
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$ |
132.6 |
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$ |
145.0 |
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(8.5 |
)% |
Europe, Middle East and Africa |
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35.3 |
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31.4 |
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12.4 |
% |
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60.0 |
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60.1 |
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(0.2 |
)% |
Rest of World |
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7.6 |
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12.5 |
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(39.5 |
)% |
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9.7 |
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29.2 |
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(66.7 |
)% |
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$ |
103.6 |
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$ |
113.1 |
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(8.4 |
)% |
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$ |
202.3 |
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$ |
234.2 |
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(13.6 |
)% |
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(1) |
This is a non-GAAP measure. See Non-GAAP measures section for additional information. |
Revenue decreased by $26 million in the second quarter of fiscal 2016 and $64 million in the first six months of
fiscal 2016 compared to the same periods in fiscal 2015. When we introduced SMART Notebook Advantage in the third quarter of fiscal 2014, we reduced the support period, and effectively, the revenue deferral period, for previously sold software to
end at March 31, 2015. Therefore, the accelerated revenue recognition due to this change in accounting estimate resulted in a positive impact of $16 million in the second quarter of fiscal 2015 and $33 million in the first six months of fiscal
2015. Adjusted Revenue decreased by $9 million in the second quarter of fiscal 2016 and $32 million in the first six months of fiscal 2016 compared to the same periods in fiscal 2015, primarily due to lower revenue from interactive whiteboards,
interactive projectors and attachment products, partly offset by strong period-over-period increases in revenue from interactive flat panels.
Adjusted Revenue in North America was negatively impacted by declines in our
education and enterprise solutions in the second quarter and first six months of fiscal 2016. Adjusted Revenue in EMEA was positively impacted by increases in revenue from interactive flat panels in the second quarter of fiscal 2016, and was flat in
the first six months of fiscal 2016. The decrease in Adjusted Revenue in Rest of World was largely due to declines in our education solutions and prior-year period sales from our NextWindow operations in the second quarter and first six months of
fiscal 2016.
Revenue and Adjusted Revenue were negatively impacted by foreign exchange movements of
approximately $4 million in the second quarter of fiscal 2016 and $7 million in the first six months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar against the Canadian
dollar, the Euro and British pound sterling.
Gross Margin
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Three months ended September 30, |
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Six months ended September 30, |
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2015 |
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2014 |
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Change |
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2015 |
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2014 |
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Change |
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Gross margin |
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$ |
37.5 |
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$ |
62.5 |
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(40.0 |
)% |
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$ |
73.7 |
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$ |
125.4 |
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(41.2 |
)% |
Gross margin percentage |
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36.2 |
% |
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48.4 |
% |
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(12.2 |
)pt |
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36.4 |
% |
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47.0 |
% |
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(10.6 |
)pt |
Adjusted Gross Margin (1) |
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$ |
37.5 |
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$ |
46.4 |
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(19.2 |
)% |
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$ |
73.7 |
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$ |
92.9 |
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(20.7 |
)% |
Adjusted Gross Margin percentage(1) |
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36.2 |
% |
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41.0 |
% |
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(4.8 |
)pt |
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36.4 |
% |
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39.7 |
% |
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(3.3 |
)pt |
(1) |
These are non-GAAP measures. See Non-GAAP measures section for additional information. |
Gross margin decreased by $25 million in the second quarter of fiscal 2016 and $52 million in the first six months
of fiscal 2015 compared to the same periods in fiscal 2015. The change in deferred revenue had a positive impact of $16 million in the second quarter of fiscal 2015 and $33 million in the first six months of fiscal 2015, due to the change in
accounting estimate as discussed previously. Adjusted Gross Margin decreased by $9 million in the second quarter of fiscal 2016 and $19 million in the first six months of fiscal 2016 compared to the same periods in fiscal 2015, due to lower Adjusted
Revenue as discussed previously. The decrease in period-over-period Adjusted Gross Margin percentage was due to the shift in product mix from interactive whiteboards to interactive flat panels which carry a lower gross margin percentage.
Gross margin and Adjusted Gross Margin were negatively impacted by foreign exchange movements of approximately $3 million
in the second quarter of fiscal 2016 and $5 million in the first six months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar against the Canadian dollar and Euro which
negatively impacted our revenue and positively impacted our cost of sales.
Operating Expenses
Selling, Marketing and Administration Expenses
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Three months ended September 30, |
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Six months ended September 30, |
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2015 |
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2014(1) |
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Change |
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2015 |
|
|
2014(1) |
|
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Change |
|
Selling, marketing and administration |
|
$ |
22.3 |
|
|
$ |
25.2 |
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|
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(11.3 |
)% |
|
$ |
47.1 |
|
|
$ |
53.2 |
|
|
|
(11.5 |
)% |
As a percent of revenue |
|
|
21.6 |
% |
|
|
19.5 |
% |
|
|
2.1 |
pt |
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|
23.3 |
% |
|
|
20.0 |
% |
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|
3.3 |
pt |
As a percent of Adjusted Revenue (2) |
|
|
21.6 |
% |
|
|
22.3 |
% |
|
|
(0.7 |
)pt |
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|
23.3 |
% |
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|
22.7 |
% |
|
|
0.6 |
pt |
(1) |
Certain reclassifications have been made to prior periods figures to conform to the current periods presentation.
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(2) |
This is a non-GAAP measure. See Non-GAAP measures section for additional information. |
As the majority of our selling, marketing and administration expenses were incurred in Canadian dollars, these expenses
were positively impacted by changes in foreign exchange rates of approximately $3 million in the second quarter of fiscal 2016 and $6 million in the first six months of fiscal 2016 compared to the same periods
in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar relative to the Canadian dollar. Removing the foreign exchange effect, our selling, marketing and administration
expenses remained flat in both the second quarter and first six months of fiscal 2016 compared to the same periods in fiscal 2015.
Research and Development Expenses
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Three months ended September 30, |
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Six months ended September 30, |
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2015 |
|
|
2014(1) |
|
|
Change |
|
|
2015 |
|
|
2014(1) |
|
|
Change |
|
Research and development |
|
$ |
9.4 |
|
|
$ |
10.0 |
|
|
|
(5.5 |
)% |
|
$ |
20.6 |
|
|
$ |
22.7 |
|
|
|
(9.5 |
)% |
As a percent of revenue |
|
|
9.1 |
% |
|
|
7.7 |
% |
|
|
1.4pt |
|
|
|
10.2 |
% |
|
|
8.5 |
% |
|
|
1.7pt |
|
As a percent of Adjusted Revenue (2) |
|
|
9.1 |
% |
|
|
8.8 |
% |
|
|
0.3pt |
|
|
|
10.2 |
% |
|
|
9.7 |
% |
|
|
0.5pt |
|
(1) |
Certain reclassifications have been made to prior periods figures to conform to the current periods presentation.
|
(2) |
This is a non-GAAP measure. See Non-GAAP measures section for additional information. |
Research and development activities remain a core focus and we continue to invest in product innovation and new
technologies. Research and development expenses were positively impacted by foreign exchange movements of approximately $1 million in the second quarter of fiscal 2016 and $2 million in the first six months of fiscal 2016 compared to the same
periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar relative to the Canadian dollar.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
Depreciation and amortization |
|
$ |
2.3 |
|
|
$ |
2.9 |
|
|
|
(21.0 |
)% |
|
$ |
4.8 |
|
|
$ |
6.0 |
|
|
|
(20.4 |
)% |
The decrease in depreciation and amortization of property and equipment in the second
quarter and first six months of fiscal 2016 compared to the same periods in fiscal 2015 was due to decreases in the net book value of these assets as a result of declining period-over-period capital expenditures.
Restructuring Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
Restructuring costs |
|
$ |
0.7 |
|
|
$ |
0.0 |
|
|
|
* |
|
|
$ |
0.9 |
|
|
$ |
2.3 |
|
|
|
(59.3 |
)% |
In fiscal 2016, we recorded additional restructuring costs related to the cancellation of an office lease. In the first quarter of fiscal 2015, we incurred $2 million in employee termination and other
restructuring costs related to the fiscal 2015 restructuring plan.
Non-Operating Expenses (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
Interest expense |
|
$ |
4.7 |
|
|
$ |
5.1 |
|
|
|
(8.9 |
)% |
|
$ |
9.3 |
|
|
$ |
10.2 |
|
|
|
(8.2 |
)% |
Foreign exchange loss |
|
$ |
7.1 |
|
|
$ |
4.6 |
|
|
|
54.7 |
% |
|
$ |
5.2 |
|
|
$ |
0.0 |
|
|
|
* |
|
Other income |
|
$ |
(0.0 |
) |
|
$ |
(0.0 |
) |
|
|
0.0 |
% |
|
$ |
(0.1 |
) |
|
$ |
(0.6 |
) |
|
|
(77.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11.8 |
|
|
$ |
9.7 |
|
|
|
21.7 |
% |
|
$ |
14.4 |
|
|
$ |
9.6 |
|
|
|
49.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
In the second quarter and first six months of fiscal 2016 and fiscal 2015, our interest expense primarily related to our
long-term debt and capital lease.
Foreign Exchange loss
In the second quarter and first six months of fiscal 2016, the change in foreign exchange loss was primarily related to
the conversion of our U.S. dollar-denominated debt into our functional currency of Canadian dollars. From July 1, 2015 to September 30, 2015, the U.S dollar strengthened by 7.7% against the Canadian dollar compared to 4.5% for the same
period last year. From March 31, 2015 to September 30, 2015, the U.S dollar strengthened by 5.6% against the Canadian dollar compared to 0.9% for the same period last year.
Income Tax (Recovery) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
Income tax (recovery) expense |
|
$ |
(0.1 |
) |
|
$ |
2.4 |
|
|
|
* |
|
|
$ |
(2.8 |
) |
|
$ |
7.1 |
|
|
|
* |
|
Effective tax rate |
|
|
0.9 |
% |
|
|
16.4 |
% |
|
|
(15.5 |
)pt |
|
|
20.1 |
% |
|
|
22.5 |
% |
|
|
(2.4 |
)pt |
The decrease in income tax expense in the second quarter and first six months of fiscal 2016 compared to the same periods in fiscal 2015 was due to variance in foreign tax rates, the decrease in revenue,
the decrease in Canadian SR&ED credits offset partially by the increase in valuation allowance.
Our tax
provision is weighted towards Canadian income tax rates as substantially all our taxable income is Canadian-based. In calculating the tax provision, we adjusted income before income taxes by the unrealized foreign exchange loss from the revaluation
of the U.S. dollar-denominated debt. This is treated as capital item for income tax purposes. We have not provided for deferred income taxes on the differences between the carrying value of substantially all of our foreign subsidiaries and their
corresponding tax basis as the earnings of those subsidiaries are intended to be permanently reinvested in their operations. As such these investments are not anticipated to give rise to income taxes in the foreseeable future. If such earnings are
remitted, in the form of dividends or otherwise, we may be subject to income taxes and foreign withholding taxes.
Non-GAAP measures
As used in this MD&A, GAAP means generally accepted accounting principles in the United
States, which are in effect from time to time. This MD&A discloses certain financial measures, such as Adjusted Revenue, Adjusted Gross Margin, Adjusted EBITDA, Adjusted Net (Loss) Income, and Adjusted Net (Loss) Income per share.
In the second quarter of fiscal 2016, we changed our definition of Adjusted Revenue from revenue adjusted for the change
in deferred revenue balances during the period, to revenue adjusted for the accelerated deferred revenue recognized as a result of the change in accounting estimate as discussed below.
We calculate Adjusted Gross Margin by subtracting cost of sales from Adjusted Revenue.
We define Adjusted Net (Loss) Income as net (loss) income before stock-based compensation, costs of restructuring,
foreign exchange gains or losses, accelerated deferred revenue recognized, amortization of intangible assets, gains or losses related to the liquidation of foreign subsidiaries and gains or losses related to the sale of long-lived assets, all net of
tax.
We calculate Adjusted Net (Loss) Income per share by dividing Adjusted Net (Loss) Income by the average
number of basic and diluted shares outstanding during the period.
We define Adjusted EBITDA as Adjusted Net Income before interest expense,
income taxes, depreciation and other income.
Adjusted Revenue, Adjusted Gross Margin, Adjusted EBITDA,
Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per share are non-GAAP measures and should not be considered as alternatives to net income or any other measure of financial performance calculated and presented in accordance with GAAP.
Adjusted Revenue, Adjusted Gross Margin, Adjusted EBITDA, Adjusted Net (Loss) Income and other non-GAAP measures have inherent limitations, and the reader should therefore not place undue reliance on them.
Due to the change in accounting estimate as a result of the reduction in the support period for previously sold products,
discussed in Note 1(a) in the unaudited interim consolidated financial statements, we chose to use the non-GAAP measures of Adjusted Revenue and Adjusted Gross Margin. The significant impact in prior years related to this change in accounting
estimate ended in the fourth quarter of fiscal 2015. Although this will no longer have a significant impact on our fiscal 2016 financial results, we will continue to use Adjusted Revenue and Adjusted Gross Margin for comparative purposes. We use
Adjusted Revenue and Adjusted Gross Margin as key measures to provide additional insights into the operational performance of the Company and to help clarify trends affecting the Companys business.
We use Adjusted EBITDA as a key measure to assess the core operating performance of our business after removing the
effects of both our leveraged capital structure and the volatility associated with the foreign currency exchange rates on our U.S. dollar-denominated debt. We also use Adjusted Net (Loss) Income to assess the performance of the business after
removing the after-tax impact of stock-based compensation, costs of restructuring, foreign exchange gains and losses, accelerated deferred revenue recognized, amortization of intangible assets and gains or losses related to the sale of long-lived
assets. We use both of these measures to assess business performance when we evaluate our results in comparison to budgets, forecasts, prior-year financial results and other companies in our industry. Many of these companies use similar non-GAAP
measures to supplement their GAAP disclosures, but such measures may not be directly comparable to ours. In addition to its use by management in the assessment of business performance, Adjusted EBITDA is used by our Board of Directors in assessing
managements performance and is a key metric in the determination of payments made under our incentive compensation plans. We believe Adjusted EBITDA and Adjusted Net (Loss) Income may be useful to investors in evaluating our operating
performance because securities analysts use metrics similar to Adjusted EBITDA and Adjusted Net (Loss) Income as supplemental measures to evaluate the overall operating performance of companies.
Adjusted EBITDA and Adjusted Net (Loss) Income are not affected by the change in accounting estimate related to revenue
recognition.
We compensate for the inherent limitations associated with using Adjusted Revenue, Adjusted
Gross Margin, Adjusted EBITDA and Adjusted Net (Loss) Income through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of Adjusted Revenue, Adjusted Gross Margin, Adjusted EBITDA and
Adjusted Net (Loss) Income to the most directly comparable GAAP measures: revenue, gross margin and net (loss) income.
The following table sets forth the reconciliation of revenue to Adjusted
Revenue and gross margin to Adjusted Gross Margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Adjusted Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
103.6 |
|
|
$ |
129.2 |
|
|
$ |
202.3 |
|
|
$ |
266.7 |
|
Deferred revenue recognized accelerated amortization |
|
|
|
|
|
|
(16.1 |
) |
|
|
|
|
|
|
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Revenue |
|
$ |
103.6 |
|
|
$ |
113.1 |
|
|
$ |
202.3 |
|
|
$ |
234.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
37.5 |
|
|
$ |
62.5 |
|
|
$ |
73.7 |
|
|
$ |
125.4 |
|
Deferred revenue recognized accelerated amortization |
|
|
|
|
|
|
(16.1 |
) |
|
|
|
|
|
|
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Gross Margin |
|
$ |
37.5 |
|
|
$ |
46.4 |
|
|
$ |
73.7 |
|
|
$ |
92.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the reconciliations of net income to Adjusted Net
(Loss) Income and Adjusted EBITDA and basic and diluted earnings per share to Adjusted Net (Loss) Income per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net (loss) income |
|
$ |
(9.0 |
) |
|
$ |
12.3 |
|
|
$ |
(11.3 |
) |
|
$ |
24.4 |
|
Adjustments to net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Foreign exchange loss |
|
|
7.1 |
|
|
|
4.6 |
|
|
|
5.2 |
|
|
|
0.0 |
|
Accelerated deferred revenue recognized |
|
|
|
|
|
|
(16.1 |
) |
|
|
|
|
|
|
(32.5 |
) |
Stock-based compensation |
|
|
0.2 |
|
|
|
0.7 |
|
|
|
1.3 |
|
|
|
1.9 |
|
Costs of restructuring |
|
|
0.7 |
|
|
|
0.0 |
|
|
|
0.9 |
|
|
|
2.3 |
|
Gain on liquidation of foreign subsidiary(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
Gain on sale of long-lived assets |
|
|
|
|
|
|
(0.0 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1 |
|
|
|
(10.8 |
) |
|
|
7.5 |
|
|
|
(28.7 |
) |
Tax impact on adjustments(2) |
|
|
0.3 |
|
|
|
(3.1 |
) |
|
|
0.5 |
|
|
|
(6.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net (loss) income, net of tax |
|
|
7.7 |
|
|
|
(7.7 |
) |
|
|
7.0 |
|
|
|
(22.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net (Loss) Income |
|
$ |
(1.3 |
) |
|
$ |
4.6 |
|
|
$ |
(4.2 |
) |
|
$ |
2.3 |
|
Additional adjustments to Adjusted Net (Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (recovery)(3) |
|
|
0.2 |
|
|
|
(0.7 |
) |
|
|
(2.4 |
) |
|
|
0.5 |
|
Depreciation in cost of sales |
|
|
0.9 |
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
2.8 |
|
Depreciation of property and equipment |
|
|
2.3 |
|
|
|
2.9 |
|
|
|
4.8 |
|
|
|
6.0 |
|
Interest expense |
|
|
4.7 |
|
|
|
5.1 |
|
|
|
9.3 |
|
|
|
10.2 |
|
Other income(1) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
6.8 |
|
|
$ |
12.9 |
|
|
$ |
9.3 |
|
|
$ |
21.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of revenue(4) |
|
|
6.6 |
% |
|
|
11.4 |
% |
|
|
4.6 |
% |
|
|
9.2 |
% |
Adjusted Net (Loss) Income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per sharebasic |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.20 |
|
Adjustments to net (loss) income, net of tax, per share |
|
|
0.06 |
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net (Loss) Income per sharebasic |
|
$ |
(0.01 |
) |
|
$ |
0.04 |
|
|
$ |
(0.03 |
) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per sharediluted |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.19 |
|
Adjustments to net (loss) income, net of tax, per share |
|
|
0.06 |
|
|
|
(0.06 |
) |
|
|
0.06 |
|
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net (Loss) Income per sharediluted |
|
$ |
(0.01 |
) |
|
$ |
0.04 |
|
|
$ |
(0.03 |
) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Included in Other income in the consolidated statements of operations. |
(2) |
Reflects the tax impact on the adjustments to net (loss) income. A key driver of our foreign exchange gain is the conversion of our U.S.
dollar-denominated debt that was originally incurred at an average rate of 1.03 into our functional currency of Canadian dollars. When the unrealized foreign exchange amount on U.S. dollar-denominated debt is in a net gain position as measured
against the original exchange rate, the gain is tax-effected at current rates. When the unrealized foreign exchange amount on the U.S. dollar-denominated debt is in a net loss position as measured against the original exchange rate and the loss
cannot be carried back to a previous year, a valuation allowance is taken against it and as a result no net tax effect is recorded. |
(3) |
Income tax (recovery) expense of $(0.1) million and $(2.8) million for the three and six months ended September 30, 2015 (2014 $2.4
million and $7.1 million) per consolidated statement of operations, net of tax impact on adjustments to Adjusted Net Income of $0.3 million and $0.5 million for the three and six months ended September 30, 2015 (2014 $(3.1) million and
$(6.6) million). |
(4) |
Adjusted EBITDA as a percent of revenue is calculated by dividing Adjusted EBITDA by Adjusted Revenue. |
Selected Quarterly Financial Data
The following tables set forth the Companys unaudited quarterly financial information and non-GAAP measures for each
of the eight most recent quarters, including the quarter ended September 30, 2015. The information in the table below has been derived from our unaudited interim consolidated financial statements. Our quarterly operating results have varied
substantially in the past and may vary substantially in the future. Accordingly, the information below is not necessarily indicative of future results. Data for the periods are indicated in millions of dollars, except for per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|
|
Second Quarter |
|
|
First Quarter |
|
|
Fourth Quarter |
|
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
|
Fourth Quarter |
|
|
Third Quarter |
|
Revenue |
|
$ |
103.6 |
|
|
$ |
98.7 |
|
|
$ |
99.6 |
|
|
$ |
126.6 |
|
|
$ |
129.2 |
|
|
$ |
137.5 |
|
|
$ |
124.2 |
|
|
$ |
158.0 |
|
Gross margin |
|
|
37.5 |
|
|
|
36.3 |
|
|
|
49.4 |
|
|
|
57.1 |
|
|
|
62.5 |
|
|
|
62.9 |
|
|
|
52.2 |
|
|
|
67.7 |
|
Net (loss) income |
|
|
(9.0 |
) |
|
|
(2.2 |
) |
|
|
(9.6 |
) |
|
|
9.3 |
|
|
|
12.3 |
|
|
|
12.1 |
|
|
|
(3.6 |
) |
|
|
4.0 |
|
(Loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
Diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
Non-GAAP measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Revenue |
|
$ |
103.6 |
|
|
$ |
98.7 |
|
|
$ |
85.8 |
|
|
$ |
111.3 |
|
|
$ |
113.1 |
|
|
$ |
121.2 |
|
|
$ |
107.9 |
|
|
$ |
141.1 |
|
Adjusted Gross Margin |
|
|
37.5 |
|
|
|
36.3 |
|
|
|
35.5 |
|
|
|
41.8 |
|
|
|
46.4 |
|
|
|
46.6 |
|
|
|
35.9 |
|
|
|
50.8 |
|
Adjusted EBITDA |
|
|
6.8 |
|
|
|
2.5 |
|
|
|
1.8 |
|
|
|
10.9 |
|
|
|
12.9 |
|
|
|
8.7 |
|
|
|
2.4 |
|
|
|
17.4 |
|
Adjusted Net (Loss) Income |
|
|
(1.3 |
) |
|
|
(2.9 |
) |
|
|
(4.5 |
) |
|
|
2.4 |
|
|
|
4.6 |
|
|
|
(2.3 |
) |
|
|
(6.8 |
) |
|
|
6.2 |
|
Adjusted Net (Loss) Income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.05 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.05 |
|
Certain reclassifications have been made to prior periods figures to conform to the current periods presentation.
Liquidity and Capital Resources
As of September 30,
2015, we held cash and cash equivalents of $31 million. Our primary source of cash flow is generated from sales of interactive displays, related attachment products, software and services. We believe that ongoing operations and associated cash flow
when combined with existing cash resources and revolving credit facilities provide sufficient liquidity to support our business operations for at least the next 12 months.
As of September 30, 2015, our outstanding debt balance was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue Date |
|
|
Maturity Date |
|
|
Interest Rate |
|
|
Amount Outstanding |
|
|
|
|
|
|
Term loan, net of unamortized debt discount of $3.6 million |
|
|
July 31, 2013 |
|
|
|
Jan 31, 2018 |
|
|
|
LIBOR + 9.25 |
% |
|
$ |
102.6 million |
|
Asset-based loan credit facility |
|
|
July 31, 2013 |
|
|
|
July 31, 2017 |
|
|
|
LIBOR + 2.5 |
% |
|
$ |
5.0 million |
|
We currently hold a four-and-a-half year, $125 million senior secured term loan (the
Term loan) and a four-year, $50 million asset-based loan credit facility (the ABL). The Term loan bears interest at LIBOR plus 9.25% with a LIBOR floor of 1.25% and will be repaid at 7.5% per annum during the first
two-and-a-half years and 10% in the last two years. The ABL bears interest at LIBOR plus 2.5% and $5 million was drawn as of September 30, 2015. We have an outstanding standby letter of credit totaling $1 million at September 30, 2015,
which reduces the amount available to us under the ABL.
All debt and credit facilities are denominated in
U.S. dollars.
The following table shows a summary of our cash flows (used in) provided by
operating activities, investing activities and financing activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
Net cash (used in) provided by operating activities |
|
$ |
(21.0 |
) |
|
$ |
9.8 |
|
Net cash used in investing activities |
|
$ |
(2.1 |
) |
|
$ |
(4.0 |
) |
Net cash used in financing activities |
|
$ |
(0.2 |
) |
|
$ |
(5.1 |
) |
Net Cash (Used in) Provided by Operating Activities
The increase in net cash used in operating activities was primarily due to a net increase in period-over-period working
capital and lower operating income. The increase in working capital in the first six months of fiscal 2016 was due to increasing inventory, primarily related to kapp, and trade receivables offset by increases in accounts payable and accrued and
other liabilities.
Net Cash Used in Investing Activities
The decrease in net cash used in investing activities was due to lower capital expenditures in the first six months of
fiscal 2016 compared to the same period in fiscal 2015.
Net Cash Used in Financing Activities
In the first six months of fiscal 2016, we drew $5 million on our ABL and repaid $5 million of our
Term loan and capital lease obligation. In the first six months of fiscal 2015, we repaid $5 million of our Term loan and capital lease obligation.
Contractual Obligations, Commitments, Guarantees and Contingencies
Contractual Obligations and Commitments
We have
certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating foreign exchange and interest rates, and
other factors may result in actual payments differing from estimates. The following table summarizes our outstanding contractual obligations as of September 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months ended September 30, |
|
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
2020 and thereafter |
|
|
Total |
|
Operating leases |
|
$ |
2.8 |
|
|
$ |
1.6 |
|
|
$ |
1.6 |
|
|
$ |
1.4 |
|
|
$ |
0.7 |
|
|
$ |
8.2 |
|
Capital lease |
|
|
4.8 |
|
|
|
4.8 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
|
76.8 |
|
|
|
96.5 |
|
Long-term debt |
|
|
11.7 |
|
|
|
12.5 |
|
|
|
82.0 |
|
|
|
|
|
|
|
|
|
|
|
106.3 |
|
Interest obligations on long-term debt |
|
|
10.9 |
|
|
|
9.6 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
23.4 |
|
Purchase commitments |
|
|
28.6 |
|
|
|
3.1 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
34.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58.9 |
|
|
$ |
31.6 |
|
|
$ |
94.1 |
|
|
$ |
6.6 |
|
|
$ |
77.5 |
|
|
$ |
268.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating lease commitments relate primarily to office and warehouse space and
represent the minimum commitments under these agreements.
The capital lease commitment relates to our
headquarters building and represents our minimum capital lease payments (including amounts representing interest) under the lease agreement and management fees.
Long-term debt commitments represent the minimum principal repayments and interest payments required under our long-term
debt and credit facilities.
Our purchase commitments are for finished goods from contract manufacturers,
certain information systems management and licensing costs.
Commitments have been calculated using foreign
exchange rates and interest rates in effect at September 30, 2015. Fluctuations in these rates may result in actual payments differing from those in the above table.
Guarantees and Contingencies
Legal
Proceedings
We are involved in various claims and litigation from time to time arising in the normal
course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in our favor, we are not able to make any determination with respect to the amount of any damages that might be
awarded against us in connection with such matters. We do not currently believe that the outcome of any such claims and litigation, or the amounts which we may be required to pay by reason thereof, would have a material adverse impact on our
financial position, results of operations or liquidity.
Indemnities and Guarantees
In the normal course of business, we enter into guarantees that provide indemnification and guarantees to counterparties
to secure sales agreements and purchase commitments. Should we be required to act under such agreements, it is expected that no material loss would result.
Off-Balance Sheet Arrangements
As of September 30,
2015, there were no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Changes in Internal Control Over Financial Reporting
During the six months ended September 30, 2015, no changes were made to the Companys internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Quantitative and Qualitative Disclosures about Market and Other Financial Risks
In the normal course of our business, we engage in operating and financing activities that generate risks in the following primary areas.
Foreign Currency Risk
Foreign currency risk is the risk that fluctuations in foreign exchange rates could impact our results from operations. We
are exposed to foreign exchange risk primarily between the Canadian dollar and both the U.S. dollar, the Euro and British pound sterling. This exposure relates to our U.S. dollar denominated debt, the sale of our products to customers globally and
purchases of goods and services in foreign currencies. A large portion of our revenue and purchases of materials and components are denominated in U.S. dollars. However, a substantial portion of our revenue is denominated in other foreign
currencies, primarily the Canadian dollar, Euro and British pound sterling. If the value of any of these currencies depreciates relative to the U.S. dollar, our foreign currency revenue will decrease when translated to U.S. dollars for financial
reporting purposes. In addition, a portion of our cost of goods sold, operating costs and capital expenditures are incurred in other currencies, primarily the Canadian dollar and the Euro. If the value of either of these currencies appreciates
relative to the U.S. dollar, our expenses will increase when translated to U.S. dollars for financial reporting purposes.
We continually monitor foreign exchange rates and periodically enter into
forward contracts and other derivative contracts to convert a portion of our forecasted foreign currency denominated cash flows into Canadian dollars for the purpose of paying our Canadian dollar denominated operating costs. We target to cover
between 25% and 75% of our expected Canadian dollar cash needs for the next 12 months through the use of forward contracts and other derivatives with the actual percentage determined by management based on the changing exchange rate environment. We
may also enter into forward contracts and other derivative contracts to manage our cash flows in other currencies. We do not use derivative financial instruments for speculative purposes. We have also entered into and continue to look for
opportunities within our supply chain to match our cost structures to our foreign currency revenues.
These
programs reduce, but do not entirely eliminate, the impact of currency exchange movements. Our current practice is to use foreign currency derivatives without hedge accounting designation. The maturity of these instruments generally occurs within 12
months. Gains or losses resulting from the fair valuing of these instruments are reported in foreign exchange gain or loss on the consolidated statements of operations.
Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will be affected by changes in market interest rates. Our long-term debt and revolving credit facilities bear interest based on
floating market rates. Changes in these market rates result in fluctuations in the cash flows required to service this debt. In the past, we partially mitigated this risk by periodically entering into interest rate swap agreements to fix the
interest rate on certain long-term variable-rate debt, and we may continue to do so in the future. Our current practice is to use interest rate derivatives without hedge accounting designation. We currently have not entered into any interest rate
derivatives. Changes in the fair value of these interest rate derivatives are included in interest expense in the consolidated statements of operations.
Credit Risk
Credit risk is the risk that the
counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us.
We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific customer receivables based on a variety of factors including currency risk, geopolitical risk,
payment history, customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by management and the allowance for doubtful receivables is adjusted as required. Account balances are charged against the
allowance for doubtful receivables when we determine that it is probable that the receivable will not be recovered. We believe that the geographic diversity of the customer base, combined with our established credit approval practices and ongoing
monitoring of customer balances, mitigates this counterparty risk.
We may also be exposed to certain losses
in the event that counterparties to the derivative financial instruments are unable to meet the terms of the contracts. Our credit exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting
date. We manage this counterparty credit risk by entering into contracts with large established counterparties.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due. We continually monitor our actual and projected cash flows and believe that our internally generated
cash flows, combined with our revolving credit facilities, will provide us with sufficient funding to meet all working capital and financing needs for at least the next 12 months.
Critical Accounting Policies and Estimates
We believe our critical accounting policies are those related to revenue recognition, inventory valuation and purchase
commitments, product warranty costs, income taxes, restructuring costs and legal and other contingencies. We consider these policies critical because they are both important to the portrayal of our financial condition and operating results, and they
require us to make judgments and estimates about inherently uncertain matters.
The preparation of financial
statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base estimates on historical
experience and assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such
differences may be material.
Our companys critical accounting policies and estimates used in the
preparation of our financial statements are reviewed regularly by management and have not changed from those disclosed in the March 31, 2015 audited consolidated financial statements, except as disclosed in Note 1-Basis of presentation and
significant accounting policies in the unaudited interim consolidated financial statements for the three and six months ended September 30, 2015.
Recently Issued Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard which will supersede existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that
requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded
disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted prior to
fiscal periods beginning after December 15, 2016. The new standard will be effective for us beginning April 1, 2018. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In April 2015, the FASB issued a new accounting standard update to simplify the presentation of debt issuance
costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In
August 2015, the FASB issued clarification that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. This
new guidance will be effective for us beginning April 1, 2016. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued a new accounting standard update on the topic of inventory. The amendments in this update
provide guidance on the subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value for entities using the first-in, first-out or the average cost method. The amendments in this update are
effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The standard should be applied prospectively with earlier application permitted as of the beginning of the interim or annual
reporting period. This new guidance will be effective for us beginning April 1, 2017. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
Interim
Consolidated Financial Statements of
SMART Technologies Inc.
Three and six months ended September 30, 2015 and 2014
SMART Technologies Inc.
Consolidated Statements of Operations (unaudited)
(thousands of U.S. dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Revenue |
|
$ |
103,577 |
|
|
$ |
129,194 |
|
|
$ |
202,314 |
|
|
$ |
266,693 |
|
Cost of sales |
|
|
66,107 |
|
|
|
66,699 |
|
|
|
128,594 |
|
|
|
141,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
37,470 |
|
|
|
62,495 |
|
|
|
73,720 |
|
|
|
125,389 |
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, marketing and administration |
|
|
22,334 |
|
|
|
25,190 |
|
|
|
47,125 |
|
|
|
53,234 |
|
Research and development |
|
|
9,442 |
|
|
|
9,995 |
|
|
|
20,580 |
|
|
|
22,747 |
|
Depreciation and amortization |
|
|
2,313 |
|
|
|
2,928 |
|
|
|
4,783 |
|
|
|
6,006 |
|
Restructuring costs |
|
|
723 |
|
|
|
8 |
|
|
|
934 |
|
|
|
2,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,812 |
|
|
|
38,121 |
|
|
|
73,422 |
|
|
|
84,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,658 |
|
|
|
24,374 |
|
|
|
298 |
|
|
|
41,107 |
|
|
|
|
|
|
Non-operating expenses (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
4,662 |
|
|
|
5,115 |
|
|
|
9,344 |
|
|
|
10,179 |
|
Foreign exchange loss |
|
|
7,130 |
|
|
|
4,608 |
|
|
|
5,164 |
|
|
|
22 |
|
Other income |
|
|
(9 |
) |
|
|
(40 |
) |
|
|
(131 |
) |
|
|
(591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,783 |
|
|
|
9,683 |
|
|
|
14,377 |
|
|
|
9,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(9,125 |
) |
|
|
14,691 |
|
|
|
(14,079 |
) |
|
|
31,497 |
|
Income tax (recovery) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
648 |
|
|
|
(920 |
) |
|
|
1,059 |
|
|
|
(920 |
) |
Deferred |
|
|
(729 |
) |
|
|
3,325 |
|
|
|
(3,887 |
) |
|
|
7,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
2,405 |
|
|
|
(2,828 |
) |
|
|
7,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,044 |
) |
|
$ |
12,286 |
|
|
$ |
(11,251 |
) |
|
$ |
24,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.20 |
|
Diluted |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.19 |
|
See accompanying notes to
consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Comprehensive (Loss) Income (unaudited)
(thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net (loss) income |
|
$ |
(9,044 |
) |
|
$ |
12,286 |
|
|
$ |
(11,251 |
) |
|
$ |
24,420 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on translation of consolidated financial statements to U.S. dollar reporting currency |
|
|
(32 |
) |
|
|
378 |
|
|
|
174 |
|
|
|
(491 |
) |
Unrealized gains on translation of foreign subsidiaries to Canadian dollar functional currency, net of income taxes of $(14) and
$139 for the three and six months ended September 30, 2015 (2014$273 and $357 for the three and six months ended September 30, 2014) |
|
|
1,913 |
|
|
|
2,064 |
|
|
|
1,158 |
|
|
|
817 |
|
Reclassification of cumulative currency translation adjustments relating to liquidated subsidiary to Other income, net of income
taxes of $0 for the six months ended September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,881 |
|
|
|
2,442 |
|
|
|
1,332 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(7,163 |
) |
|
$ |
14,728 |
|
|
$ |
(9,919 |
) |
|
$ |
24,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars, except number of shares)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
March 31, 2015 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
31,117 |
|
|
$ |
54,465 |
|
Trade receivables, net of allowance of $3,339 and $4,392 |
|
|
65,027 |
|
|
|
61,584 |
|
Income taxes recoverable |
|
|
7,629 |
|
|
|
7,432 |
|
Inventory |
|
|
86,111 |
|
|
|
51,638 |
|
Deferred income taxes |
|
|
9,969 |
|
|
|
8,052 |
|
Other current assets |
|
|
6,479 |
|
|
|
6,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
206,332 |
|
|
|
189,637 |
|
|
|
|
Property and equipment |
|
|
47,377 |
|
|
|
54,745 |
|
Deferred income taxes |
|
|
9,284 |
|
|
|
8,304 |
|
Deferred financing fees |
|
|
1,895 |
|
|
|
2,462 |
|
Other long-term assets |
|
|
541 |
|
|
|
603 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,429 |
|
|
$ |
255,751 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
37,779 |
|
|
$ |
18,678 |
|
Accrued and other current liabilities |
|
|
42,476 |
|
|
|
44,340 |
|
Deferred revenue |
|
|
15,135 |
|
|
|
13,134 |
|
Current portion of capital lease obligation |
|
|
1,077 |
|
|
|
1,103 |
|
Current portion of long-term debt |
|
|
11,719 |
|
|
|
10,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
108,186 |
|
|
|
87,411 |
|
|
|
|
Long-term debt |
|
|
95,886 |
|
|
|
96,342 |
|
Capital lease obligation |
|
|
50,283 |
|
|
|
53,818 |
|
Deferred revenue |
|
|
13,484 |
|
|
|
11,787 |
|
Other long-term liabilities |
|
|
695 |
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
268,534 |
|
|
|
250,296 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders (deficit) equity |
|
|
|
|
|
|
|
|
Share capital |
|
|
|
|
|
|
|
|
Common sharesno par value; unlimited shares authorized; outstanding 122,429,920 and 122,190,913 |
|
|
696,488 |
|
|
|
696,151 |
|
Treasury sharesoutstanding 410,502 |
|
|
(840 |
) |
|
|
(840 |
) |
Accumulated other comprehensive income |
|
|
4,004 |
|
|
|
2,672 |
|
Additional paid-in capital |
|
|
49,652 |
|
|
|
48,630 |
|
Accumulated deficit |
|
|
(752,409 |
) |
|
|
(741,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(3,105 |
) |
|
|
5,455 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,429 |
|
|
$ |
255,751 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Shareholders Deficit (unaudited)
(thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, |
|
|
|
2015
|
|
|
2014
|
|
Share capital stated amount |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
695,311 |
|
|
$ |
694,041 |
|
Participant Equity Loan Plan |
|
|
25 |
|
|
|
175 |
|
Shares issued under stock plans |
|
|
312 |
|
|
|
755 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
695,648 |
|
|
|
694,971 |
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
2,672 |
|
|
|
(1,464 |
) |
Other comprehensive income (loss) |
|
|
1,332 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
4,004 |
|
|
|
(1,560 |
) |
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
48,630 |
|
|
|
43,738 |
|
Stock-based compensation expense |
|
|
1,334 |
|
|
|
1,884 |
|
Shares issued under stock plans |
|
|
(312 |
) |
|
|
(736 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
49,652 |
|
|
|
44,886 |
|
|
|
|
Accumulated deficit |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(741,158 |
) |
|
|
(765,286 |
) |
Net (loss) income |
|
|
(11,251 |
) |
|
|
24,420 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
(752,409 |
) |
|
|
(740,866 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders deficit |
|
$ |
(3,105 |
) |
|
$ |
(2,569 |
) |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, |
|
|
|
2015
|
|
|
2014
|
|
Cash (used in) provided by |
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(11,251 |
) |
|
$ |
24,420 |
|
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,709 |
|
|
|
8,811 |
|
Amortization of deferred financing fees |
|
|
456 |
|
|
|
536 |
|
Amortization of long-term debt discount |
|
|
798 |
|
|
|
539 |
|
Stock-based compensation expense |
|
|
1,334 |
|
|
|
1,884 |
|
Unrealized loss (gain) on foreign exchange |
|
|
4,238 |
|
|
|
(2,223 |
) |
Deferred income tax (recovery) expense |
|
|
(3,887 |
) |
|
|
7,997 |
|
Gain on liquidation of foreign subsidiary |
|
|
|
|
|
|
(422 |
) |
Other |
|
|
(12 |
) |
|
|
4 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
|
(3,501 |
) |
|
|
15,813 |
|
Inventory |
|
|
(39,929 |
) |
|
|
14,696 |
|
Other current assets |
|
|
(942 |
) |
|
|
1,485 |
|
Income taxes recoverable |
|
|
(935 |
) |
|
|
(4,561 |
) |
Accounts payable, accrued and other current liabilities |
|
|
20,584 |
|
|
|
(34,101 |
) |
Deferred revenue |
|
|
5,317 |
|
|
|
(25,120 |
) |
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities |
|
|
(21,021 |
) |
|
|
9,758 |
|
|
|
|
Investing |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,103 |
) |
|
|
(4,147 |
) |
Proceeds from sale of long-lived assets |
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(2,103 |
) |
|
|
(4,032 |
) |
|
|
|
Financing |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
5,000 |
|
|
|
5,000 |
|
Repayment of long-term debt |
|
|
(4,688 |
) |
|
|
(9,688 |
) |
Repayment of capital lease obligation |
|
|
(543 |
) |
|
|
(591 |
) |
Participant Equity Loan Plan |
|
|
24 |
|
|
|
177 |
|
Other |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(207 |
) |
|
|
(5,095 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(17 |
) |
|
|
(618 |
) |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(23,348 |
) |
|
|
13 |
|
Cash and cash equivalents, beginning of period |
|
|
54,465 |
|
|
|
58,146 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
31,117 |
|
|
$ |
58,159 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents are comprised as follows |
|
|
|
|
|
|
|
|
Cash |
|
$ |
26,403 |
|
|
$ |
37,894 |
|
Cash equivalents |
|
|
4,714 |
|
|
|
20,265 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,117 |
|
|
$ |
58,159 |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
7,140 |
|
|
$ |
7,744 |
|
Income taxes paid |
|
$ |
554 |
|
|
$ |
5,870 |
|
Amount of non-cash capital expenditures in current liabilities |
|
$ |
142 |
|
|
$ |
102 |
|
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
1. Basis of
presentation and significant accounting policies
The unaudited interim consolidated financial statements
of SMART Technologies Inc. (the Company) have been prepared by management in accordance with accounting principles generally accepted in the United States of America (GAAP) applied on a basis consistent with those disclosed
in our annual audited consolidated financial statements except as discussed below. They do not include all the disclosures required by GAAP for annual financial statements and should be read in conjunction with the Companys audited
consolidated financial statements for the year ended March 31, 2015, which have been prepared in accordance with GAAP. All normal recurring adjustments considered necessary for fair presentation have been included in these financial statements.
(a) Revenue recognition for arrangements with multiple deliverables
In the year ended March 31, 2014, the Company decreased the period over which deferred revenue for technical support
services and unspecified software upgrades is amortized. The Company determined that this adjustment was a change in accounting estimate and accounted for the change prospectively commencing from September 24, 2013. The Company concluded that
the support period for these sales ended on March 31, 2015. Therefore, there is no continuing impact on operating income and net income subsequent to March 31, 2015. For the three months ended September 30, 2014 the effect of this
change on operating income and net income was an increase of $9,870 and $7,402, respectively and the impact on earnings per share was an increase of $0.06 on a basic and diluted basis. For the six months ended September 30, 2014 the effect of
this change on operating income and net income was an increase of $19,717 and $14,788, respectively and the impact on earnings per share was an increase of $0.12 on a basic and diluted basis.
(b) Recent accounting guidance not yet adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition
standard which will supersede existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances.
The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate
performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning
after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted prior to fiscal periods beginning after December 15, 2016. The new standard will be effective for the
Company beginning April 1, 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In April 2015, the FASB issued a new accounting standard update to simplify the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued clarification that debt issuance costs related to line-of-credit
arrangements could be presented as an asset and amortized, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments are effective for annual reporting periods beginning after December 15,
2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. This new guidance will be effective for the Company beginning April 1, 2016. The adoption
of this standard is not expected to have a material impact on the Companys consolidated financial statements.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
In July 2015, the FASB issued a new accounting standard update on the
topic of inventory. The amendments in this update provide guidance on the subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value for entities using the first-in, first-out or the average
cost method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The standard should be applied prospectively with earlier application permitted as
of the beginning of the interim or annual reporting period. This new guidance will be effective for the Company beginning April 1, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
2. Restructuring costs
(a) Fiscal 2015 March restructuring
At the end of fiscal
2015, the Company completed a reorganization which merged the existing Education and Enterprise segments, effective April 1, 2015. Certain functions that were previously distinct to the Education and Enterprise segments were centralized at the
corporate level. The restructuring plan included outsourcing of the Companys information technology function. The restructuring plan was substantially completed as at September 30, 2015.
Changes in the accrued restructuring obligation associated with the fiscal 2015 March restructuring activities were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2015 |
|
|
|
Employee Termination Costs |
|
|
Other Restructuring Costs |
|
|
Total |
|
Balance at beginning of period |
|
$ |
4,066 |
|
|
$ |
31 |
|
|
$ |
4,097 |
|
Restructuring costs paid |
|
|
(3,143 |
) |
|
|
(31 |
) |
|
|
(3,174 |
) |
Currency translation adjustment |
|
|
(50 |
) |
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
873 |
|
|
$ |
|
|
|
$ |
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2015, the accrued fiscal 2015 March restructuring obligation
of $873 (March 31, 2015$4,097) was included in accrued and other current liabilities.
(b) Other
restructuring
Other restructuring activities undertaken from fiscal 2012 to 2015 included the closure of the
Ottawa business location, the exit of the optical touch sensor business for desktop displays and restructuring of NextWindow, increased focus on target markets, streamlined corporate support functions and cost reductions, the transfer of interactive
display assembly operations to contract manufacturers and a change in business focus for specific regions including movement to a leaner organizational structure with additional reliance placed on key channel partners. These restructuring plans were
substantially completed as at September 30, 2015.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
Changes in the accrued restructuring obligation associated with the
other restructuring activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2015 |
|
|
|
Employee Termination Costs |
|
|
Facilities Costs |
|
|
Total |
|
Balance at beginning of period |
|
$ |
1,053 |
|
|
$ |
217 |
|
|
$ |
1,270 |
|
Restructuring costs paid |
|
|
(281 |
) |
|
|
|
|
|
|
(281 |
) |
Adjustments |
|
|
(25 |
) |
|
|
959 |
|
|
|
934 |
|
Currency translation adjustment |
|
|
(35 |
) |
|
|
(61 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
712 |
|
|
$ |
1,115 |
|
|
$ |
1,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, 2014 |
|
|
|
Employee Termination Costs |
|
|
Facilities Costs |
|
|
Other Restructuring Costs |
|
|
Total |
|
Balance at beginning of period |
|
$ |
5,191 |
|
|
$ |
4,129 |
|
|
$ |
|
|
|
$ |
9,320 |
|
Restructuring costs incurred |
|
|
1,942 |
|
|
|
|
|
|
|
781 |
|
|
|
2,723 |
|
Restructuring costs paid |
|
|
(3,300 |
) |
|
|
(4,043 |
) |
|
|
(333 |
) |
|
|
(7,676 |
) |
Adjustments |
|
|
(320 |
) |
|
|
24 |
|
|
|
(140 |
) |
|
|
(436 |
) |
Accretion expense |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Currency translation adjustment |
|
|
36 |
|
|
|
70 |
|
|
|
(9 |
) |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,549 |
|
|
$ |
188 |
|
|
$ |
299 |
|
|
$ |
4,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first six months of fiscal 2016, the Company recorded additional restructuring
costs related to the cancellation of an office lease.
At September 30, 2015, the Company has incurred
total restructuring costs of $42,715 since the commencement of the other restructuring activities discussed above, comprised of employee termination benefits of $27,552, facilities costs of $12,651 and other restructuring costs of $2,512.
At September 30, 2015, $1,827 (March 31, 2015 $1,113) of the accrued other restructuring
obligation was included in accrued and other current liabilities.
3. Inventory
The components of inventory were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
March 31, 2015 |
|
Finished goods |
|
$ |
86,273 |
|
|
$ |
54,318 |
|
Raw materials |
|
|
3,431 |
|
|
|
803 |
|
Provision for obsolescence |
|
|
(3,593 |
) |
|
|
(3,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
86,111 |
|
|
$ |
51,638 |
|
|
|
|
|
|
|
|
|
|
The provision for obsolescence is related to finished goods and raw materials inventory.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
4. Property and equipment
The components of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
March 31, 2015 |
|
Cost |
|
|
|
|
|
|
|
|
Asset under capital lease, net of deferred gain |
|
$ |
43,763 |
|
|
$ |
46,030 |
|
Information systems, hardware and software |
|
|
53,269 |
|
|
|
56,054 |
|
Assembly equipment, furniture, fixtures and other |
|
|
23,148 |
|
|
|
28,780 |
|
Assets under development |
|
|
203 |
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
120,383 |
|
|
$ |
131,946 |
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
|
|
Asset under capital lease, net of deferred gain |
|
$ |
6,471 |
|
|
$ |
5,424 |
|
Information systems, hardware and software |
|
|
48,207 |
|
|
|
48,741 |
|
Assembly equipment, furniture, fixtures and other |
|
|
18,328 |
|
|
|
23,036 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73,006 |
|
|
$ |
77,201 |
|
Net book value |
|
|
|
|
|
|
|
|
Asset under capital lease, net of deferred gain |
|
$ |
37,292 |
|
|
$ |
40,606 |
|
Information systems, hardware and software |
|
|
5,062 |
|
|
|
7,313 |
|
Assembly equipment, furniture, fixtures and other |
|
|
4,820 |
|
|
|
5,744 |
|
Assets under development |
|
|
203 |
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,377 |
|
|
$ |
54,745 |
|
|
|
|
|
|
|
|
|
|
5. Accrued and other current liabilities
The components of accrued and other current liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
March 31, 2015 |
|
Product warranty |
|
$ |
11,184 |
|
|
$ |
11,448 |
|
Accrued compensation and employee benefits |
|
|
7,419 |
|
|
|
8,418 |
|
Accrued restructuring liabilities |
|
|
2,700 |
|
|
|
5,210 |
|
Other current liabilities |
|
|
21,173 |
|
|
|
19,264 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,476 |
|
|
$ |
44,340 |
|
|
|
|
|
|
|
|
|
|
6. Product warranty
Changes in the product warranty obligation, which is included in accrued and other current liabilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Balance at beginning of period |
|
$ |
11,555 |
|
|
$ |
18,539 |
|
|
$ |
11,448 |
|
|
$ |
17,775 |
|
Actual warranty costs incurred |
|
|
(1,433 |
) |
|
|
(2,052 |
) |
|
|
(3,566 |
) |
|
|
(4,017 |
) |
Warranty provision |
|
|
1,951 |
|
|
|
2,126 |
|
|
|
3,930 |
|
|
|
4,230 |
|
Currency translation adjustment |
|
|
(889 |
) |
|
|
(788 |
) |
|
|
(628 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
11,184 |
|
|
$ |
17,825 |
|
|
$ |
11,184 |
|
|
$ |
17,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
7. Long-term debt
The components of long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
March 31, 2015 |
|
Term loan |
|
$ |
106,250 |
|
|
$ |
110,938 |
|
Unamortized debt discount |
|
|
(3,645 |
) |
|
|
(4,440 |
) |
Current portion of long-term debt |
|
|
(11,719 |
) |
|
|
(10,156 |
) |
Asset-based loan |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
95,886 |
|
|
$ |
96,342 |
|
|
|
|
|
|
|
|
|
|
All debt and credit facilities are U.S. dollar denominated facilities.
The Term loan matures on January 31, 2018 and currently bears interest at LIBOR plus 9.25% with a LIBOR floor of
1.25%. The Company also has a $50,000 asset-based loan credit facility (the ABL) that bears interest at LIBOR plus 2.5%. The ABL matures on July 31, 2017 and $5,000 was drawn as of September 30, 2015. The Company has an
outstanding standby letter of credit totaling $1,000 at September 30, 2015 (March 31, 2015$1,000), which reduces the amount available under the ABL.
8. Share capital
The Companys authorized share
capital consists of an unlimited number of Common Shares and an unlimited number of Preferred Shares issuable in series.
The share capital activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
Stated amount |
|
|
Shares outstanding |
|
Common Shares |
|
|
|
|
|
|
|
|
Balance, March 31, 2015 |
|
$ |
696,151 |
|
|
|
122,190,913 |
|
Participant Equity Loan Plan |
|
|
25 |
|
|
|
|
|
Shares issued under stock plan |
|
|
312 |
|
|
|
239,007 |
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015 |
|
$ |
696,488 |
|
|
|
122,429,920 |
|
Treasury Shares |
|
|
|
|
|
|
|
|
Balance, March 31, 2015 |
|
$ |
(840 |
) |
|
|
(410,502 |
) |
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015 |
|
$ |
(840 |
) |
|
|
(410,502 |
) |
|
|
|
|
|
|
|
|
|
Total share capital |
|
$ |
695,648 |
|
|
|
122,019,418 |
|
|
|
|
|
|
|
|
|
|
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
9. Income taxes
Income tax (recovery) expense differs from the amount that would be computed by applying the combined Canadian federal and
provincial statutory income tax rates to (loss) income before income taxes.
The reasons for these differences
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
(Loss) income before income taxes |
|
$ |
(14,079 |
) |
|
$ |
31,497 |
|
Combined tax rate |
|
|
26.50 |
% |
|
|
25.00 |
% |
|
|
|
|
|
|
|
|
|
Expected income tax (recovery) expense |
|
$ |
(3,731 |
) |
|
$ |
7,874 |
|
Adjustments |
|
|
|
|
|
|
|
|
Non-deductible, non-taxable items |
|
|
1,128 |
|
|
|
795 |
|
Variation in foreign tax rates |
|
|
(955 |
) |
|
|
938 |
|
Change in valuation allowance |
|
|
1,369 |
|
|
|
(1,301 |
) |
Investment tax credits |
|
|
(806 |
) |
|
|
(1,683 |
) |
Other |
|
|
167 |
|
|
|
454 |
|
|
|
|
|
|
|
|
|
|
Income tax (recovery) expense |
|
$ |
(2,828 |
) |
|
$ |
7,077 |
|
|
|
|
|
|
|
|
|
|
The Company and its Canadian subsidiaries file federal and provincial income tax returns
in Canada, its U.S. subsidiaries file federal and state income tax returns in the U.S. and its other foreign subsidiaries file income tax returns in their respective foreign jurisdictions. The Company and its subsidiaries are generally no longer
subject to income tax examinations by tax authorities for years before March 31, 2007. Tax authorities in various jurisdictions are conducting examinations of local tax returns for various taxation years ending after March 31, 2007.
Notwithstanding managements belief in the merit of the Companys tax filing position, it is possible that the final outcome of any audits by taxation authorities may differ from estimates and assumptions used in determining the
Companys consolidated tax provision and accruals, which could result in a material effect on the consolidated income tax provision and the net income for the period in which such determinations are made.
The Company does not recognize tax benefits associated with uncertain tax positions unless the position is more likely
than not to be sustained upon examination.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
10. (Loss) earnings per share amounts
Basic (loss) earnings per share is computed based on the weighted average number of Common shares outstanding during the
period. Diluted (loss) earnings per share is computed based on the weighted average number of Common shares plus the effect of dilutive potential Common shares outstanding during the period using the treasury stock method. Dilutive potential Common
shares include outstanding stock options, deferred share units and restricted share units.
The components of
basic and diluted earnings per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months
ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net (loss) income available for common shareholders |
|
$ |
(9,044 |
) |
|
$ |
12,286 |
|
|
$ |
(11,251 |
) |
|
$ |
24,420 |
|
Weighted-average shares outstanding |
|
|
122,019,418 |
|
|
|
121,592,503 |
|
|
|
121,923,927 |
|
|
|
121,443,284 |
|
Effect of dilutive securities |
|
|
|
|
|
|
5,136,797 |
|
|
|
|
|
|
|
5,430,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares |
|
|
122,019,418 |
|
|
|
126,729,300 |
|
|
|
121,923,927 |
|
|
|
126,873,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.20 |
|
Diluted (loss) earnings per share |
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
|
$ |
(0.09 |
) |
|
$ |
0.19 |
|
No dilutive securities were included in the diluted earnings per share calculation for
the three and six months ended September 30, 2015 due to net losses reported. Anti-dilutive securities excluded from the calculations of diluted earnings per share were 95,251 and 444,772 for the three and six months ended
September 30, 2014.
11. Commitments and contingencies
In the normal course of business, the Company enters into guarantees that provide indemnification and guarantees to
counterparties to secure sales agreements and purchase commitments. It is not anticipated that the Company would suffer a material loss in the event that it is required to honor these guarantees.
12. Segment disclosure
Effective April 1, 2015, the Company completed a reorganization which merged the existing Education and Enterprise sales and customer service teams into the new Solutions business unit, and
established separate sales and customer service teams dedicated to the Companys new line of products in the kapp business unit. Certain functions that were previously distinct to the individual Education and Enterprise segments were
centralized at the corporate level. As a result of only the sales and customer service teams being dedicated to a specific business unit, no discreet financial information is available on a business unit basis. The existing NextWindow segment no
longer earns revenue or incurs expenses as it enters the final stage of its wind down. Therefore, the Company no longer has individual business units that meet the criteria of an operating segment, and is now organized and managed as a single
reportable operating segment.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
Revenue information relating to the geographic locations in which the
Company sells products, classified by the billing addresses of our customers, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Six months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
57,081 |
|
|
$ |
70,350 |
|
|
$ |
121,143 |
|
|
$ |
144,822 |
|
Canada |
|
|
3,595 |
|
|
|
8,814 |
|
|
|
11,472 |
|
|
|
21,069 |
|
Europe, Middle East and Africa |
|
|
35,323 |
|
|
|
36,059 |
|
|
|
59,971 |
|
|
|
68,689 |
|
Rest of World |
|
|
7,578 |
|
|
|
13,971 |
|
|
|
9,728 |
|
|
|
32,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,577 |
|
|
$ |
129,194 |
|
|
$ |
202,314 |
|
|
$ |
266,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2015, two customers accounted for 15% and
17% of revenue, respectively. For the six months ended September 30, 2015, the same two customers accounted for 12% and 15% of revenue, respectively. For the three and six months ended September 30, 2014, no individual customer accounted
for more than 10% of revenue.
13. Financial instruments
The Companys financial instruments consist of foreign exchange and interest rate derivative instruments and other
financial instruments including cash and cash equivalents, trade receivables, accounts payable, accrued and other current liabilities, the capital lease obligation and long-term debt.
The Company uses derivatives to partially offset its exposure to foreign exchange risk and interest rate risk. The
Company enters into derivative transactions with high credit quality counterparties and, by policy, seeks to limit the amount of credit exposure to any one counterparty based on an analysis of the counterpartys relative credit standing. The
Company does not use derivative financial instruments for trading or speculative purposes.
(a) Foreign
exchange rate risk
Foreign exchange rate risk is the risk that fluctuations in foreign exchange rates could
impact the Company. The Company operates globally and is exposed to significant foreign exchange risk, primarily between the Canadian dollar and both the U.S. dollar (USD), and the Euro (EUR). This exposure relates to our
U.S. dollar-denominated debt, the sale of our products to customers globally and purchases of goods and services in foreign currencies. The Company seeks to manage its foreign exchange risk by monitoring foreign exchange rates, forecasting its
net foreign currency cash flows and periodically entering into forward contracts and other derivative contracts to convert a portion of its forecasted foreign currency denominated cash flows into Canadian dollars for the purpose of paying Canadian
dollar denominated operating costs. The Company may also enter into forward contracts and other derivative contracts to manage its cash flows in other currencies.
These programs reduce but do not entirely eliminate the impact of currency exchange movements. The Company currently does
not apply hedge accounting to its currency derivatives. The maturity of these instruments occurs within 12 months. Gains or losses resulting from the fair valuing of these instruments are reported in foreign exchange loss in the consolidated
statements of operations.
(b) Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will be affected by changes in market interest
rates. The Companys financing includes long-term debt and revolving credit facilities that bear interest
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
based on floating market rates. Changes in these rates result in fluctuations in the required cash flows to service this debt. The Company partially mitigates this risk by periodically entering
into interest rate swap agreements to fix the interest rate on certain long-term variable-rate debt. The Company currently does not apply hedge accounting to its interest rate derivatives. Changes in the fair value of these interest rate derivatives
are included in interest expense in the consolidated statements of operations.
(c) Credit risk
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations,
resulting in a financial loss to the Company.
The Company sells hardware and software to a diverse customer
base over a global geographic area. The Company evaluates collectability of specific customer receivables based on a variety of factors as described in Note 1(e) to the audited consolidated financial statements for the year ended March 31,
2015. The geographic diversity of the customer base, combined with the Companys established credit approval practices and ongoing monitoring of customer receivables balances, partially mitigates this counterparty risk.
Fair value measurements
Accounting Standards Codification (ASC) 820 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-tier fair value hierarchy, which prioritizes the inputs in the valuation methodologies in measuring fair
value:
Level 1Unadjusted quoted prices at the measurement date for identical assets or
liabilities in active markets.
Level 2Observable inputs other than quoted market prices
included in level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active or inputs that are observable or can be corroborated by observable market
data.
Level 3Significant unobservable inputs which are supported by little or no market
activity and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following table presents the Companys assets and liabilities that are measured at fair value on a recurring
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
4,714 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,714 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
|
|
|
$ |
1,822 |
|
|
$ |
|
|
|
$ |
1,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
1,822 |
|
|
$ |
|
|
|
$ |
1,822 |
|
|
|
|
|
|
|
|
|
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SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
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March 31, 2015 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets |
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Money market funds |
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$ |
27,873 |
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$ |
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$ |
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$ |
27,873 |
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Derivative instruments |
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639 |
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639 |
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Total assets |
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$ |
27,873 |
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$ |
639 |
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$ |
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$ |
28,512 |
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Liabilities |
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Derivative instruments |
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$ |
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$ |
927 |
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$ |
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$ |
927 |
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Total liabilities |
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$ |
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$ |
927 |
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$ |
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$ |
927 |
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(a) Derivative contracts
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September 30, 2015 |
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Fair value |
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Contract expiry |
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Rates |
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Notional amounts of quantity |
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Buy/Sell |
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Foreign exchange forward derivative contracts |
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$ |
(660 |
) |
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Oct 2015 to Jun 2016 |
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1.1698 - 1.2949 |
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USD 12,000 |
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Sell |
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(650 |
) |
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Oct 2015 to Jun 2016 |
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1.3762 - 1.4478 |
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EUR 12,000 |
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Sell |
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(512 |
) |
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Oct 2015 to Mar 2016 |
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1.7906 - 1.8670 |
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GBP 4,000 |
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Sell |
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$ |
(1,822 |
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March 31, 2015 |
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Fair value |
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Contract expiry |
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Rates |
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Notional amounts of quantity |
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Buy/Sell |
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Foreign exchange forward derivative contracts |
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$ |
(607 |
) |
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Apr 2015 to Nov 2015 |
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1.1294 - 1.2152 |
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USD 7,000 |
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Sell |
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639 |
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Apr 2015 to Dec 2015 |
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1.4010 - 1.4938 |
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EUR 20,000 |
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Sell |
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(320 |
) |
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Apr 2015 to Nov 2015 |
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1.7906 - 1.8354 |
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GBP 5,500 |
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Sell |
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$ |
(288 |
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The Company enters into foreign exchange forward derivative contracts to economically
hedge its risks in the movement of foreign currencies against the Companys functional currency of the Canadian dollar. The fair value of foreign exchange derivative contracts of nil is included in other current assets at September 30,
2015 (March 31, 2015 $639). The fair value of foreign exchange derivative contracts of $1,822 is included in accrued and other current liabilities at September 30, 2015 (March 31, 2015 $927). Changes in the fair value of these
contracts are included in foreign exchange loss. The Company recorded a loss of $1,762 and a gain of $372 for the three months ended September 30, 2015 and 2014, respectively, and a loss of $2,471 and a gain of $2,032 for the six months ended
September 30, 2015 and 2014, respectively, under these contracts.
The estimated fair values of foreign
exchange and interest rate derivative contracts are derived using complex financial models with inputs such as benchmark yields, time to maturity, reported trades, broker/dealer quotes, issuer spreads and discount rates.
Considerable judgment is required in developing the estimates of fair value. Therefore, estimates are not necessarily
indicative of the amounts the Company could expect to realize in a liquidation or unwinding of an existing contract.
(b) Long-term debt
The estimated fair value of the Companys
long-term debt has been determined based on current market conditions by discounting future cash flows under current financing arrangements at borrowing rates believed to be available to the Company for debt with similar terms and remaining
maturities.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three and six months ended September 30, 2015 and 2014
The fair value of debt was measured utilizing Level 3 inputs. The Level
3 fair value measurements utilize a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms and benchmark forward yield curves and other inputs such as a discount rate that is intended to represent our
credit risk for secured or unsecured obligations. The Company estimates its credit risk based on the corporate credit rating and the credit rating on its variable-rate long-term debt and utilizes benchmark yield curves that are widely used in the
financial industry.
The carrying value and fair value of the Companys long-term debt are as follows:
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September 30, 2015 |
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March 31, 2015 |
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Carrying value |
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Fair value |
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Carrying value |
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Fair value |
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Variable-rate long-term debt, excluding debt discount |
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$ |
106,250 |
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$ |
104,809 |
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$ |
110,938 |
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$ |
111,424 |
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(c) Other financial assets and liabilities
The fair values of cash and cash equivalents, trade receivables, accounts payable and accrued and other current
liabilities approximate their carrying amounts due to the short-term maturity of these instruments. A portion of these items are denominated in currencies other than the Canadian dollar functional currency of the Company including the U.S. dollar,
Euro and British pound sterling and are translated at the exchange rate in effect at the balance sheet date.
14. Comparative figures
Certain reclassifications have been made to prior periods figures to conform to the current
periods presentation.
15. Subsequent events
On October 9, 2015, the Company announced cost reduction initiatives as a result of its financial outlook update and
strategic review. The Company is expected to incur restructuring costs of approximately $4 million, all of which are related to employee terminations. The initiatives are expected to be substantially completed in the third quarter of fiscal 2016.
Exhibit 99.3
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14 (a)
of the Securities Exchange Act of 1934
CERTIFICATION
I, Neil Gaydon, certify that:
1) |
I have reviewed the interim financial statements and interim MD&A (together, the quarterly report) of SMART Technologies Inc. for
the second quarter ending September 30, 2015; |
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the issuer as of, and for, the period presented in this report; |
4) |
The issuers other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the issuer and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c) |
Evaluated the effectiveness of the issuers disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the issuers internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting; and |
5) |
The issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the issuers auditors and the audit committee of issuers board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the issuers ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant |
role in the issuers internal control over financial reporting.
Dated this 5th day of November, 2015.
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By: |
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/s/ Neil Gaydon |
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Neil Gaydon President & Chief Executive Officer |
Exhibit 99.4
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14 (a)
of the Securities Exchange Act of 1934
CERTIFICATION
I, Steve Winkelmann, certify that:
1) |
I have reviewed the interim financial statements and interim MD&A (together, the quarterly report) of SMART Technologies Inc. for
the second quarter ending September 30, 2015; |
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the issuer as of, and for, the period presented in this report; |
4) |
The issuers other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the issuer and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c) |
Evaluated the effectiveness of the issuers disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the issuers internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting; and |
5) |
The issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the issuers auditors and the audit committee of issuers board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the issuers ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuers internal control
over financial reporting. |
Dated this 5th day of November, 2015.
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By: |
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/s/ Steve Winkelmann |
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Steve Winkelmann Interim Vice President, Finance & Chief Financial Officer |
Smart Technologies Inc. (MM) (NASDAQ:SMT)
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