ANNUAL REPORT
2016
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
LETTER TO SHAREHOLDERS
Enclosed please find our 2016 Annual Report. We are extremely proud of our
achievements during the last year and believe our record results reflect the level
of excellence attained in all areas of our operations. We are extremely excited
about our prospects and the opportunities that we believe will present
themselves in 2017.
Our Omni-platform approach to lotteries paid significant dividends, with strong
sales of instant tickets combining with growth in a number of ancillary areas to
reach record revenue levels.
Our new press performance improved significantly during the year, but there
remains work to do to achieve the expected lower cost platform. The press is
producing high quality product and we are seeing incremental improvements in
our cost efficiencies each month as our experience grows.
Our iLottery operations remain the industry standard. Our Michigan ilottery
operation clearly illustrates that a properly run, market focused, responsible
gaming approach can be very successful, while still supporting growth in the
traditional bricks and mortar operations at the same time.
And our acquisition strategy continues to develop, with increased resources and
strong focus we are hoping the results of our efforts will come to fruition in the
near future.
Sales
2016 revenue reached record levels at over $246 million, an improvement of
11%. A number of factors led to the increase, including higher volumes of instant
tickets (generating $3.2 million in additional revenue), higher average selling
price reflecting higher sales of our high value proprietary products (increasing
revenue by $4.3 million) and improved sales of our ancillary products including
iLottery, digital and licensed games sales creating $6.5 million in additional
revenue. Charitable gaming sales were up $3.2 million through additional
volumes of vending machines and strong sales in pull tabs. The weaker
Canadian dollar impacted our revenue figures positively by $8.2 million.
Our expanding sales in our ancillary product lines, although still small relative to
our sales of instant tickets, is an important metric as we expand into providing
greater value added services to our lottery customers. Our continued focus on
innovation is highlighted through the robust sales of our value added products
such as our Scratch FX® premium products, which achieved record sales for a
second year in a row.
2016 witnessed increasing traction and interest in our lottery management
systems (including our SureTrack® information system), with a number of
installations achieved during the year. Lotteries are increasingly looking to
update and modernize their instant ticket information systems and our unique
stand-alone inventory tracking and distribution software is well positioned to drive
higher sales. We are investing additional resources in the next upgraded version
of SureTrack® and look forward to assisting more customers in the future.
Licensed game sales continue to play an important role with lotteries, providing a
unique game experience for their players. 2016 generated considerable interest
in a number of our arcade-based licenses such as Frogger and PacManTM and
our outlook for 2017 is very positive, including future sales relating to our
Corvette licensed products.
Iowa, Kentucky, Massachusetts, France,
Our contract portfolio remains very strong and is well-positioned to generate
higher sales volumes. Contract renewals were attained for a number of lotteries
including Florida,
Israel, Czech
Republic and Poland during 2016. In addition, new contracts were awarded with
existing clients whose contracts expired, including Kansas, Minnesota, Finland,
Sweden and two lotteries in Australia. A new 3-year contract with the Michigan
Lottery was initiated in early 2017 which continues our long standing,
collaborative partnership with an industry leading lottery.
Our Michigan iLottery joint venture continued to outpace the rest of the industry
for internet-based lottery operations. The ability to play draw based games was
added during the year and combined with the sale of instant tickets and Keno,
lottery players have embraced this platform as an important method of choice to
play lottery games. Our enhanced subscription service for the Virginia Lottery
started live operation in the fall of 2016 and has already exceeded the lottery`s
expectations. Marketed appropriately, we have seen digital and internet-based
sales augment lotteries revenue while at the same time assisting in strong growth
in sales of lottery products at traditional retail locations.
Operations
Gross margin increased approximately $5 million in absolute terms, reflecting the
growth in revenue discussed previously. Gross margin percentage remained
steady at 20%. The positive leverage of increased volume and higher selling
prices was mitigated by higher costs associated with the operation of the new
Tresu press. While producing large volumes of quality product, our new press
has not yet achieved the ultimate cost efficiencies we anticipate. However,
throughout 2016 we experienced steady improvement in key operating metrics
and we continue to see steady improvements. We are confident this trend will
continue steadily throughout 2017.
Administration and selling expenses increased 9% compared to 2015. Additional
investments have been made in a number of areas to support our ancillary digital
and lottery management services product lines. Included in our administration
category are a number of support activities including our technical and research
department as well as our large information technology group. These employees
are directly correlated to our manufacturing and production activities and are
critical in driving our innovation process.
One of the strengths of our business model is the generation of significant free
cash flow and 2016 was no exception. Cash flow from operations before CAPEX
and investments in working capital generated $28.6 million during the year,
compared to $22.5 million in 2015. After deducting our expenditures for CAPEX
and a large investment in non-cash working capital, our net financial positon
(interest bearing debt less cash) improved by approximately $3 million. As
working capital balances stabilize, combined with a continued low level of
CAPEX, we anticipate generating significant amounts of free cash flow. These
funds will provide the foundation to grow our business including through the
financing of acquisitions.
The Canadian dollar was slightly weaker during 2016 relative to both the U.S.
dollar and the Euro compared to 2015, which has a positive impact on our
operating results. Pollard has a net exposure to U.S. dollar cash inflows and a
weaker Canadian dollar does generate additional cash. Similarly we have a
number of European customers who pay in Euros so a weaker Canadian dollar
compared to the Euro has a positive impact. A weaker Canadian dollar also
assists us in bidding more aggressively for international contracts which helped
us during 2016.
We worked diligently during 2016 investigating opportunities to grow our
business through strategic alliances including acquisitions. We believe there
exists a number of actionable prospects to expand our business through the
addition of key resources to supplement and improve our product and service
options for our clients. We have been very cautious in our analysis and will only
consummate a transaction if the financial and business metrics exceed
appropriate internal hurdles.
Outlook for 2017
We expect 2017 to be another very good year for Pollard Banknote, building on
all the success achieved in 2016. The lottery industry remains very robust,
particularly in the instant ticket sector. Our existing contract portfolio provides us
a good foundation to grow along with our lottery customers. Additional
expansion of lotteries into ancillary areas such as loyalty clubs and digital
products provides growth opportunities for Pollard.
Our new press capacity will continue to provide the opportunity to grow our
production volumes and to do so in an improving cost structure environment.
iLottery operations are expected to grow and support our traditional core instant
ticket products. We will be actively monitoring and participating in the
development of iLottery opportunities in the U.S. and throughout the world. We
believe recent interest in iLottery operations has increased in a number of
American jurisdictions and we are cautiously optimistic we will see positive
developments in 2017.
All of the factors discussed above should result in very strong cash flow during
the year which can be used to further reduce our debt or provide a cornerstone
for funding acquisitions.
2016 was a very successful year for Pollard with growth in a number of areas
including higher sales, innovative product development and increased capacity.
These results could not have been achieved without the dedication of almost
1,200 passionate employees; over 60 loyal lottery customers and hundreds of
hard-working charitable gaming distributors; dozens of supportive suppliers and
vendors; our diligent board of directors and of course, our shareholders, who
have backed us for many years and continue to help provide the inspiration to
grow and expand the Pollard name in the lottery world.
We thank everyone for all your support and look forward to achieving even
greater success in 2017.
*****
On February 22, 2017, our Director, friend and mentor, Del Crewson, passed away.
Since our IPO in 2005, Del has been an integral part of Pollard`s success. His business
acumen, wisdom and insightful analysis were matched by his kindness, sense of humour
and passion for doing the right thing. Pollard is an appreciably better organization as a
result of Del`s contributions. He will be sorely missed.
Douglas Pollard
Co-Chief Executive Officer
John Pollard
Co-Chief Executive Officer
DIRECTORS OF POLLARD BANKNOTE LIMITED
Gordon Pollard
Executive Chair
Gordon Pollard joined Pollard Banknote in 1989 as Vice President, Marketing. He became
Co-Chief Executive Officer in 1997 and on May 1, 2011, was appointed Executive Chair of
the Board of Directors. Prior to 1989, he practiced law with a major Manitoba firm
specializing in corporate and securities law. Mr. Pollard has an LL.B. from the University of
Manitoba and a B.A. from the University of Winnipeg.
Jerry Gray
Jerry Gray is Dean Emeritus of the I. H. Asper School of Business at the University of
Manitoba where he also held the CA Manitoba Endowed Chair in Business Leadership. He is
a Past Chair of the Winnipeg Regional Health Authority and is a director and Chairman of
the Board of Gendis, Inc. He has consulted with many major corporations in the United
States and Canada in the areas of motivation, organizational design, manpower planning,
managing change, management development, incentive system design, customer service and
strategic planning.
Garry Leach
Garry Leach is the Chief Executive Officer of Mandak Capital Limited (an investment
corporation). From 1988 to 2004, Mr. Leach was President and Chief Executive Officer of
Gerdau MRM Steel (Manitoba Rolling Mills) and its predecessors. Mr. Leach has previously
served on the Board of Directors for Gerdau Ameristeel, GLM Industries, Manitoba Hydro,
the Canadian Steel Producers Association, (Ottawa), the Steel Manufacturers Association,
(Washington), as well as the Business Council of Manitoba. Mr. Leach also served as
Regent for the University of Winnipeg.
Douglas Pollard
Douglas Pollard is Co-Chief Executive Officer of Pollard Banknote. He joined Pollard
Banknote in 1997 as Vice President, Lottery Management Services and on May 1, 2011, he
was appointed Co-Chief Executive Officer. From 1997 to 1999 he was a director and the
General Manager of Imprimerie Spéciale de Banque, a subsidiary of Pollard Banknote based
in Paris, France. Prior
to 1997 Mr. Pollard was a Senior Consultant with
PricewaterhouseCoopers. Mr. Pollard has an M.B.A. from The Richard Ivey School of
Business at the University of Western Ontario and a B.A. from the University of Manitoba.
John Pollard
John Pollard is Co-Chief Executive Officer of Pollard Banknote. He joined Pollard Banknote
in 1986 as Vice President, Finance and became Co-Chief Executive Officer in 1997. Prior to
1986, he was an associate with the accounting firm Deloitte & Touche LLP. Mr. Pollard has
a B.Comm. from the University of Manitoba, and is a former member of the Institute of
Chartered Accountants of Manitoba.
December 31, 2016
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
March 13, 2017
This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2016, is prepared as at March 13, 2017, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2016.
Results are reported in Canadian dollars and have been prepared in accordance with International
Financial Reporting Standards (“GAAP” or “IFRS”).
Forward-Looking Statements
Certain statements in this report may constitute “forward-looking” statements which involve known and
unknown risks, uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed
or implied by such forward looking statements. When used in this document, such statements include
such words as “may,” “will,” “expect,” “believe,” “plan” and other similar terminology. These statements
reflect management’s current expectations regarding future events and operating performance and speak
only as of the date of this document. There should not be an expectation that such information will in
all circumstances be updated, supplemented or revised whether as a result of new information, changing
circumstances, future events or otherwise.
Use of Non-GAAP Financial Measures
Reference to “Adjusted EBITDA” is to earnings before interest, income taxes, depreciation and
amortization, unrealized foreign exchange gains and losses, mark-to-market gains and losses on foreign
currency contracts, and certain non-recurring items including start-up costs. Adjusted EBITDA is an
important metric used by many investors to compare issuers on the basis of the ability to generate cash
from operations and management believes that, in addition to net income, Adjusted EBITDA is a useful
supplementary measure.
Adjusted EBITDA is a measure not recognized under GAAP and does not have a standardized meaning
prescribed by GAAP. Therefore, this measure may not be comparable to similar measures presented by
other entities. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative
to net income determined in accordance with GAAP as an indicator of Pollard’s performance or to cash
flows from operating, investing and financing activities as measures of liquidity and cash flows.
Basis of Presentation
The results of operations in the following discussions encompass the consolidated results of Pollard for
the year ended December 31, 2016. All figures are in millions except for per share amounts.
2
POLLARD BANKNOTE LIMITED
Overview
Pollard Banknote Limited (“Pollard”) is one of the leading providers of products and services to the lottery
and charitable gaming industries throughout the world. Management believes Pollard is the largest
provider of instant-win scratch tickets (“instant tickets”) based in Canada and the second largest producer
of instant tickets in the world.
Pollard produces and provides a comprehensive line of instant tickets and lottery services including:
licensed products, distribution, SureTrack® lottery management system, retail telephone selling (“tel-
sell”), marketing, iLottery, digital products, Social InstantsTM, retail management services and instant
ticket vending machines. In addition, Pollard’s charitable gaming product line includes pull-tab (or break-
open) tickets, bingo paper, pull-tab vending machines and ancillary products such as pull-tab counting
machines. Pollard also markets products to the commercial gaming and security sector including such
items as promotional scratch and win tickets, transit tickets and parking passes.
Pollard’s lottery products are sold extensively throughout Canada, the United States and the rest of the
world, wherever applicable laws and regulations authorize their use. Pollard serves over 60 instant ticket
lotteries including a number of the largest lotteries throughout the world. Charitable gaming products
are mostly sold in the United States and Canada where permitted by gaming regulatory authorities.
Pollard serves a highly diversified customer base in the charitable gaming market of over 250 independent
distributors with the majority of revenue generated from repeat business.
Product line breakdown of revenue
Year ended
December 31,
2016
Year ended
December 31,
2015
89%
11%
90%
10%
Year ended
December 31,
2016
Year ended
December 31,
2015
54%
20%
26%
49%
24%
27%
Instant Tickets
Charitable Gaming Products
Geographic breakdown of revenue
United States
Canada
International
3
The following financial information should be read in conjunction with the accompanying financial
statements of Pollard and the notes therein as at and for the year ended December 31, 2016.
SELECTED FINANCIAL INFORMATION
(millions of dollars, except per share information)
Sales
Cost of sales
Gross profit
Gross profit as a % of sales
Administration expenses
Expenses as a % of sales
Selling expenses
Expenses as a % of sales
Net income
Net income as a % of sales
Adjusted EBITDA
Adjusted EBITDA as a % of sales
Year ended
December 31,
2016
Year ended
December 31,
2015
Year ended
December 31,
2014
Year ended
December 31,
2013
$246.4
$221.0
$194.5
$184.9
197.2
176.7
153.4
149.7
49.2
20.0%
20.9
8.5%
8.0
3.2%
12.3
5.0%
29.7
12.1%
44.3
20.0%
19.2
8.7%
7.4
3.3%
7.5
3.4%
26.8
12.1%
41.1
21.1%
17.0
8.7%
6.9
3.5%
8.7
4.5%
25.6
13.2%
35.2
19.0%
15.2
8.2%
6.8
3.7%
5.4
2.9%
22.7
12.3%
$0.23
$0.23
Earnings per share (basic)
$0.52
$0.32
$0.37
Earnings per share (diluted)
$0.52
$0.32
$0.37
December 31,
December 31,
December 31,
December 31,
2016
2015
2014
2013
Total Assets
Total Non-Current Liabilities
$176.8
$94.4
$164.1
$96.3
$149.3
$89.2
$133.4
$79.2
4
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(millions of dollars)
Year ended
December 31,
2016
Year ended
December 31,
2015
Year ended
December 31,
2014
Year ended
December 31,
2013
$12.3
$7.5
$8.7
$5.4
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange (gain) loss
Mark-to-market (gain) loss on foreign
currency contracts
Start-up costs – Michigan iLottery
Income taxes
10.8
3.4
(1.6)
-
-
4.8
8.4
2.9
3.8
(0.5)
-
4.7
7.9
2.9
1.7
0.1
0.6
3.7
8.6
3.4
1.0
0.4
-
3.9
Adjusted EBITDA
$29.7
$26.8
$25.6
$22.7
5
REVIEW OF OPERATIONS
Financial and operating information has been derived from, and should be read in conjunction with, the
consolidated financial statements of Pollard and the selected financial information disclosed in this MD&A.
ANALYSIS OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2016
Sales
Product Line Sales
Fiscal 2016
(in millions of dollars)
Product Line Sales
Fiscal 2015
(in millions of dollars)
Instant
Tickets,
$218.7
Charitable
Gaming
Products,
$27.7
Instant
Tickets,
$197.7
Charitable
Gaming
Products,
$23.3
During the year ended December 31, 2016 (“Fiscal 2016” or “2016”), Pollard achieved sales of $246.4
million, compared to $221.0 million in the year ended December 31, 2015 (“Fiscal 2015” or “2015”).
Factors impacting the $25.4 million sales increase were:
Higher instant ticket average selling prices for 2016 increased sales by $4.3 million compared to 2015,
primarily as a result of greater proprietary product sales, while higher instant ticket volumes increased
sales by $3.2 million. Improved sales of our ancillary lottery products and services further increased
sales by $6.5 million from Fiscal 2015 due primarily to increased revenues from iLottery. Charitable
gaming volumes were also higher than Fiscal 2015 increasing sales by $2.4 million, primarily as a result
of greater vending machine sales, while the increase in average selling price increased sales of charitable
gaming products by $0.8 million.
Sales Breakdown
Fiscal 2016
Sales Breakdown
Fiscal 2015
United
States
54%
International
26%
Canada
20%
United
States
49%
International
27%
Canada
24%
During Fiscal 2016, Pollard generated approximately 68.8% (2015 – 65.0%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2016 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.328 compared to an average
rate of $1.269 during Fiscal 2015. This 4.7% increase in the U.S. dollar value resulted in an approximate
increase of $7.6 million in revenue relative to Fiscal 2015. Also during Fiscal 2016, the Canadian dollar
6
weakened against the Euro resulting in an approximate increase of $0.6 million in revenue relative to
Fiscal 2015.
Cost of sales and gross profit
Cost of sales was $197.2 million in Fiscal 2016 compared to $176.7 million in Fiscal 2015. Cost of sales
was higher in Fiscal 2016 relative to Fiscal 2015 as a result of an increase in instant ticket volumes,
increased ancillary lottery products and services sales, higher exchange rates on U.S. dollar transactions
in 2016, which increased cost of sales approximately $5.8 million, and higher amortization relating to our
new press.
Gross profit was $49.2 million (20.0% of sales) in Fiscal 2016 compared to $44.3 million (20.0% of sales)
in Fiscal 2015. This higher gross profit was due primarily to the increase in ancillary lottery products and
services sales, increased average selling price of instant tickets and the positive impact from higher
exchange rates on net U.S. dollar transactions.
Administration expenses
Administration expenses increased to $20.9 million in Fiscal 2016 from $19.2 million in Fiscal 2015 due
primarily to higher professional fees, increased compensation expenses (which primarily related to
expansion of our lottery management system and ancillary lottery product and services sales) including
incentive accruals.
Selling expenses
Selling expenses increased to $8.0 million in Fiscal 2016 from $7.4 million in Fiscal 2015 due primarily to
higher compensation expense in our charitable gaming division to support increased sales, higher
contract support costs and the increased Canadian dollar equivalent of U.S. dollar denominated expenses.
Other income
Other income in Fiscal 2016 consisted of a $0.7 million loss on equity investment, which was fully offset
by a $0.7 million miscellaneous gain, primarily consisting of a $0.5 million gain on the sale of an associate.
Interest expense
Interest expense increased to $3.4 million in Fiscal 2016 from $2.9 million in Fiscal 2015 primarily as a
result of no longer capitalizing borrowing costs related to the new press project, which ended after the
second quarter in 2015.
Foreign exchange gain
The net foreign exchange gain was $0.4 million in Fiscal 2016 compared to a net loss of $3.1 million in
Fiscal 2015. The 2016 net foreign exchange gain consisted of a $1.6 million unrealized gain primarily a
result of the decreased Canadian equivalent value of U.S. denominated accounts payable and long-term
debt with the strengthening of the Canadian dollar relative to the U.S. dollar. This gain was partially
offset by the realized foreign exchange loss of $1.2 million as a result of foreign currency denominated
account receivables collected being converted into Canadian dollars at unfavorable foreign exchange
rates.
7
The 2015 net foreign exchange loss consisted of a $3.8 million unrealized loss which was primarily a
result of the increased Canadian equivalent value of U.S. denominated debt with the significant
weakening of the Canadian dollar relative to the U.S. dollar. This loss was partially offset by the realized
foreign exchange gain of $0.7 million as a result of foreign currency denominated account receivables
collected being converted into Canadian dollars at favorable foreign exchange rates.
Amortization and depreciation
Amortization and depreciation, including depreciation of property and equipment and the amortization of
deferred financing costs and intangible assets, totaled $10.8 million during Fiscal 2016 which increased
from $8.4 million during Fiscal 2015 primarily as a result of increased depreciation of property, plant and
equipment due to the commissioning of the new press in our Ypsilanti facility.
Adjusted EBITDA
Adjusted EBITDA was $29.7 million in Fiscal 2016 compared to $26.8 million in Fiscal 2015. The primary
reason for the increase in Adjusted EBITDA of $2.9 million was the increase in gross profit of $7.3 million
(net of amortization and depreciation). This increase was partially offset by higher administration
expenses of $1.7 million, an increase in selling expenses of $0.6 million and the increase in realized
foreign exchange loss of $1.9 million.
Income taxes
Income tax expense was $4.8 million in Fiscal 2016, an effective rate of 28.1%, which was similar to our
expected effective rate of 27.0%.
Income tax expense was $4.7 million in Fiscal 2015, an effective rate of 38.8%, which was higher than
our expected effective rate of 26.8% due primarily to differences relating to the foreign exchange impact
of Canadian dollar denominated debt in its U.S. subsidiaries. Pollard has capitalized its U.S. operations
using intercompany Canadian dollar debt. The weakening of the Canadian dollar versus the U.S. dollar
results in a future gain on debt repayment for U.S. tax purposes in the subsidiary, creating a deferred
tax expense with no related income (as the gain is eliminated on consolidation). This increased the
consolidated provision percentage approximately 30%. Other permanent differences relating to the
foreign exchange translation of property, plant and equipment decreased the provision by approximately
15%. Current income tax expense was in a recovery position due to accelerated tax depreciation on
capital expenditures.
Net income
Net income was $12.3 million in Fiscal 2016 compared to net income of $7.5 million in Fiscal 2015. The
primary reasons for the increase in net income were the increase gross profit of $4.9 million and the
decrease in net foreign exchange loss of $3.5 million. Partially offsetting these increases in net income
were the increase in administration expense of $1.7 million, the increase in selling expenses of $0.6
million, the increase in interest expense of $0.5 million and the decrease in the non-cash mark-to-market
gain on foreign currency contracts of $0.5 million.
Earnings per share (basic and diluted) increased to $0.52 per share in Fiscal 2016 from $0.32 per share
in Fiscal 2015.
8
Liquidity and Capital Resources
Cash provided by operating activities
For the year ended December 31, 2016, cash flow provided by operating activities was $11.7 million
compared to $19.7 million in Fiscal 2015. Higher net income before income taxes after non-cash
adjustments in Fiscal 2016 contributed to an increase in cash provided by operating activities compared
to Fiscal 2015. Changes in the non-cash component of working capital decreased cash flow from
operations by $16.9 million for Fiscal 2016 (due primarily to increases in accounts receivable and
inventory, partially offset by an increase in accounts payable and accrued liabilities), compared to a
decrease of $2.8 million for Fiscal 2015 (due primarily to increases in accounts receivable, prepaid
expenses and income taxes receivable, and a decrease in accounts payable and accrued liabilities,
partially offset by a decrease in inventory). The significant increase in the investment in accounts
receivables in 2016 was a result of increased sales volumes.
Cash used for interest payments increased to $3.3 million in 2016 as compared to $2.8 million in 2015.
As well, cash used for pension plan contributions increased to $3.1 million in 2016 as compared to $2.9
million in 2015. Cash received for income taxes recovered was $0.7 million in 2016 compared to $3.1
million of income taxes paid in 2015. Income taxes were recovered as a result of tax loss carrybacks
generated from accelerated depreciation on U.S. based equipment.
Cash used for investing activities
In the year ended December 31, 2016, cash used for investing activities was $6.4 million compared to
$16.5 million in the year ended December 31, 2015. In Fiscal 2016, capital expenditures were $5.0
million. Pollard expended $0.8 million on its investment in its iLottery joint venture and $1.1 million on
additions to intangible assets. These intangible additions primarily related to implementation costs,
including capitalized internal costs, for ERP software. Proceeds from the sale of Pollard’s investment in
associate provided cash of $0.5 million.
In Fiscal 2015, capital expenditures were $15.4 million, with $12.0 million in expenditures relating to the
new press project including various auxiliary equipment. Pollard expended $0.4 million on its investment
in its iLottery joint venture and $0.7 million on additions to intangible assets, net of investment tax
credits. These intangible additions primarily related to implementation costs, including capitalized
internal costs, for ERP software.
Cash used for financing activities
Cash used for financing activities was $5.4 million in the year ended December 31, 2016, compared to
cash used for financing activities of $2.3 million in the year ended December 31, 2015.
During Fiscal 2016, cash was used to repay $1.8 million of long-term debt, $0.7 million of subordinated
debt, $0.2 million of financing costs and dividends paid of $2.8 million.
During Fiscal 2015 proceeds from long-term debt of $1.0 million were offset by $0.4 million of financing
costs and dividends paid of $2.8 million.
As at December 31, 2016, Pollard had unused committed credit facility of $18.9 million. This amount is
available to be used for future working capital requirements, contractual obligations, capital expenditures
and dividends.
9
ANALYSIS OF RESULTS FOR THE PERIOD OCTOBER 1, 2016 TO DECEMBER 31, 2016
FOURTH QUARTER OF 2016
SELECTED FINANCIAL INFORMATION
(millions of dollars)
Three months ended Three months ended
December 31, 2015
December 31, 2016
(unaudited)
(unaudited)
Sales
Cost of sales
Gross profit
Administration
Selling
Other expense
Income from operations
Finance costs
Income before income taxes
Income taxes:
Current (recovery)
Future
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange loss
Income taxes
Adjusted EBITDA
$65.7
51.5
14.2
4.9
2.2
0.3
6.8
1.2
5.6
1.2
0.6
1.8
$3.8
2.3
0.8
0.4
1.8
$9.1
$57.2
45.6
11.6
5.7
2.0
0.1
3.8
1.8
2.0
(4.5)
5.3
0.8
$1.2
2.4
0.8
1.1
0.8
$6.3
10
Sales
During the three months ended December 31, 2016, Pollard achieved sales of $65.7 million, compared
to $57.2 million in the three months ended December 31, 2015. Factors impacting the $8.5 million sales
increase were:
Instant ticket sales volumes for the fourth quarter of 2016 were higher than the fourth quarter of 2015
by 14.1%, which increased sales by $6.7 million, due to higher volumes from existing customers. In
addition, an increase in our ancillary instant ticket products and services volumes, primarily sales from
iLottery, increased sales by $1.1 million. Higher volumes of charitable game sales added $1.5 million in
sales compared to the fourth quarter of 2015, primarily as a result of higher vending machine sales.
Partially offsetting these increases in sales was a slight decrease in average selling price of instant tickets
compared to 2015 which reduced sales by $0.6 million.
During the three months ended December 31, 2016, Pollard generated approximately 68.2% (2015 –
62.0%) of its revenue in U.S. dollars including a portion of international sales which were priced in U.S.
dollars. During the fourth quarter of 2016 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.332, compared to an average rate of $1.336 during the fourth quarter of 2015.
This 0.3% decrease in the value of the U.S. dollar resulted in an approximate decrease of $0.1 million in
revenue relative to 2015. Also during the fourth quarter of 2016, the Canadian dollar strengthened
against the Euro resulting in an approximate decrease of $0.1 million in revenue relative to 2015.
Cost of sales and gross profit
Cost of sales was $51.5 million in the fourth quarter of 2016 compared to $45.6 million in the fourth
quarter of 2015. Cost of sales was higher in the quarter relative to the fourth quarter of 2015 as a result
of an increase in instant ticket volumes and higher ancillary instant ticket products and services volumes.
Gross profit was $14.2 million (21.6% of sales) in the fourth quarter of 2016 compared to $11.6 million
(20.3% of sales) in the fourth quarter of 2015. This increase in gross profit dollars was due to the higher
instant ticket sales volumes and higher ancillary instant ticket products and services volumes. The
increase in gross profit percentage was due to a favorable instant ticket sales mix.
Administration expenses
Administration expenses were $4.9 million in the fourth quarter of 2016 which was lower compared to
$5.7 million in the fourth quarter of 2015 primarily as a result of lower professional fees, including a
settlement generating a recovery of previous legal expenses.
Selling expenses
Selling expenses increased to $2.2 million in the fourth quarter of 2016 from $2.0 million in the fourth
quarter of 2015 primarily as a result of an increase in contract support costs.
Other expense
Other expense of $0.3 million in the fourth quarter of 2016 consisted of $0.4 million loss on equity
investment, which was partially offset by a $0.1 million miscellaneous gain.
11
Interest expense
Interest expense of $0.8 million in the fourth quarter of 2016 was similar to $0.8 million in the fourth
quarter of 2015.
Foreign exchange loss
The net foreign exchange loss was $0.3 million in the fourth quarter of 2016 compared to a net loss of
$0.9 million in the fourth quarter of 2015. The 2016 net foreign exchange loss consisted of a $0.4 million
unrealized loss which was primarily a result of the increased Canadian equivalent value of U.S.
denominated debt with the weakening of the Canadian dollar relative to the U.S. dollar. This loss was
partially offset by the realized foreign exchange gain of $0.1 million, as a result of foreign currency
denominated account receivables collected being converted into Canadian dollars at favorable foreign
exchange rates.
The 2015 net foreign exchange loss consisted of a $1.1 million unrealized loss which was primarily a
result of the increased Canadian equivalent value of U.S. denominated debt with the weakening of the
Canadian dollar relative to the U.S. dollar. This loss was partially offset by the realized foreign exchange
gain of $0.2 million, as a result of foreign currency denominated account receivables collected being
converted into Canadian dollars at favorable foreign exchange rates.
Amortization and depreciation
Amortization and depreciation, including depreciation of property, plant and equipment and the
amortization of deferred financing costs and intangible assets, totaled $2.3 million during the fourth
quarter of 2016 which was similar to $2.4 million during the fourth quarter of 2015.
Adjusted EBITDA
Adjusted EBITDA was $9.1 million in the fourth quarter of 2016 compared to $6.3 million in the fourth
quarter of 2015. The primary reasons for the increase in Adjusted EBITDA were the increase in gross
profit (net of amortization and depreciation) of $2.6 million and the decrease in administration expenses
of $0.8 million, partially offset by higher selling expenses of $0.2 million and an increase in other expenses
of $0.2 million.
Income taxes
Income tax expense was $1.8 million in the fourth quarter of 2016, an effective rate of 32.5% which was
higher than our expected effective rate of 27.0% due primarily to differences relating to the foreign
exchange impact of Canadian dollar denominated debt in its U.S. subsidiaries. Pollard has capitalized its
U.S. operations using intercompany Canadian dollar debt. The significant weakening of the Canadian
dollar versus the U.S. dollar in the fourth quarter results in a future gain on debt repayment for U.S. tax
purposes in the subsidiary, creating a deferred tax expense with no related income (as the gain is
eliminated on consolidation). This increased the consolidated provision percentage by about 8%. Other
permanent differences relating to the foreign exchange translation of property, plant and equipment
decreased the provision by approximately 4%.
Income tax expense was $0.8 million in the fourth quarter of 2015, an effective rate of 37.8% which was
higher than our expected effective rate of 26.8% due primarily to differences relating to the foreign
exchange impact of Canadian dollar denominated debt in its U.S. subsidiaries. Pollard has capitalized its
12
U.S. operations using intercompany Canadian dollar debt. The significant weakening of the Canadian
dollar versus the U.S. dollar in the fourth quarter results in a future gain on debt repayment for U.S. tax
purposes in the subsidiary, creating a deferred tax expense with no related income (as the gain is
eliminated on consolidation). This increased the consolidated provision percentage by about 31%. Other
permanent differences relating to the foreign exchange translation of property, plant and equipment
decreased the provision by approximately 21%. Current income tax expense was in a recovery position
due to accelerated tax depreciation on capital expenditures.
Net income
Net income was $3.8 million in the fourth quarter of 2016 compared to $1.2 million in the fourth quarter
of 2015. The primary reasons for the increase in net income were the higher gross profit of $2.6 million,
the decrease in administration expenses of $0.8 million and the decrease in net foreign exchange loss of
$0.6 million. Partially offsetting these increases were the increase in income taxes of $1.0 million, the
increase in selling expenses of $0.2 million and higher other expenses of $0.2 million.
Earnings per share (basic and diluted) increased to $0.16 per share in the fourth quarter of 2016 from
$0.05 per share in the fourth quarter of 2015.
Quarterly Information
(unaudited)
(millions of dollars)
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
Sales
$65.7
$62.7
$54.0
$64.0
$57.2
$57.9
$51.4
$54.5
Adjusted EBITDA
9.1
7.8
6.0
6.8
6.3
7.5
6.3
6.7
Net income
3.8
2.8
2.1
3.6
1.2
1.9
3.0
1.4
Q4 2016 sales and adjusted EBITDA were higher due to increased sales volumes and favorable sales mix.
Productive Capacity
Management has defined the current productive capacity, factoring in the new press becoming fully
operational, as the level of operations necessary to maintain a minimum Adjusted EBITDA of $30.0 to
$35.0 million on an annualized basis. Due to varying factors implicit in the nature of the lottery industry
and the instant ticket market, productive capacity can best be measured through a financial output such
as Adjusted EBITDA and cash flow. A significant impact on our Adjusted EBITDA capacity will be the
timing of the ramp up of our new press and how quickly increased volumes will be attained through the
relatively long sales cycle of the lottery industry. A number of factors impact the level of Adjusted EBITDA
including physical plant capacity, machine capacity, nature of product and service offerings produced and
mix of customers. Changes to productive capacity have occurred primarily through expenditures on fixed
assets and improved processes and other internal improvement measures. Productive capacity is also
13
impacted by changes in foreign exchange relationships. There have been no increases in productive
capacity due to acquisitions since Pollard’s initial public offering (“IPO”) in August 2005.
Pollard’s strategy with respect to productive capacity is to expend the required funds and resources to
maintain the assets required to generate the targeted cash flow. In addition, dependent on certain
market conditions and limitations on available funds, projects are incurred to increase cash inflow or
decrease cash outflow. The nature of the lottery industry does not in itself lead to significant
obsolescence risk with the operating assets. To grow productive capacity, ongoing investment in new
technology, new fixed assets and new intangible assets is required. Pollard utilizes a number of individual
strategies to maintain and grow productive capacity including a capital expenditure budget and a rigorous
formal approval process, flexible individual customer management relationships and structured
maintenance programs throughout all of the facilities.
An important component to managing and growing productive capacity is the management of certain
intangible assets, including customer contracts and relationships, patents, computer software and
goodwill. Certain of these assets are reflected in Pollard’s financial statements due to the use of continuity
of interest method of accounting during the transfer of the business at Pollard’s IPO.
Management focuses on maintaining and growing the value of the customer relationship through winning
contract renewals, pursuing and obtaining new contracts and assisting existing customers growing their
instant ticket product lines. Regular commitment to research and development allows continual
development of patents, software and additional technological assets that maintain and increase
operating income and cash flow. Detailed cost benefit analysis is performed for any significant investment
of funds or resources in order to minimize the associated risks that these assets will not be able to
generate the expected level of cash flow. Where new opportunities are identified, such as a new
marketing opportunity or a new machine or process able to reduce input costs, consideration is given to
revise plans and take advantage of these prospects.
Certain risks are associated with projects aimed at increasing productive capacity, including increases in
working capital, acquisition or development of intellectual property, development of additional products
or services and purchases of fixed assets. If these investments fail to increase Adjusted EBITDA and
cash flow, then productive capacity will ultimately decrease over time due to the consumption of these
investment resources. The impact on productive capacity may also depend upon the completion and
start up timing of certain investment projects.
Working Capital
Net non-cash working capital varies throughout the year based on the timing of individual sales
transactions and other investments. The nature of the lottery industry is few individual customers who
generally order large dollar value transactions. As such, the change in timing of a few individual orders
can impact significantly the amount required to be invested in inventory or receivables at a particular
period end. The high value, low volume of transactions results in some significant volatility in non-cash
working capital, particularly during a period of rising volumes. Similarly, the timing of the completion of
the sales cycle through collection can significantly impact non-cash working capital.
Instant tickets are produced specifically for individual clients resulting in a limited investment in finished
goods inventory. Customers are predominantly government agencies, which result in regular payments.
There are a limited number of individual customers, and therefore net investment in working capital is
managed on an individual customer by customer basis, without the need for company wide benchmarks.
14
The overall impact of seasonality does not have a material impact on the carrying amounts in working
capital.
As at December 31, 2016, Pollard’s investment in non-cash working capital increased $16.9 million
compared to December 31, 2015, primarily as a result of an increased investments in accounts receivables
and inventories, which were partially offset by an increase in accounts payable and accrued liabilities.
Increased sales volumes, particularity in the fourth quarter, resulted in the large increase in accounts
receivable.
December 31, December 31,
2016
2015
Working Capital
Total Assets
Total Non-Current Liabilities
$49.5
$176.8
$94.4
$39.1
$164.1
$96.3
Credit Facility
Pollard’s credit facility was renewed effective June 24, 2016. The credit facility provides loans of up to
$75.0 million for its Canadian operations and US$12.0 million for its U.S. subsidiaries. The borrowings
for the Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $75.0
million Canadian equivalent. Borrowings under the credit facility bear interest at fixed and floating rates
based on Canadian and U.S. prime bank rates, banker’s acceptances or LIBOR. At December 31, 2016,
the outstanding letters of guarantee were $1.2 million. The remaining balance available for drawdown
under the credit facility was $18.9 million.
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including working capital ratios, debt to income before interest, income taxes,
amortization and depreciation (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As
at December 31, 2016, Pollard is in compliance with all financial covenants.
Pollard’s credit facility is secured by a first security interest in all of the present and after acquired property
of Pollard’s operating subsidiaries. The facility can be prepaid without penalties. Under the terms of the
agreement effective June 24, 2016, the facility was committed for a two year period, renewable June 24,
2018.
Pollard believes that its credit facility, subordinated loan from Pollard Equities Limited and ongoing cash
flow from operations will be sufficient to allow it to meet ongoing requirements for investment in capital
expenditures, working capital and dividends at existing business levels.
Subordinated Debt
On April 2, 2014, Pollard entered into a loan agreement with Pollard Equities Limited (“Equities”) for a
subordinated term loan facility with a seven year term in the amount of $6.8 million. Equities owns
approximately 73.5% of Pollard’s outstanding shares.
Quarterly principal payments on the subordinated loan facility commenced the quarter following June 30,
2016. Interest on the subordinated debt commenced with the first draw at a rate of 9%. The loan is
fully subordinated to the secured credit facility.
15
Outstanding Share Data
As at December 31, 2016 and March 13, 2017, outstanding share data was as follows:
Common shares
23,543,158
Share Options
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to grant
options to purchase common shares to eligible persons and to determine the applicable terms. The
aggregate maximum number of common shares available for issuance from Pollard’s treasury under the
Option Plan is 2,354,315 common shares.
On March 5, 2014, the Board of Directors approved the award of 100,000 options to purchase common
shares of Pollard for certain key management personnel. The options were granted on March 10, 2014,
and have a seven year term, vesting 25% per year over the first four years. The exercise price of the
options was equal to the closing price of the common shares on March 7, 2014.
On September 7, 2016, the Board of Directors approved the award of 25,000 options to purchase
common shares of Pollard for a key management member. The options were granted on October 3,
2016, and have a seven year term, vesting 25% per year over the first four years. The exercise price of
the options was equal to the closing price of the common shares on September 30, 2016.
Subsequent to year end, on March 13, 2017, the Board of Directors approved the award of 125,000
options to purchase common shares of Pollard for key management personnel. The options will be
granted on March 16, 2017, and have a seven year term, vesting 25% per year over the first four years.
The exercise price of the options will be equal to the closing price of the common shares on March 15,
2017.
Contractual Obligations
Pollard rents premises and equipment under long-term operating leases. The following is a schedule by
year of commitments and contractual obligations outstanding, including related interest payments:
(millions of dollars)
Total
<1 Year
2-3 Years
4-5 Years Thereafter
Long-term debt
$74.7
$2.3
$72.4
-
Subordinated debt
$7.3
$1.8
$3.3
$2.2
-
-
Pension liability
$13.5
$1.3
$2.6
$2.6
$7.0
Operating leases
$22.7
$4.9
$7.9
$5.8
$4.1
Total
$118.2
$10.3
$86.2
$10.6
$11.1
16
Pension Obligations
Pollard sponsors four non-contributory defined benefit pension plans, of which three are final pay plans
and one is a flat benefit plan. As of December 31, 2016, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $44.4 million and the accrued benefit plan obligations were $57.9
million. Pollard’s total annual funding contribution for all pension plans in 2017 is expected to be
approximately $4.1 million, compared to $2.6 million in 2016, including estimated solvency payments.
One of Pollard’s Canadian pension plans will be subject to a solvency valuation as of December 31, 2016.
We anticipate the valuation will result in a deficit due the low current levels of the mandated interest rate
used to discount the future liabilities. We estimate the valuation will generate an estimated deficit of
approximately $13.0 million. As a result Pollard will be subject to additional special pension plan
payments beginning in 2017 of approximately $1.3 million per year through to 2026. These additional
solvency payments do not impact pension expense and therefore will not affect our net income or
EBITDA. Pollard was subject to additional solvency payments from 2011 to 2013, when Pollard was
required to make additional pension contributions of approximately $2.0 million per year. These
additional pension solvency payments will be funded from operating cash flows.
Off-Balance Sheet Arrangements
Other than the operating leases described previously, Pollard has no other off-balance sheet
arrangements.
Related Party Transactions
During the year ended December 31, 2016, Pollard paid property rent of $3.1 million (2015 - $3.1 million)
and $0.4 million (2015 - $0.3 million) in plane charter costs to affiliates of Equities. In addition, Pollard
paid Equities $0.6 million (2015 - $0.6 million) of interest on Pollard’s subordinated debt.
During the year ended December 31, 2016, Equities paid Pollard $0.07 million (2015 - $0.07 million) for
accounting and administration fees.
During the year ended December 31, 2016, Pollard reimbursed operating costs and paid software
royalties of $1.8 million (2015 - $0.5 million) to its iLottery partner which are recorded in cost of sales
and $0.6 million (2015 - $0.1 million) of development costs.
At December 31, 2016, Pollard owes Equities and its affiliates $0.9 million (2015 - $0.8 million) for rent,
interest and other expenses. Also included in accounts payable and accrued liabilities is a net amount
owing to Pollard’s iLottery partner of $0.8 million (2015 - $1.1 million) for reimbursement of operating
costs and capital expenditures, and its share of operating profits.
Critical Accounting Policies and Estimates
The preparation of the financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Management of Pollard regularly reviews its estimates
and assumptions based on historical experience and various other assumptions that it believes would
result in reasonable estimates given the circumstances. Actual results could differ from those estimates
17
under different assumptions. The following is a discussion of accounting policies which require significant
management judgment and estimation.
Impairment of goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired of
Pollard’s U.S. subsidiaries and the excess purchase price over the underlying carrying amount of the
portion of the net assets sold as at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction
with the IPO, and is not amortized. Goodwill is subject to an annual impairment test. This requires an
estimation of the “value in use” or “fair value less costs to sell” of the cash-generating units (“CGUs”) to
which goodwill is allocated. Estimating a value in use requires Pollard to make an estimate of the
expected future cash flows from the CGUs and also to choose a suitable discount rate in order to calculate
the present value of those cash flows.
Employee future benefits
Accounting for defined benefit plans requires Pollard to use actuarial assumptions. These assumptions
include the discount rate and the rate of compensation increases. These assumptions depend on
underlying factors such as economic conditions, government regulations, investment performance,
employee demographics and mortality rates.
Income taxes
Pollard is required to evaluate the recoverability of deferred income tax assets. This requires an estimate
of Pollard’s ability to utilize the underlying future income tax deductions against future taxable income
before they expire. In order to evaluate the recoverability of these deferred income tax assets, Pollard
must estimate future taxable income.
Future Changes in Accounting Policies
In July 2014, the International Accounting Standards Board (“IASB”) issued International Financial
Reporting Standards (“IFRS”) 9 Financial Instruments (“IFRS 9”), which replaces the existing guidance
in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on
the classification and measurement of financial instruments, a new expected credit loss model for
calculating impairment on financial assets and new general hedge accounting requirements. It also
carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS
9 is required for fiscal years beginning on or after January 1, 2018. Pollard is currently assessing the
impact of the new standard on its consolidated financial statements.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard
specifies the steps and timing for recognizing revenue, as well as requiring more informative, relevant
disclosures. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue. IFRS 15 is required
for fiscal years beginning on or after January 1, 2018 with early adoption available. Pollard is currently
assessing the impact of the new standard on its consolidated financial statements.
In September 2014, the IASB issued amendments to IFRS 10 Consolidated Financial Statements and IAS
28 Investments in Associates and Joint Ventures (2011). The amendments address an acknowledged
inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale
or contribution of assets between an investor and its associate or joint venture. The main consequence
of the amendments is that a full gain or loss is recognized when a transaction involves a business
18
(whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction
involves assets that do not constitute a business, even if these assets are housed in a subsidiary. These
amendments were to be effective for fiscal years beginning on or after January 1, 2016, with early
adoption available; however, in December 2015 the IASB decided to defer the effective date for these
amendments indefinitely. Pollard is currently assessing the impact of the amendments on its consolidated
financial statements.
In January 2016, the IASB issued IFRS 16 Leases which replaces IAS 17 Leases. This standard introduces
a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases
with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to
recognize a right-of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. This standard substantially carries forward the lessor
accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other
areas of the lease accounting model have been impacted, including the definition of a lease. Transitional
provisions have been provided. The new standard is effective for annual periods beginning on or after
January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts
with Customers at or before the date of initial adoption of IFRS 16. Pollard is currently assessing the
impact of the new standard on its consolidated financial statements.
In January 2016, the IASB issued amendments to IAS 7 Statement of Cash Flows. The amendments
were issued to improve information provided to users of financial statements about an entity’s changes
in liabilities arising from financing activities. These amendments are effective for annual periods
beginning on or after January 1, 2017. Earlier application is permitted. Pollard does not expect these
amendments to have a material impact on its consolidated financial statements.
In January 2016, the IASB issued amendments to IAS 12 Income Taxes. The amendments were
regarding the recognition of deferred tax assets for unrealized losses relating to debt instruments
measured at fair value. These amendments are effective for annual periods beginning on or after January
1, 2017. Earlier application is permitted. Pollard does not expect these amendments to have a material
impact on its consolidated financial statements.
In June 2016, the IASB issued amendments to IAS 2 Share-Based Payments. The amendments clarify
how to account for certain types of share-based payment transactions. These amendments are effective
for annual periods beginning on or after January 1, 2018. Retrospective or earlier application is permitted
under certain conditions. Pollard is currently assessing the impact of the amendments on its consolidated
financial statements.
In December 2016, the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and Advance
Consideration. The interpretation clarifies the date of the transaction for the purposes of determining
the exchange rate to use on initial recognition of the related asset, expense or income is the date on
which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the
payment or receipt of advance consideration. The interpretation is effective for annual periods beginning
on or after January 1, 2018. Retrospective or earlier application is permitted under certain conditions.
Pollard is currently assessing the impact of the amendments on its consolidated financial statements.
19
Industry Risks and Uncertainties
Pollard is exposed to a variety of business and industry risks. A summary of the major risks faced by Pollard
is noted below.
Dependence on Key Products
Instant lottery tickets and related services accounted for approximately 89% of Pollard's Fiscal 2016
revenues. Pollard's financial results and condition are substantially dependent on the continued success
and growth in sales of this product and the profitability of such sales. Competitive efforts by other
manufacturers of similar or substitute products, shifts in consumer preferences or the introduction and
acceptance of alternative product offerings could have a material adverse effect on Pollard's business,
financial condition, liquidity and results of operations.
Economic Uncertainty
Considerable economic uncertainty and concern over possible recessions and economic downturns have
dominated the news in the past few years. Instant lottery tickets account for approximately 89% of
revenue and Pollard’s financial results and condition are substantially dependent on the continued success
and growth in sales of this product and the profitability of such sales. Historically the lottery industry,
and particularly the instant ticket product lines, has not shown any significant negative impact during
downturns in the economic cycles. However, lotteries, similar to many government agencies, are
increasingly under pressure to reduce costs and expenditures. As such, Pollard has witnessed downward
pressure on its selling prices. Continued pressure on lotteries to reduce their costs may further negatively
impact Pollard’s selling prices. Significant shifts in consumer preferences or the introduction and
acceptance of alternative product offerings could have a material adverse effect on Pollard’s business,
financial condition, liquidity and results of operations.
Inability to Sustain Sales or EBITDA Margins
Pollard’s income depends upon its ability to generate sales to customers and to sustain its EBITDA margins.
These margins are dependent upon Pollard’s ability to continue to profitably sell lottery tickets and gaming
products and to continue to provide products and services that make it the supplier of choice to its
customers. If Pollard’s costs of sales or operating costs increase, or other manufacturers of gaming products
could compete more favourably with it, Pollard may not be able to sustain its level of sales or EBITDA
margins.
Dependence on Major Customers
Pollard’s 10 largest customers accounted for approximately 54% of its revenue during Fiscal 2016.
Pollard’s largest customer accounted for approximately 17% of Pollard’s revenues during Fiscal 2016.
The nature of the worldwide lottery industry limits the absolute number of lottery operations. As is
customary in the industry, Pollard does have long-term contracts with most of its customers. However,
most allow the customer to cancel the contract at will and none guarantee volumes or order levels. A
significant reduction of purchases by any of Pollard’s largest customers could have a material adverse
effect on Pollard’s business, financial condition, liquidity and results of operations including the amount
of cash available for dividends to shareholders.
20
Exchange Rate Fluctuation
A significant portion of Pollard’s revenues are denominated in foreign currencies, primarily U.S. dollars and
Euros, as well as expenses, principally related to its U.S. operations and to the purchase of raw materials,
which are denominated in U.S. dollars. Furthermore, although certain raw materials may be purchased in
Canadian dollars, they may have inputs that are denominated in foreign currencies. Any changes in the
exchange rate between the Canadian dollar and these foreign currencies could have a material effect on
the results of Pollard.
For the purposes of financial reporting, any change in the value of the Canadian dollar against the U.S. dollar
and Euro during a given financial reporting period would result in a foreign exchange loss or gain on their
translation into Canadian dollar equivalent. Further, Pollard’s reported earnings could fluctuate materially
as a result of revenues and expenses denominated in foreign currencies under GAAP. There can be no
assurance that changes in the currency exchange rate will not have a material adverse effect on Pollard or
on its ability to maintain a consistent level of dividends in Canadian dollars.
Additional Capital Requirements
Pollard believes that its future operating income will be sufficient to fund operations and planned capital
expenditures. However, Pollard may be required to raise additional capital in the future if it decides to
make additional acquisitions or significant additional capital expenditures.
The availability of future borrowings and access to capital markets for longer-term future financing depends
on prevailing conditions and the acceptability of financing terms offered. There can be no assurances that
future borrowings or equity financing will be available or available on acceptable terms.
Competition
The instant ticket and charitable gaming business is highly competitive, and Pollard faces competition from
a number of domestic and foreign instant ticket manufacturers and other competitors. Pollard currently has
two instant ticket competitors in North America: Scientific Games Corporation and IGT. Charitable gaming
competitors include a number of manufacturers such as Arrow International, Inc. and International Gamco,
Inc. Internationally, there are a number of lottery instant ticket vendors which compete with Pollard
including Scientific Games, IGT, and the Eagle Press Group of Companies.
Some of Pollard's competitors have longer operating histories, greater name recognition, larger customer
bases and greater financial, technical and marketing resources than Pollard. These resources may allow
them to respond more quickly than Pollard can to new or emerging technologies and to changes in
customer requirements. It may also allow them to devote greater resources than Pollard can to the
development, promotion and sale of their products. Pollard's competitors may also engage in more
extensive research and development, undertake more far-reaching marketing campaigns and adopt more
aggressive pricing policies. The market for Pollard's products is highly competitive at both the lottery
and charitable gaming levels. Pollard expects competition to continue to be intense. Pollard also faces
competition from emerging and existing lottery and charitable gaming products, such as internet gaming
products and video lottery terminals. Competition from these and other gaming products may weaken
demand for Pollard’s products.
21
Licensing and Regulatory Requirements
Pollard is subject to regulation in most jurisdictions in which its products are sold or used by persons or
entities licensed to conduct gaming activities. The gaming regulatory requirements vary from jurisdiction
to jurisdiction and licensing, other approval or finding of suitability processes with respect to Pollard, its
personnel and its products, can be lengthy and expensive. Many jurisdictions have comprehensive
licensing, reporting and operating requirements with respect to the sale and manufacture of bingo and
bingo related products, including bingo paper and pull-tab tickets. These licensing requirements have a
direct impact on the conduct of the day-to-day operations of Pollard. Generally, gaming regulatory
authorities may deny applications for licenses, other approvals or findings of suitability for any cause they
may deem reasonable. There can be no assurance that Pollard, its products or its personnel will receive
or be able to maintain any necessary gaming licenses, other approvals or findings of suitability. The loss
of a license in a particular jurisdiction will prohibit Pollard from selling products in that jurisdiction and
may prohibit Pollard from selling its products in other jurisdictions. The loss of one or more licenses held
by Pollard could have an adverse effect on the business.
Certain jurisdictions require extensive personal and financial disclosure and background checks from
persons and entities beneficially owning a specific percentage (typically five percent or more) of a
vendor’s securities. The failure of beneficial owners of Pollard’s securities to submit to background checks
and provide such disclosure could result in the imposition of penalties upon these beneficial owners and
could jeopardize the award of a lottery contract to Pollard or provide grounds for termination of an
existing lottery contract.
Income and Other Taxes
Pollard and its incorporated subsidiaries are subject to Canadian federal and provincial, and U.S. federal,
state and withholding taxes. As taxing regimes change their tax basis and rates or initiate reviews of
prior tax returns, Pollard could be exposed to increased costs of taxation, which would reduce the amount
of funds available for operations.
Intellectual Property
Pollard’s commercial success depends, in part, on its ability to secure and protect intellectual property
rights that are important to its business, including patent, trademark, copyright and trade secret rights,
to operate without infringing third party intellectual property rights and to avoid having third parties
circumvent the intellectual property rights that Pollard owns or licenses. In particular, the patents and
trademarks Pollard owns or licenses may not be valid or enforceable. In addition, Pollard cannot be
certain that its proprietary technology affords a competitive advantage, does not infringe third party
rights, or will not need to be altered in response to competing technologies. Pollard also cannot be certain
that technologies developed in the future will be the subject of valid and enforceable intellectual property
rights.
In addition, litigation may be necessary to determine the scope, enforceability and validity of third party
intellectual property rights or to establish Pollard’s intellectual property rights. Regardless of merit, any
such litigation could be time consuming and expensive, divert management's time and attention, subject
Pollard to significant liabilities, require Pollard to enter into costly royalty or licensing agreements, or
require Pollard to modify or stop using intellectual property that it owns or licenses.
22
Interest Rates
Pollard has certain floating rate loans and may be negatively impacted by increases in interest rates, the
effects of which would be to reduce net income and the amount of cash available for operations and on
its ability to maintain a consistent level of dividends in Canadian dollars.
Future Acquisition and Integration Risks
To grow by acquisition, Pollard must identify and acquire suitable acquisition candidates at attractive
prices and successfully integrate any acquired businesses with its existing operations. If the expected
synergies from acquisitions do not materialize or Pollard fails to successfully integrate any new businesses
into its existing business, Pollard's financial performance could be significantly impacted. To the extent
that businesses acquired by Pollard or their prior owners failed to comply with or otherwise violated
applicable laws, Pollard, as a successor owner, may be financially responsible for these violations.
In connection with future acquisitions by Pollard, there may be liabilities that Pollard failed or was unable
to discover in its due diligence prior to the consummation of the acquisition. The discovery of any
material liabilities could have a material adverse effect on Pollard's business, financial condition, liquidity
and results of operations or future prospects.
Financial Instruments
Pollard is exposed to financial risks that arise from fluctuations in interest rates and foreign exchange
rates and the degree of volatility of these rates, liquidity risk and credit risk. Pollard uses financial
instruments, from time to time, to manage these risks.
Pollard’s risk management policies are established to identify and analyze the risks, to set appropriate risk
limits and controls to monitor risks and adherence to limits. The Audit Committee oversees how
management monitors compliance with Pollard’s risk management policies and procedures. The Audit
Committee is assisted in its oversight role by Internal Audit, who undertakes regular reviews of risk
management controls and utilizes the annual risk assessment process as the basis for the annual internal
audit plan.
Risk Exposure
Currency risk
Pollard sells a significant portion of its products and services to customers in the United States and to
international customers where sales are denominated in U.S. dollars. In addition, a significant portion of
its cost inputs are denominated in U.S. dollars. Pollard also generates revenue in currencies other than
Canadian and U.S. dollars, primarily in Euros.
In addition, translation differences arise when foreign currency monetary assets and liabilities are
translated at foreign exchange rates that change over time.
Interest rate risk
Pollard is exposed to interest rate risk relating to its fixed and floating rate instruments. Fluctuation in
interest rates will have an effect on the valuation and repayment of these instruments.
23
Credit risk
Credit risk in the risk of financial loss if a customer or counterpart to a financial instrument fails to meet its
financial obligations.
Liquidity risk
Liquidity risk is the risk that Pollard will not be able to meet its financial obligations as they fall due.
Risk Management
Currency risk
Pollard utilizes a number of tools to manage its foreign currency risk including sourcing its manufacturing
facilities in the U.S. and sourcing other cost of sales in U.S. dollars.
A 50 basis point strengthening/weakening in the foreign exchange rate between the Canadian and U.S.
dollar would decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $0.06 million for year ended December 31, 2016 (2015 - $0.05 million). A 50 basis point
strengthening/weakening in the foreign exchange rate between the Canadian dollar and Euro would
decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $0.06 million for year ended December 31, 2016 (2015 - $0.05 million).
Two manufacturing facilities are located in the U.S. and a significant amount of cost inputs for all
production facilities are denominated in U.S. dollars, offsetting a large portion of the U.S. dollar revenue
in a natural hedge.
As at December 31, 2016, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $1.6 million ($2015 - $4.1
million). A 50 basis point weakening/strengthening in the value of the Canadian dollar relative to the
U.S. dollar would result in a decrease/increase in income before income taxes of approximately $0.01
million (2015 - $0.02 million).
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2016, Pollard had no outstanding foreign currency contracts.
Interest rate risk
A 50 basis point decrease/increase in interest rates would result in an increase/decrease in income before
income taxes of $0.4 million for the year ended December 31, 2016 (2015 - $0.4 million).
Credit risk
Credit risk on Pollard’s accounts receivable is minimized since they are mainly from governments and
their agencies and are collected in a relatively short period of time. Credit risk on foreign currency
contracts is minimized since the counterparties are restricted to Schedule 1 Canadian financial
institutions.
The carrying amount of accounts receivable is reduced through the use of an allowance account and any
adjustment to the allowance account is recognized in the statement of income within selling and
24
administration expenses. When a receivable balance is considered uncollectible, it is written off against
the allowance account.
Liquidity risk
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet its
liabilities when due. Pollard maintains a committed credit facility including up to $75.0 million for its
Canadian operations and up to US$12.0 million for its U.S. subsidiaries. At December 31, 2016, the
unused balance available for drawdown was $18.9 million (2015 - $17.6 million).
The 2017 requirements for capital expenditures, working capital and dividends are expected to be
financed from cash flow provided by operating activities and unused credit facility. Pollard enters into
contractual obligations in the normal course of business operations.
Outlook
The lottery industry continues to grow in a number of areas, particularly relating to instant tickets and
ancillary services. Lotteries are looking to grow the amount of funds they can raise for good causes by
meeting consumer demand for gaming products. This includes refreshing their core products in addition
to expanding into alternative channels such as digital products. Retail consumer demand for instant
tickets remains very robust and we believe this underlying product strength will continue.
The outlook for our instant ticket volumes in 2017 remains positive and we expect it to grow, due to
overall growth in the market, higher underlying retail sales in our existing customer base and strategically
increasing our market share utilizing additional available capacity generated through our recent
investments in new capacity. As is the nature of our business, quarter to quarter variations in our
volumes will continue, as timing of orders and the variability of the mix of our work over short term
periods will impact our quarterly results. Historically our product mix during the first half of the year
involves fewer higher value-added proprietary products and we expect this trend to continue. The timing
of revenue recognition can also be impacted between quarters based on the timing of receipt of the
product by our customers.
Our additional press capacity in Ypsilanti continues to produce increasing volumes of high quality product,
evidenced in both the fourth quarter of 2016 and the first quarter of 2017. Our efficiencies and related
cost structure are improving and we are confident that as our experience grows we will be able to
continue to lower our cost platform. Improvement will be incremental and continue throughout 2017 with
focus on such critical areas as reduced spoilage, improved set up time, lower machine costs and more
efficient labour costs.
Our contract portfolio remains very strong, with the renewal of a number of key contracts occurring in
2016. In January 2017 we were awarded a new three year contract (with five one-year renewal options
available) to provide instant tickets to the Michigan lottery, an important and long served customer of
Pollard. We do not have any significant contracts coming due in 2017 when renewal options are
considered, while a number of lottery contracts where we do not provide significant product are up for
bid this upcoming year. We will bid strategically to enhance our product mix and grow our market share
while at the same time focusing on growth of our profit margins.
Lotteries are increasing their focus on ancillary services such as: developing player loyalty programs to
improve engagement with lottery consumers; expanding digital options for extending interactions with
players and providing greater entertainment value; improving the efficiency of their product distribution
25
to ensure products are easily accessible to players; refreshing their retail point of sale programs; and
investigating the appropriate internet and iLottery strategy for each respective jurisdiction. These trends
will continue to progress and provide additional opportunities for Pollard to expand our business within
the lottery market.
iLottery business remains an important initiative within the lottery industry, particularly in the North
American market. Lotteries are taking a cautious approach to expanding in this area and, although we
do not anticipate many new opportunities to open up in the short term, there are several jurisdictions
currently investigating taking this step in the near term. We continue to monitor developments and assist
the industry in realizing the potential of working through this channel. Our Michigan iLottery operation
continues to be the industry leader and adds significantly to the Michigan Lottery’s contribution to its
good causes. Our second iLottery contract with the Virginia Lottery began operation in the fall of 2016
and while available only for subscriptions for draw based games, it demonstrates another successful
iLottery implementation.
The market for charitable games products (bingo paper and pull-tabs) remains stable and our American
Games operation continues to be an important contributor to our financial success. Our focus will be on
incrementally building market share through growth of specific product initiatives such as pull-tabs for
specific events and the lottery market.
We continue to review strategic initiatives to increase our expertise to serve the market as lotteries
expand their products and services. This includes looking at strategic acquisitions to both add to our
core competencies and develop additional areas of expertise. Our strong organic cash flow allows us the
flexibility to pursue opportunities to grow our organization while maintaining a sound financial foundation.
The nature of the international focus of our business results in a net positive exposure to U.S. dollar cash
flows. Changes in the foreign exchange relationship between the Canadian and U.S. dollar can impact
the short term financial results including the operating cash flow and creation of gains and/or losses in
monetary assets and liabilities on the balance sheet. We maintain a significant array of internal hedges
to offset our net exposure to the U.S. dollar and do not anticipate utilizing any financial hedges in the
near future. We also maintain a net exposure to the Euro, major fluctuations in this currency will also
impact our financial results.
Our budgeted capital expenditures for 2017 should remain at similar levels as experienced in 2016, with
no major projects anticipated. Assuming no additional significant investments in non-cash working
capital, strong positive operating cash flow is expected going forward.
Disclosure Controls and Procedures
Under National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,”
issuers are required to document the conclusions of the Chief Executive Officer and Chief Financial Officer
(the “Certifying Officers”) regarding the design and effectiveness of the disclosure controls and
procedures. Pollard’s management, with the participation of the Certifying Officers of Pollard, has
concluded that the disclosure controls and procedures as defined in National Instrument 52-109 are
designed appropriately and are effective at providing reasonable assurance of achieving the disclosure
objectives.
26
Internal Controls over Financial Reporting
Under National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,”
issuers are required to document the conclusions of the Certifying Officers regarding the design and
effectiveness of the internal controls over financial reporting. Management used the Internal Control –
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO 2013) as the control framework in designing its internal controls over financial
reporting. Pollard’s management, with the participation of the Certifying Officers of Pollard, has
concluded that the internal controls over financial reporting as defined in National Instrument 52-109 are
designed appropriately and are effective at providing reasonable assurance of achieving the financial
reporting objectives.
No changes were made in Pollard’s internal control over financial reporting during the year ended
December 31, 2016, that have materially affected, or are reasonably likely to materially affect, Pollard’s
internal control over financial reporting.
Additional Information
Shares of Pollard Banknote Limited are traded on the Toronto Stock Exchange under the symbol PBL.
Additional information relating to Pollard, including the Audited Consolidated Financial Statements and
the Annual Information Form for the year ended December 31, 2016, is available on SEDAR at
www.sedar.com.
Pollard Banknote Limited
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474-2323
www.Pollardbanknote.com
27
Management’s Report
The accompanying consolidated financial statements and all the information contained in the annual report
of Pollard Banknote Limited (“Pollard”) are the responsibility of management and have been approved by
the Board of Directors of Pollard. Financial and operating data elsewhere in the annual report is consistent
with the information contained in the financial statements. The financial statements and all other
information have been prepared by management in accordance with Canadian generally accepted
accounting principles. The financial statements include some amounts and assumptions based on
management’s best estimates which have been derived with careful judgment.
In fulfilling its responsibilities, management of Pollard has developed and maintains a system of internal
accounting controls. These controls are designed to ensure that the financial records are reliable for
preparing the financial statements. The Board of Directors of Pollard carries out its responsibility for the
financial statements through the Audit Committee. The Audit Committee reviews Pollard’s annual
consolidated financial statements and recommends their approval by the Board of Directors. The auditors
have full access to the Audit Committee with and without management present.
The consolidated financial statements have been audited by KPMG LLP Chartered Accountants, whose
opinion is contained in this annual report.
“John Pollard”
“Robert Rose”
JOHN POLLARD
Co-Chief Executive Officer
March 13, 2017
ROBERT ROSE
Chief Financial Officer
Consolidated Financial Statements of
POLLARD BANKNOTE
LIMITED
Years ended December 31, 2016 and 2015
KPMG LLP
Suite 2000 – One Lombard Place
Winnipeg MB R3B 0X3
Canada
Telephone (204) 957-1770
Fax
(204) 957-0808
www.kpmg.ca
Internet
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Pollard Banknote Limited
We have audited the accompanying consolidated financial statements of Pollard Banknote Limited, which
comprise the consolidated statements of financial position as at December 31, 2016 and 2015, the
consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years
then ended, and notes, comprising a summary of significant accounting policies and other explanatory
information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity.
KPMG Canada provides services to KPMG LLP
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Pollard Banknote Limited as at December 31, 2016 and 2015, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
March 13, 2017
Winnipeg, Canada
Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
Assets
Current assets
Cash
Restricted cash
Accounts receivable
Inventories (note 5)
Prepaid expenses and deposits
Income taxes receivable
Total current assets
Non-current assets
Property, plant and equipment (note 6)
Equity investment (note 7)
Goodwill (note 8)
Intangible assets (note 9)
Total non-current assets
December 31,
2016
December 31,
2015
$
$
7,500
3,203
38,585
27,232
3,437
-
79,957
46,906
468
37,513
11,916
96,803
7,587
560
24,151
23,739
4,169
3,046
63,252
50,380
401
37,717
12,340
100,838
Total assets
$
176,760
$
164,090
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Dividends payable
Income taxes payable
Current portion long-term debt (note 11)
Current portion subordinated debt (note 12)
Total current liabilities
Non-current liabilities
Long-term debt (note 11)
Subordinated debt (note 12)
Other non-current liabilities
Pension liability (note 13)
Deferred income taxes (note 10)
Total non-current liabilities
Shareholders’ equity
Share capital (note 14)
Reserves
Deficit
Total shareholders’ equity
Commitments and contingencies (note 15)
December 31,
2016
December 31,
2015
$
$
25,864
706
2,541
-
1,363
30,474
70,852
4,769
395
13,524
4,909
94,449
73,209
3,917
(25,289)
51,837
22,290
706
-
1,203
-
24,199
72,083
6,813
397
11,270
5,751
96,314
73,209
4,384
(34,016)
43,577
Total liabilities and shareholders’ equity
$
176,760
$
164,090
See accompanying notes to consolidated financial statements.
On behalf of the Board:
“Jerry Gray” Director
“John Pollard” Director
Pollard Banknote Limited
Consolidated Statements of Income
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31
Sales
Cost of sales
Gross profit
Administration
Selling
Other income (note 16)
Income from operations
Finance costs (note 17)
Finance income (note 17)
Income before income taxes
Income taxes (note 10)
Current (recovery)
Deferred (reduction)
2016
2015
$
246,414
$
221,030
197,177
49,237
176,675
44,355
20,919
8,037
(32)
20,313
4,281
(1,042)
17,074
5,144
(339)
4,805
19,177
7,374
(284)
18,088
6,382
(490)
12,196
(677)
5,410
4,733
Net income
Net income per share (basic) (note 18)
Net income per share (diluted) (note 18)
$
$
$
12,269
$
7,463
0.52 $
0.52
$
0.32
0.32
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31
Net income
$
12,269
$
7,463
2016
2015
Other comprehensive income (loss)
Items that are or may be reclassified to profit and loss
Foreign currency translation differences – foreign
operations
Items that will never be reclassified to profit and loss
Defined benefit plans remeasurements, net of
income tax (reduction) of ($291) and $773 (note
10 & note 13)
Other comprehensive income (loss) – net of income tax
(467)
2,928
(737)
(1,204)
2,070
4,998
Comprehensive income
$
11,065
$
12,461
See accompanying notes to consolidated financial statements.
Total
equity
43,577
12,269
Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Year ended December 31, 2016
Attributable to equity holders of Pollard Banknote
Limited
Balance at January 1, 2016
$
73,209
4,384
(34,016)
Share
capital
Translation
reserve
Deficit
Net income
Other comprehensive loss
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax reduction of ($291)
Total other comprehensive loss
Total comprehensive income (loss)
Share based compensation (note 14)
$
$
Dividends to owners of Pollard Banknote Limited
-
-
-
-
-
-
-
-
12,269
(467)
-
-
(737)
(467)
(737)
(467)
(467)
-
-
(737)
11,532
(1,204)
11,065
20
20
(2,825)
(2,825)
Balance at December 31, 2016
$
73,209
3,917
(25,289)
51,837
Year ended December 31, 2015
Attributable to equity holders of Pollard Banknote
Limited
Share
capital
Translation
reserve
Deficit
Total
equity
Balance at January 1, 2015
$
73,209
1,456
(40,750)
33,915
Net income
Other comprehensive income
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax of $773
Total other comprehensive income
Total comprehensive income
$
$
Share based compensation (note 14)
Dividends to owners of Pollard Banknote Limited
-
-
-
-
-
-
-
-
7,463
7,463
2,928
-
2,928
2,928
-
-
-
2,070
2,070
9,533
26
2,928
2,070
4,998
12,461
26
(2,825)
(2,825)
Balance at December 31, 2015
$
73,209
4,384
(34,016)
43,577
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31
Cash increase (decrease)
Operating activities
Net income
Adjustments
Income taxes
Amortization and depreciation
Interest expense
Unrealized foreign exchange (gain) loss
Loss on equity investment
Pension expense
Gain on sale of investment in associate
Mark-to-market gain on foreign currency contracts
Interest paid
Income tax recovered (paid)
Pension contributions
Change in non-cash operating working capital
(note 20)
Investing activities
Additions to property, plant and equipment
Equity investment (note 7)
Proceeds from sale of investment in associate
Additions to intangible assets
Financing activities
Net proceeds from (repayments of) long-term debt
Repayments of subordinated debt
Change in other non-current liabilities
Deferred financing charges paid
Dividends paid
Foreign exchange gain on cash held in foreign currency
Change in cash position
Cash position, beginning of year
2016
2015
$
12,269
$
7,463
4,805
10,799
3,374
(1,532)
730
4,417
(516)
-
(3,270)
672
(3,102)
(16,920)
11,726
(4,996)
(807)
516
(1,124)
(6,411)
(1,789)
(681)
16
(165)
(2,825)
(5,444)
42
(87)
7,587
4,733
8,351
2,917
3,776
32
4,532
-
(483)
(2,828)
(3,141)
(2,879)
(2,815)
19,658
(15,376)
(433)
-
(682)
(16,491)
989
-
(46)
(384)
(2,825)
(2,266)
474
1,375
6,212
7,587
Cash position, end of year
$
7,500
$
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
1.
Reporting entity:
Pollard Banknote Limited (“Pollard”) was incorporated under the laws of Canada on March 26, 2010.
The address of Pollard’s registered office is 140 Otter Street, Winnipeg, Manitoba, Canada, R3T 0M8.
The consolidated financial statements of Pollard as at and for the year ended December 31, 2016,
comprise Pollard and its subsidiaries and its interest in other entities. Pollard is primarily involved in
the manufacture, development and sale of lottery and gaming products.
The controlling party of Pollard is Pollard Equities Limited (“Equities”), a privately held company.
Equities owns approximately 73.5% of Pollard’s outstanding shares.
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”).
On March 13, 2017, Pollard’s Board of Directors approved these consolidated financial
statements.
(b) Basis of preparation:
These consolidated financial statements have been prepared on a historical cost basis, except
for the following material items in the statement of financial position:
• The pension liability is recognized as the net total of the fair value of plan assets less the
present value of the defined benefit obligation.
These statements are presented in Canadian dollars, Pollard’s functional currency, and all values
are rounded to the nearest thousand (except share and per share amounts) unless otherwise
indicated.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
2.
Basis of preparation (continued):
(c) Use of estimates and judgments:
The preparation of the consolidated financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates
are recognized prospectively. Actual results may differ from these estimates.
Information about judgments, assumptions and estimation uncertainties that have a significant
risk of resulting in a material adjustment within the next period are as follows:
Impairment of goodwill:
Pollard determines whether goodwill is impaired at least on an annual basis. This requires an
estimation of the “value in use” or “fair value less costs to sell” of the cash-generating units
(“CGUs”) to which goodwill is allocated. Estimating a value in use requires Pollard to make an
estimate of the expected future cash flows from the CGUs and also to choose a suitable
discount rate in order to calculate the present value of those cash flows. Judgment is required
in determining the level at which to test goodwill, including the grouping of assets that generate
cash inflows. Further details are provided in note 8.
Employee future benefits:
Accounting for defined benefit plans requires Pollard to use actuarial assumptions. These
assumptions include the discount rate and the rate of compensation increases. These
assumptions depend on underlying factors such as economic conditions, government
regulations, investment performance, employee demographics and mortality rates. See note
13 for further information.
Income taxes:
Pollard is required to evaluate the recoverability of deferred income tax assets. This requires
an estimate of Pollard’s ability to utilize the underlying future income tax deductions against
future taxable income before they expire. In order to evaluate the recoverability of these
deferred income tax assets, Pollard must estimate future taxable income. Further details are
provided in note 10.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Pollard and all its subsidiaries.
Subsidiaries are entities which are under Pollard’s control, where control is defined as the power
to govern financial and operating policies of an entity so as to obtain benefits from its activities.
Pollard holds 100% of the voting rights in, and therefore controls, its subsidiaries.
Significant subsidiaries:
Percent Ownership Interest
December 31, 2016
December 31, 2015
Pollard Holdings, Inc.
Pollard (U.S.) Ltd.
Pollard Games, Inc.
Pollard iLottery Inc.
100
100
100
100
100
100
100
100
Pollard has entered into a contractual joint agreement with Neogames S.à r.l. for the operation
of iLottery gaming for the Michigan Lottery. As such Pollard has recognized in relation to its
interest in the joint operation: its assets, including its share of any assets held jointly; its liabilities,
including its share of any liabilities incurred jointly and its share of revenue and expenses.
Pollard, in conjunction with NeoGames US, LLP, established NeoPollard Interactive LLC (“NPI”).
Pollard accounts for its investment in NPI as a joint venture. Under the equity method of
accounting Pollard recognizes its share of the income and expenses and equity movements of
NPI.
All inter-company balances and transactions, and any unrealized income and expenses arising
from inter-company transactions, have been eliminated.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
(b) Restricted cash:
Under the terms of Pollard’s iLottery contract with the Michigan Lottery, Pollard holds iLottery
players’ deposits in a bank account for the benefit of the lottery and therefore the cash is not
available for use by Pollard. Pollard records an equal, offsetting liability within accounts payable
and accrued liabilities. Pollard has excluded changes in the restricted cash and related liability
from its calculation of the change in cash position in the statements of cash flows.
(c) Revenue recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, significant risks and
benefits of ownership are transferred, the sales price to the customer is fixed or is determined
and collection of the resulting receivable is reasonably assured. The significant risks of ownership
and benefits of ownership are normally transferred in accordance with the shipping terms agreed
to with the customer. In some instances, revenue is recognized when the customers’ tickets are
sold at retail. Volume rebates are accrued and recorded as a reduction to sales based on
historical experience and management’s expectations regarding sales volume.
Revenues relating to license and royalty sales, iLottery services, loyalty programs, digital and
lottery management services are recognized pursuant to the terms of the applicable contracts.
Where Pollard provides software and related infrastructure, revenue is recognized in proportion
to the stage of completion of the contracted work.
(d) Inventories:
Raw materials, work-in-process and finished goods are valued at the lower of cost and net
realizable value. The cost of raw material inventory is based on its weighted average cost and
includes all costs incurred to acquire the materials. In addition to the direct costs of conversion,
the cost of work-in-process and finished goods, which Pollard manufactures, also includes an
appropriate share of production overheads based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion.
(e) Goodwill:
Goodwill is comprised of the excess sale price over the underlying carrying amount of the net
assets sold as at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction with the
Initial Public Offering (“IPO”) and the excess purchase price over the underlying carrying amount
of the net assets acquired of Pollard’s U.S. subsidiaries. Goodwill is not amortized but is subject
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
to an annual impairment test to ensure its recoverable value remains greater than, or equal to,
book value.
(f) Intangible assets:
Deferred development:
Development expenditures are recognized as an intangible asset only if Pollard can demonstrate
that the development costs can be measured reliably, the product is technically and commercially
feasible, future economic benefits are probable and Pollard has sufficient resources to complete
development and to use or sell the asset. The expenditures capitalized include the cost of
materials, direct labour, overhead costs that are directly attributable to preparing the asset for
its intended use and borrowing costs incurred in respect of qualifying assets. Other development
expenditures are expensed as incurred.
Capitalized development expenditures are measured at cost less accumulated amortization and
accumulated impairment losses.
Computer software and licenses:
Computer software consists of the cost of acquiring and implementing these systems. Cost of
implementation include third party costs as well as direct labour and related overhead costs
attributable to the asset. Minimum license fees incurred in connection with our licensing
agreements for our use of third-party brands are capitalized and amortized over the estimated
life of the asset.
Capitalized computer software costs and licenses are measured at cost less accumulated
amortization and accumulated impairment losses.
Other intangible assets:
Intangible assets that are acquired by Pollard and have finite useful lives are measured at cost
less accumulated amortization and accumulated impairment losses.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Intangible assets are amortized, on a straight-line basis, over their estimated useful lives as
follows:
Asset
Customer assets
Patents
Computer software and licenses
Deferred development
Rate
16 years
Term of patent
5 to 10 years or term of license
2 to 7 years
Amortization methods, estimated useful lives and residual value are reviewed each annual
reporting date and adjusted prospectively if appropriate.
(g) Property, plant and equipment:
Property, plant and equipment (“PP&E”) are stated at cost less investment tax credits (including
SR&ED credits), accumulated depreciation and accumulated impairment losses. Cost includes
expenditures that are directly attributable to the acquisition of the asset. The cost of self-
constructed assets includes the cost of materials, direct labour and related fringes, other costs
directly attributable to bringing the assets to working condition for their intended use and
borrowing costs incurred in respect to qualifying assets. Major spare parts are treated as PP&E
when they have a useful life greater than a year. Once major spare parts are put in service, they
are transferred into equipment and amortized accordingly.
An item of PP&E is derecognized upon disposal or when no future economic benefits are expected
from its use or disposal. The gain or loss on disposal of an item of PP&E is determined by
comparing the proceeds from disposal with the carrying value of the PP&E and is recognized in
the statement of income on a net basis.
The cost of each component of an item of PP&E is depreciated over its estimated useful life on
a straight-line basis, commencing the date it is ready for use. Land is not depreciated. The
estimated useful lives for the current and comparative periods are as follows:
Asset
Buildings
Leasehold improvements
Equipment
Furniture, fixtures and computers
Rate
10 to 30 years
Term of lease
2 to 11 years
3 to 9 years
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Depreciation methods, useful lives and residual values are reviewed each annual reporting date
and adjusted prospectively if appropriate.
The carrying value of property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.
(h) Investment in associate:
Pollard accounts for its investment in associate using the equity method of accounting as it has
significant influence, but not control. Significant influence is presumed to exist when Pollard
holds between 20 and 50 percent of the voting power of another entity. The consolidated
financial statements include Pollard’s share of the income and expenses and equity movements
of the entity accounted for under the equity method of accounting.
(i)
Investment in joint venture:
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement, rather than rights to the assets
and obligations for the liabilities. Joint control is the contractually agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities require consent
of both parties.
The consolidated financial statements include Pollard’s share of the income and expenses and
equity movements of the entity accounted for under the equity method of accounting.
(j) Investment in joint operation:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require consent of both parties.
The consolidated financial statements include Pollard’s interest in the Michigan Lottery iLottery
joint operations: its assets, including its share of any assets held jointly; its liabilities, including
its share of any liabilities incurred jointly and its share of revenue and expenses.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
(k) Financial instruments:
Non-derivative financial assets
Pollard initially recognizes loans and receivables on the date that they originated. All other
financial assets (including assets designated at fair value through profit or loss) are recognized
initially on the trade date at which Pollard becomes a party to the contractual provisions of the
instrument. Pollard derecognizes a financial asset when the contractual rights to the cash flows
from the asset expire.
Financial assets and liabilities are offset and the net amount presented on the statement of
financial position when, and only when, Pollard has a legal right to offset the amounts and intends
either to settle on a net basis or to realize the asset and settle the liability simultaneously. Pollard
classifies non-derivative financial assets into the following categories: financial assets at fair
value through profit or loss, held-to-maturity financial assets, loans and receivables and available-
for-sale financial assets.
i) Financial assets at fair value through profit or loss
A financial asset is classified as financial assets at fair value through profit or loss if it is classified
as held for trading or is designated as such upon initial recognition. Attributable transaction
costs are recognized in net income as incurred. Financial assets at fair value through profit or
loss are measured at fair value, and changes therein are recognized in net income. Pollard has
no non-derivative financial assets classified as financial assets at fair value through profit or loss.
ii) Held-to-maturity financial assets
If Pollard has the positive intent and ability to hold debt securities to maturity, then such financial
assets are classified as held-to-maturity. Held-to-maturity financial assets are initially recognized
at fair value plus any directly attributable transaction costs. Subsequent to initial recognition
held-to-maturity financial assets are measured at amortized cost using the effective interest
method, less any impairment losses. Pollard has no financial assets classified as held-to-maturity.
iii) Loans and receivables
Loans and receivables are financial assets with fixed or determined payments that are not quoted
in an active market. Such assets are initially recognized at fair value plus any directly attributable
transaction costs. Subsequent to initial recognition loans and receivables are measured at
amortized cost using the effective interest method, less any impairment losses, and the net gain
or loss is included in finance income. Pollard has classified cash, restricted cash and accounts
receivable as loans and receivables.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
iv) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as
available-for-sale or are not classified in any of the previous categories. Subsequent to initial
recognition, available-for-sale financial assets are measured at fair value and changes therein,
other than impairment losses and foreign exchange differences, are recognized in other
comprehensive income and are presented in the fair value reserve in equity. When an investment
is derecognized, the gain or loss accumulated in equity is reclassified to net income. Pollard has
no financial assets classified as available-for-sale.
Non-derivative financial liabilities
All non-derivative financial liabilities are classified as other financial liabilities and are recognized
initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, these financial liabilities are measured at amortized cost using the effective interest
method and the net gain or loss is included in finance costs.
Pollard classifies accounts payable and accrued liabilities, dividends payable, long-term debt,
subordinated debt and other non-current liabilities as other financial liabilities.
Share Capital
Common stock is classified as equity. Incremental costs directly attributable to the issue of
common stock are recognized as a deduction from equity, net of any tax effects.
Derivatives and hedge accounting
Pollard may use certain derivative financial instruments to manage risks of fluctuation in interest
rates and foreign exchange rates. On initial designation of the derivative as the hedging
instrument, Pollard formally documents the relationship between the hedging instrument and the
hedging item, including the risk management objectives and strategy in undertaking the hedge
transaction and the hedged risk, together with the methods that will be used to assess the
effectiveness of the hedging relationship. Pollard makes an assessment, both at the inception
of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments
are expected to be “highly effective” in offsetting the change in the fair value or cash flows of
the respective hedged items attributable to the hedged risk, and whether the actual results of
each hedge are within a range of 80 – 125 percent.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Derivatives are recognized initially at fair value and attributable transaction costs are recognized
in net income as incurred. Subsequent to initial recognition, derivatives are measured at fair
value and changes are accounted for as follows:
i) Cash flow hedges
When a derivative financial instrument is designated as the hedging instrument in a hedge
of the variability in cash flows attributable to a particular risk associated with a recognized
asset or liability, the effective portion of changes in the fair value of the derivative is
recognized in other comprehensive income and presented in the hedging reserve in equity.
Any ineffective portion of changes in fair value of the derivative is recognized immediately in
net income. If the hedging instrument no longer meets the criteria for hedge accounting,
then hedge accounting is discontinued prospectively. This results in the amortization of the
respective derivative’s cumulative changes in fair value in the hedging reserve, over the
remaining term of the derivative. Any adjustments to fair value after discontinuing hedge
accounting are recognized immediately in net income as finance income or loss.
ii) Other non-trading derivatives
When a derivative financial instrument is not designated in a hedge relationship that qualifies
for hedge accounting, all changes in its fair value are recognized immediately in net income
as finance income or loss.
(l) Translation of foreign currencies:
The functional currency for each of Pollard’s subsidiaries is the currency of the primary economic
environment in which the entity operates. Transactions in foreign currencies are translated to
the respective functional currencies of each entity within the consolidated group using the
exchange rates in effect at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are translated to the functional currency
at the exchange rates prevailing at the end of the reporting period. Non-monetary items
measured at historical cost in a foreign currency are translated to the functional currency using
the exchange rate prevalent at the date of acquisition. Non-monetary items denominated in
foreign currencies that are measured at fair value are translated to the functional currency at the
exchange rate prevalent at the date that the fair value was determined. Foreign currency
differences arising from translation are recognized in net income, except for exchange differences
arising on the translation of financial instruments qualifying as a cash flow hedge, which are
recognized directly in other comprehensive income (“OCI”).
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
The results and financial position of entities within the consolidated group that have a functional
currency different from the presentation currency are translated into Canadian dollars as follows:
assets and liabilities are translated at the exchange rate prevailing at the end of the reporting
period; income and expenses are translated at the average rate for the reporting period; all
resulting exchange differences are recognized in OCI. On disposal of a foreign operation, the
deferred cumulative amount recognized in OCI relating to that particular foreign operation is
recognized in net income.
(m) Employee benefits:
Share based compensation
The grant date fair value of stock options granted to employees is recognized as an expense,
with a corresponding increase in equity, over the vesting period of the awards.
Defined contribution plans
Pollard’s U.S. subsidiaries maintain two defined contribution plans in the United States. The
obligation to contribute to these plans is recognized as an employee benefit expense as incurred.
Defined benefit plans
Pollard maintains four non-contributory defined benefit pension plans in Canada and the United
States, three being final pay plans and one being a flat benefit plan. None of the plans have
indexation features.
The costs of Pollard’s defined benefit plans are recognized over the period in which employees
render service to Pollard in return for the benefits. The defined benefit obligations associated
with the plans are actuarially determined using the projected unit credit method pro-rated on
service and management’s best estimate of salary escalation and retirement ages of employees.
The present value of the defined benefit obligations are determined by discounting the estimated
future cash outflows using interest rates of high quality corporate bonds that have maturity terms
approximating the maturity terms of the related obligation and that are denominated in the
currency in which the benefits will be paid. The expected return on pension plan assets is
calculated utilizing the discount rate used to measure the defined benefit obligation at the
beginning of the annual period.
Past service costs are recognized as an expense on a straight line basis over the average period
until the benefits becomes vested. If the benefits have vested, past service costs are recognized
in net income immediately.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Remeasurements that arise in calculating the present value of the defined benefit obligation and
the fair value of plan assets are recognized immediately in OCI.
Pollard’s pension asset is limited to the total of any unrecognized past services costs and the
present value of economic benefits available in the form of any future refunds from the plan or
reductions in future contributions to the plan. In order to calculate the present value of economic
benefits, consideration is given to any minimum funding requirements that apply to Pollard’s
plans. An economic benefit is available to Pollard if it is realizable during the life of the plan, or
on settlement of the plan liabilities.
(n) Income taxes:
Current income tax and deferred income tax are recognized in the statement of income except
to the extent that the tax relates to items recognized directly in equity or in OCI. Current income
tax is the expected tax payable or receivable on the taxable income or loss for the period and
any adjustment to tax payable in respect to previous years. Current income tax expense includes
withholding taxes.
Deferred income tax is recorded to reflect the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities and their tax basis. Deferred
income tax assets and liabilities are determined based on the enacted or substantively enacted
tax rates, which are expected to be in effect when the underlying items of income and expense
are expected to be realized.
Deferred income tax is not recognized for: temporary differences related to investments in
subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future,
taxable temporary differences arising on the initial recognition of goodwill or temporary
differences on the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss.
Deferred income tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date of enactment or substantive enactment, except if it
relates to an item previously recognized in equity, in which case the adjustment is made to
equity.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to
offset current income tax liabilities and assets, and they are levied by the same taxation authority
on the same taxable entity, or on different tax entities which intend to settle their current income
tax assets and liabilities on a net basis.
(o) Provisions:
Provisions are recognized when Pollard has a present legal or constructive obligation as a result
of a past event that can be estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. If the effect of the time value of money is
material, provisions are discounted using a current pre-tax rate that reflects, where appropriate,
the risks specific to the liability. Where discounting is used, the increase in the provision due to
the passage of time is recognized as a finance cost.
(p) Impairment:
Financial assets
Financial assets classified as loans and receivables, held-to-maturity and available-for-sale are
assessed at each reporting period date to determine whether there is objective evidence that it
is impaired. A financial asset is impaired if objective evidence indicates that a loss event has
occurred after the initial recognition of the asset, and that the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated reliably. Evidence of
impairment may include default or delinquency by a debtor, indications that a debtor will enter
bankruptcy or economic conditions that correlate with defaults. Pollard has neither available-
for-sale nor held-to-maturity instruments.
For loans and receivables, Pollard first assesses whether objective evidence of impairment exists
for financial assets that are individually significant, or collectively for financial assets that are not
individually significant. If Pollard determines that no objective evidence of impairment exists for
an individually assessed financial asset, whether significant or not, it includes the asset in a group
of financial assets with similar credit risk characteristics and collectively assess them for
impairment. Individually assessed assets with an impairment loss are not included in the
collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss
is measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows. The present value of the estimated future cash flows is discounted
at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced
through the use of an allowance account and the amount of the loss is recognized in the
statement of income. If, in a subsequent year, the amount of the estimated impairment loss
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
increases or decreases because of an event occurring after the impairment was recognized, the
previously recognized impairment is increased or reduced by adjusting the allowance account,
through the statement of income.
Non-financial assets
The carrying amount of Pollard’s non-financial assets, other than inventories and deferred income
tax assets, are reviewed at each reporting date to determine whether there is an indication that
an asset may be impaired. If any such indication exists, or when the annual impairment testing
for an asset is required, Pollard estimates the asset’s recoverable amount. For goodwill the
recoverable amount is estimated as of December 31 each year. An impairment loss is recognized
if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value
less costs to sell. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset of CGU. For the purpose of impairment
testing, assets that cannot be tested individually are grouped together into the smallest group of
assets that generates cash inflows from continuing use that are largely independent of cash
inflows of other assets or CGUs.
Impairment losses are recognized in net income. Impairment losses recognized in respect to
CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and
then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An
impairment loss in respect to goodwill is not reversed. In respect to other assets, impairment
losses recognized in prior periods are assessed at each reporting date for any indications that
the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. An impairment loss can
only be reversed to the extent that the asset’s carrying value that would have been determined,
net of amortization, if no impairment had been recognized.
(q) Finance costs and finance income:
Finance costs comprise interest expense on borrowings, amortization of deferred financing costs,
mark-to-market losses on foreign exchange contracts and net foreign exchange losses.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
3.
Significant accounting policies (continued):
Borrowing costs that are not directly attributable to the acquisition, construction or production
of an asset that necessarily takes a substantial period of time to get ready for its intended use
or sale are expensed in the period incurred using the effective interest method.
Finance income comprises mark-to-market gains on foreign exchange contracts and net foreign
exchange gains.
4.
Future accounting standards:
In July 2014, the International Accounting Standards Board (“IASB”) issued International Financial
Reporting Standards (“IFRS”) 9 Financial Instruments (“IFRS 9”), which replaces the existing
guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised
guidance on the classification and measurement of financial instruments, a new expected credit loss
model for calculating impairment on financial assets and new general hedge accounting
requirements. It also carries forward the guidance on recognition and derecognition of financial
instruments from IAS 39. IFRS 9 is required for fiscal years beginning on or after January 1, 2018.
Pollard is currently assessing the impact of the new standard on its consolidated financial statements.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard
specifies the steps and timing for recognizing revenue, as well as requiring more informative, relevant
disclosures. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue. IFRS 15 is
required for fiscal years beginning on or after January 1, 2018 with early adoption available. Pollard
is currently assessing the impact of the new standard on its consolidated financial statements.
In September 2014, the IASB issued amendments to IFRS 10 Consolidated Financial Statements and
IAS 28 Investments in Associates and Joint Ventures (2011). The amendments address an
acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in
dealing with the sale or contribution of assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full gain or loss is recognized when a transaction
involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized
when a transaction involves assets that do not constitute a business, even if these assets are housed
in a subsidiary. These amendments were to be effective for fiscal years beginning on or after January
1, 2016, with early adoption available; however, in December 2015 the IASB decided to defer the
effective date for these amendments indefinitely. Pollard is currently assessing the impact of the
amendments on its consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
4.
Future accounting standards (continued):
In January 2016, the IASB issued IFRS 16 Leases which replaces IAS 17 Leases. This standard
introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities
for all leases with a term of more than 12 months, unless the underlying asset is of low value. A
lessee is required to recognize a right-of-use asset representing its right to use the underlying asset
and a lease liability representing its obligation to make lease payments. This standard substantially
carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures
to be provided by lessors. Other areas of the lease accounting model have been impacted, including
the definition of a lease. Transitional provisions have been provided. The new standard is effective
for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities
that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption
of IFRS 16. Pollard is currently assessing the impact of the new standard on its consolidated financial
statements.
In January 2016, the IASB issued amendments to IAS 7 Statement of Cash Flows. The amendments
were issued to improve information provided to users of financial statements about an entity’s
changes in liabilities arising from financing activities. These amendments are effective for annual
periods beginning on or after January 1, 2017. Earlier application is permitted. Pollard does not
expect these amendments to have a material impact on its consolidated financial statements.
In January 2016, the IASB issued amendments to IAS 12 Income Taxes. The amendments were
regarding the recognition of deferred tax assets for unrealized losses relating to debt instruments
measured at fair value. These amendments are effective for annual periods beginning on or after
January 1, 2017. Earlier application is permitted. Pollard does not expect these amendments to have
a material impact on its consolidated financial statements.
In June 2016, the IASB issued amendments to IAS 2 Share-Based Payments. The amendments
clarify how to account for certain types of share-based payment transactions. These amendments
are effective for annual periods beginning on or after January 1, 2018. Retrospective or earlier
application is permitted under certain conditions. Pollard is currently assessing the impact of the
amendments on its consolidated financial statements.
In December 2016, the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and
Advance Consideration. The interpretation clarifies the date of the transaction for the purposes of
determining the exchange rate to use on initial recognition of the related asset, expense or income
is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability
arising from the payment or receipt of advance consideration. The interpretation is effective for
annual periods beginning on or after January 1, 2018. Retrospective or earlier application is permitted
under certain conditions. Pollard is currently assessing the impact of the amendments on its
consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
5.
Inventories:
Raw materials
Work-in-process
Finished goods
December 31,
2016
December 31,
2015
$
$
$
11,246
784
15,202
9,679
749
13,311
27,232
$
23,739
During 2016 Pollard recorded inventory write-downs of $622 representing an increase in the
obsolescence reserves and write-downs of $22 due to changes in foreign exchange rates.
During 2015 Pollard recorded inventory write-downs of $359 representing an increase in the
obsolescence reserves and write-downs of $11 due to changes in foreign exchange rates.
The cost of sales reflects the costs of inventory including direct material, direct labour and
manufacturing overheads.
6.
Property, plant and equipment:
Cost
Land Buildings
improvements Equipment
Leasehold
Spare
parts
Furniture,
fixture and
computers
Assets in
progress
Total
Balance at January 1, 2015
$
803
Additions/net transfers
Disposals
Effect of movements in
exchange rates
Balance at December 31,
-
-
-
9,391
2,488
-
-
2,159
122,956 1,023
3,989
15,148 155,469
295
26,807
223
173
(14,610)
15,376
-
(34)
160
924
-
-
-
-
(34)
6
-
1,090
2015
$
803
11,879
2,614
150,653 1,246
722
3,578
107
4,168
712
538
171,901
(312)
4,996
Additions/net transfers
Effect of movements in
exchange rates
Balance at December 31,
-
-
189
-
2016
$
803
12,068
3,306
154,054
1,353
4,879
226
176,689
(30)
(177)
-
(1)
-
(208)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
6.
Property, plant and equipment (continued):
Accumulated
depreciation
Land Buildings
improvements Equipment
Leasehold
Spare
parts
Furniture,
fixture and
computers
Assets in
progress
Total
Balance at January 1, 2015
$
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2015
Depreciation for the year
Effect of movements in
exchange rates
Balance at December 31,
2016
$
$
-
-
-
-
-
-
-
-
4,227
1,365
105,705
323
-
-
4,550
362
193
5,217
-
(34)
130
761
1,688
111,649
250
7,574
-
(23)
(138)
4,912
1,915
119,085
-
-
-
-
-
-
-
-
3,449
184
-
1
3,634
237
- 114,746
-
5.917
-
(34)
-
892
- 121,521
-
8,423
-
-
(161)
3,871
- 129,783
Carrying amounts
Land Buildings
improvements Equipment
Leasehold
Spare
parts
Furniture,
fixture and
computers
Assets in
progress
Total
At December 31, 2015
At December 31, 2016
$
$
803
803
7,329
7,156
926
39,004
1,246
1,391
34,969
1,353
534
1,008
538
226
50,380
46,906
In 2014 Pollard commenced the installation of a new printing press which was reflected in the assets
in progress category. The press was put into service in 2015. Included in the 2015 expenditures
were $390 of capitalized borrowing costs (2016 - nil).
7. Equity investment:
Interest in joint venture
Balance – beginning of year
Investment
Equity loss
Effects of movements in exchange rates
Balance – end of year
December 31,
2016
December 31,
2015
$
$
$
401
807
(730)
(10)
468
$
-
433
(32)
-
401
Pollard has entered into an agreement with NeoGames US, LLP for the establishment of NeoPollard
Interactive LLC. The entity was established to provide iLottery services in the United States and
Canada, excluding the State of Michigan.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
7. Equity investment (continued):
Pollard and Neogames S.à r.l. operate the iLottery operation for the Michigan Lottery under a
separate joint operating agreement. Pollard recognizes its interest in the joint operation by including
its assets, including its share of any assets held jointly, its liabilities, including its share of any liabilities
incurred jointly and its share of revenue and expenses.
8.
Goodwill:
Goodwill is comprised of $30,620 (2015 - $30,620), representing the excess purchase price over the
underlying carrying amount of the net assets sold, as at August 5, 2005, as a result of the 26.7% of
Pollard sold as part of its IPO with the remaining $6,893 (2015 - $7,097) from Pollard’s purchase of
its U.S. subsidiaries. Goodwill has been allocated to CGUs for impairment testing in this manner, as
described in the table below.
Lottery
Charitable games
December 31,
2016
December 31,
2015
$
$
30,620 $
6,893
37,513 $
30,620
7,097
37,717
During 2016 the value of goodwill decreased $204 (2015 – increased $1,117) as a result of changes
in foreign exchange rates.
For both the lottery and charitable games CGUs the recoverable amounts have been determined
based on a value in use calculation using cash flow projections from financial forecasts approved by
senior management. These forecasts cover a period of five years and reflect an estimate of a terminal
value. Included in these forecasts is an assumption of a 3% growth rate which was based on
historical trend and expected future performance.
The calculation of value in use for the CGUs described above are most sensitive to the following key
assumptions on which management has based its cash flow projections to undertake impairment
testing of goodwill:
Revenue and related gross profit
Foreign exchange rates
Discount rates
Growth rates
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
8.
Goodwill (continued):
Revenue and related gross profit
Projected cash flows from revenue assumes the continuation of recent historical trends adjusted for
expected new contract wins, anticipated contract renewal pricing pressures and the expected impact
of sales initiatives in conjunction with certain production efficiencies that are being developed or are
expected to be developed.
Foreign exchange rates
A significant portion of revenue is denominated in U.S. dollars and Euros, partially offset by U.S.
dollar denominated costs. In addition, certain financial assets and liabilities are denominated in U.S.
currency. Projected cash flows assume an estimated exchange rate between Canadian dollars to
U.S. dollars and Euros based on expected exchange rates during the forecast period.
Discount rates
Discount rates were calculated based on the estimated cost of equity capital and debt capital
considering data and factors relevant to the economy, the industry and the CGUs. These costs were
then weighted in terms of a typical industry capital structure to arrive at an estimated weighted
average cost of capital. The after-tax discount rates applied to the cash flow projections for the
CGUs described above were as follows:
Lottery
Charitable games
10.0%
11.0%
Growth rates
Growth rates are based on estimated sustainable long-term growth rates of the CGUs.
Management believes that any reasonable possible change in any of the key assumptions on which
the cash generating unit’s recoverable amounts are based would not cause the unit’s carrying
amounts to exceed its recoverable amount.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
9.
Intangible assets:
Cost
Customer
assets
Patents
Deferred
development
Computer
software
and
licenses
Total
Balance at January 1, 2015
$
18,645
5,051
1,171
5,431 30,298
Additions (net of investment
tax credits)
Additions – internally
developed (net of
investment tax credits)
Effect of movements in
exchange rates
Balance at December 31, 2015
Additions (net of investment
tax credits)
Additions – internally
developed (net of
investment tax credits)
Balance at December 31, 2016
Accumulated amortization
Balance at January 1, 2015
Amortization for the year
Effect of movements in
exchange rates
Balance at December 31, 2015
Amortization for the year
Balance at December 31, 2016
-
-
81
-
-
346
427
(30)
285
255
-
18,645
-
5,132
-
1,141
15
15
6,077 30,995
-
55
-
898
953
-
18,645
-
5,187
7
1,148
164
171
7,139 32,119
Customer
assets
10,967
1,165
-
12,132
1,165
13,297
Patents
4,415
252
-
4,667
114
4,781
Deferred
development
Computer
software
and
licenses
Total
808
147
816 17,006
1,645
81
-
955
151
1,106
4
4
901 18,655
1,548
118
1,019 20,203
$
$
$
$
$
Carrying amounts
Customer
assets
Patents
Deferred
development
Computer
software
and
licenses
Total
At December 31, 2015
At December 31, 2016
$
$
6,513
5,348
465
406
186
42
5,176 12,340
6,120 11,916
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
9.
Intangible assets (continued):
Customer assets, $3,874 of patents and $229 of computer software were recognized as a result of
the excess purchase price over the underlying carrying amount of the intangible assets acquired as
at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction with the IPO. As at December
31, 2011, computer software and licenses, and patents recognized at IPO were fully amortized.
Customer assets will continue to be amortized until fiscal 2021.
The majority of the non-IPO computer software additions relate to the on-going implementation,
starting in 2014, of a new ERP platform. A portion of the platform went live January 2016, at which
time amortization pertaining to that portion commenced.
Amortization of intangible assets in 2016 of $1,548 (2015 – $1,645), was included in cost of sales.
10. Income taxes:
Income tax expense
Current (recovery)
Deferred (reduction)
Total
2016
5,144
(339)
4,805
$
$
2015
(677)
5,410
4,733
$
$
Income tax recognized in other comprehensive income (loss)
Amount
before
tax
Tax
benefit
2016
Amount
net of tax
Amount
before
tax
Tax
expense
2015
Amount
net of tax
Defined benefit plans
remeasurement
gain (loss)
$
$
(1,028)
(1,028)
291
291
(737) $
2,843
(773)
2,070
(737) $
2,843
(773)
2,070
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
10. Income taxes (continued):
Reconciliation of effective tax rate
2016
2016
2015
Net income for the year
Total income tax expense
Income before income taxes
Income tax using Pollard's domestic tax rate
27.0%
$
$
12,269
4,805
17,074
4,610
$
$
26.8%
2015
7,463
4,733
12,196
3,266
Changes in expected tax rates and other
non-deductible amounts
Effect of non-taxable items related to
foreign exchange
1.5%
259
(3.3%)
(401)
(0.4%)
(64)
15.3%
28.1% $
4,805
38.8% $
1,868
4,733
Deferred income tax assets and liabilities
Recognized deferred income tax assets and liabilities
Deferred income tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
2016
2015
2016
2015
2016
2015
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Other
$
19
108
364
5,758
148 $
-
325
5,477
(6,926)
(3,265)
-
(1,458)
(6,347) $
(3,515)
-
(1,734)
(6,907)
(3,157)
364
4,300
(6,199)
(3,515)
325
3,743
1,611
72
1,869
28
(1,192)
-
(1,631)
(371)
419
72
238
(343)
Tax assets (liabilities)
$
7,932
7,847 $
(12,841)
(13,598) $
(4,909)
(5,751)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
10. Income taxes (continued):
Movement in temporary differences during the year
Balance
January 1,
2015
Recognized
in profit or
loss
Recognized in
other
comprehensive
income
Balance
December 31,
2015
Recognized
in profit or
loss
Recognized in
other
comprehensive
income
Balance
December 31,
2016
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Unused tax losses
Other
$
(1,240)
(3,328)
304
3,656
(4,959)
(187)
21
860
-
-
-
(773)
(6,199)
(3,515)
325
3,743
672
520
(125)
(434)
(520)
(218)
-
-
-
238
-
(343)
Tax assets (liabilities)
$
459
(5,437)
(773)
(5,751)
(708)
358
39
266
181
-
415
551
-
-
-
291
-
-
-
(6,907)
(3,157)
364
4,300
419
-
72
291
(4,909)
Recognized in the consolidated statements of income as follows:
Deferred income tax expense (reduction)
Finance income
2016
(339)
(212)
$
(551)
$
2015
5,410
27
5,437
$
$
Amounts included in finance income relate to unrealized foreign exchange.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
11. Long-term debt:
December 31,
2016
December 31,
2015
Credit facility, interest of 3.1% to 3.4%, payable
monthly, maturing 2018
$
71,003
$
Deferred financing charges, net of amortization
Less current portion
(151)
70,852
-
73,497
(211)
73,286
(1,203)
$
70,852
$
72,083
Included in the total credit facility balance is a U.S. dollar loan balance of US$13,400 (2015 -
US$14,200).
Effective June 24, 2016, Pollard Banknote Limited renewed its credit facility. The credit facility
provides loans of up to $75,000 for its Canadian operations and US$12,000 for its U.S. subsidiaries.
The borrowings for the Canadian operations can be denominated in Canadian or U.S. dollars, to a
maximum of $75,000 Canadian equivalent. Borrowings under the credit facility bear interest at fixed
and floating rates based on Canadian and U.S. prime bank rates, banker’s acceptances or LIBOR. At
December 31, 2016, the outstanding letters of guarantee drawn under the credit facility were $1,205
(2015 - $1,257).
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including working capital ratios, debt to income before interest, income taxes,
amortization and depreciation (“Adjusted EBITDA”) ratios and certain debt service coverage ratios.
As at December 31, 2016, Pollard is in compliance with all financial covenants.
As of December 31, 2016, Pollard has unused credit facility available of $18,908 (2015 - $17,591).
Pollard’s credit facility is secured by a first security interest in all of the present and after acquired
property of Pollard. The facility can be prepaid without penalties. Under the terms of the agreement
the facility was committed for a two year period, renewable June 24, 2018.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
12. Subordinated debt:
Subordinated debt, interest of 9.00% payable
quarterly, maturing 2021
Less current portion
December 31,
2016
December 31,
2015
$
$
6,132 $
6,813
(1,363)
-
4,769 $
6,813
On April 2, 2014, Pollard entered into a loan agreement with Equities for a subordinated term loan
facility with a seven year term in the amount of $6,813 to assist in the purchase of a printing press.
Quarterly principal payments on the subordinated loan facility commenced the quarter following June
30, 2016. Interest on the subordinated debt commenced with the first draw at a rate of 9%. The
loan is fully subordinated to the secured credit facility.
13. Pension liability:
Fair value of benefit plan assets
Present value of benefit plan obligations
Net pension liability
December 31,
2016
December 31,
2015
$
$
44,372
(57,896)
$
40,073
(51,343)
(13,524)
$
(11,270)
Pollard sponsors non-contributory defined benefit plans providing pension benefits to its employees.
Pollard has four pension plans of which three are final pay plans and one is a flat benefit plan. None
of the plans have indexation features. The measurement date for all the plans is December 31. The
two plans of the U.S. subsidiaries require valuations annually with the last valuations being as of
January 1, 2016. One of the Canadian plans of Pollard currently requires valuation every three years
with the next valuation to be completed in fiscal 2017 as of December 31, 2016. Pollard’s other
Canadian plan’s last valuation was as of January 1, 2013. A new valuation of this plan will also be
completed in fiscal 2017 as of December 31, 2016. Pollard’s U.S. subsidiaries also maintain two
defined contribution plans. The pension expense for these defined contribution plans is the annual
funding contribution by the subsidiaries.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
13. Pension liability (continued):
Pollard expects to contribute approximately $4,100 to its defined benefit plans in 2017. Included in
the 2017 estimated contributions is $1,300 in additional solvency payments.
The benefit plan assets are held in trust and are invested as follows:
Equities
Bonds
Cash and cash equivalents
December 31,
2016
December 31,
2015
61.5%
35.8%
2.7%
62.3%
37.2%
0.5%
100.0%
100.0%
Information about Pollard’s defined benefit plans, in aggregate, is as follows:
Benefit plan assets
Fair value, beginning of year
Expected return on plan assets
Employer contributions
Benefits paid
Remeasurement (losses) gains
Effect of movements in exchange rates
Fair value, end of year
Accrued benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Remeasurement (gains) losses
Effect of movements in exchange rates
Balance, end of year
Net pension liability
2016
2015
$
40,073
1,733
2,577
(1,743)
1,866
(134)
37,460
1,534
2,387
(1,765)
(311)
768
44,372
$
40,073
$
51,343
3,464
2,161
(1,743)
2,894
(223)
49,402
3,595
1,979
(1,765)
(3,154)
1,286
57,896
$
51,343
(13,524) $
(11,270)
$
$
$
$
$
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
13. Pension liability (continued):
The total net cost for Pollard’s defined benefit and defined contribution pension plans recognized in
cost of sales is as follows:
2016
2015
Net defined benefit plans cost
Current service cost
Interest on plan obligations
Actual return on plan assets
Difference between expected return and actual
return on plan assets
Net defined benefit plans cost
Defined contribution plans cost
$
$
3,464
2,161
(3,599)
2,142
4,168
249
Net pension plans cost
$
4,417
$
3,595
1,979
(1,223)
(64)
4,287
245
4,532
Actuarial assumptions
The principal actuarial assumptions used in measuring at the reporting date are as follows:
Discount rate
Rate of compensation increase
2016
2015
4.0% to 4.3%
0% to 3.0%
4.3% to 4.7%
0% to 3.0%
Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2016, Pollard used CPM2014 Private Sector projected CPM-B mortality table for
its Canadian subsidiary’s pension plans and the RP-2016 healthy mortality tables for its U.S.
subsidiary’s pension plans. As of December 31, 2015, Pollard used CPM2014 Private Sector projected
with Scale B mortality table for its Canadian subsidiary’s pension plans and the RP-2015 healthy
mortality tables for its U.S. subsidiary’s pension plans.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
13. Pension liability (continued):
Sensitivity analysis
Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions,
holding other assumptions constant, would have affected the defined benefit obligation by the
amounts show below:
Discount rate (1% movement)
Rate of compensation increase (1% movement)
Future mortality (one year)
$
$
$
(11,083) $
$
$
1,949
1,247
14,722
(1,774)
(1,282)
Increase
Decrease
Remeasurements
Remeasurement (losses) gains arising on plan
assets
$
1,866
$
(311)
2016
2015
Remeasurement (gains) losses arising on plan
liabilities from:
Demographic assumptions
Financial assumptions
Experience adjustments
Remeasurement (gains) losses arising on plan
liabilities
$
$
(81) $
3,223
(248)
(268)
(3,110)
224
2,894
$
(3,154)
Remeasurements recognized in other comprehensive income
Amount accumulated in deficit, beginning of year
Recognized during the year
Amount accumulated in deficit, end of year
$
$
(11,259) $
(737)
(13,329)
2,070
(11,996) $
(11,259)
2016
2015
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
14. Share capital:
Authorized
Unlimited common shares
Unlimited preferred shares
Issued
23,543,158 common shares
Ownership restrictions:
December 31,
2016
December 31,
2015
$
$
73,209
73,209
$
$
73,209
73,209
The holders of the common shares are entitled to one vote in respect to each common share held,
subject to the Board of Directors ability to take constraint actions when a person, or group of persons
acting in concert acquires, agrees to acquire, holds, beneficially owns or controls, either directly or
indirectly, a number of shares equal to or in excess of 5% of the common shares (on a non-diluted
basis) issued and outstanding (“Ownership Threshold”). The Board of Directors, in its sole discretion,
can take the following constraint actions:
• place a stop transfer on all or any of the common shares believed to be in excess of the
Ownership Threshold;
•
•
suspend all voting and/or dividend rights on all or any of common share held believed to be
in excess of the Ownership Threshold;
apply to a court seeking an injunction to prevent a person from acquiring, holding, owning,
controlling and/or directing, directly or indirectly, common shares in excess of the Ownership
Threshold; and/or
• make application to the relevant securities commission to effect a cease trading order or
such similar restriction, until the person no longer controls common shares equal to or in
excess of the Ownership Threshold.
In addition, if a Gaming Regulatory Authority has determined that ownership by a holder of common
shares is inconsistent with its declared policies, the Board of Directors is entitled to take constraint
action against such shareholder. Any person who controls common shares equal to or in excess of
the Ownership Threshold, may be required to file an application, be investigated and have suitability
as a shareholder determined by a Gaming Regulatory Authority, if such Gaming Regulatory Authority
has reason to believe such ownership would otherwise be inconsistent with its declared policies. The
shareholder must pay all the costs of the investigation incurred by any such Gaming Regulatory
Authority.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
14. Share capital (continued):
Capital management:
Pollard’s objectives in managing capital are to maintain a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future development of the business. Pollard
also strives to maintain an optimal capital structure to reduce the overall cost of capital.
In the management of capital, Pollard includes long-term debt, subordinated debt, share capital and
deficit, but excludes reserves. The Board of Directors regularly monitors the levels of debt, equity
and dividends.
Pollard monitors capital on the basis of funded debt to Adjusted EBITDA, working capital ratio and
debt service coverage. Pollard has externally imposed capital requirements as determined through
its bank credit facility. As at December 31, 2016, Pollard is in compliance with all financial covenants.
Dividends:
Dividends are paid on the common shares within 15 days of the end of each quarter and are fully
discretionary, as determined by the Board of Directors of Pollard.
On November 14, 2016, a dividend of $0.03 per share was declared, payable on January 13, 2017,
to the shareholders of record on December 31, 2016.
There were no other changes in Pollard’s approach to capital management during the current period.
Share based compensation:
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to
grant options to purchase common shares to eligible persons and to determine the applicable terms.
The aggregate maximum number of common shares available for issuance from Pollard’s treasury
under the Option Plan is 2,354,315 common shares.
On March 5, 2014, the Board of Directors approved the award of 100,000 options to purchase
common shares of Pollard for certain key management personnel. The options were granted on
March 10, 2014, and have a seven year term, vesting 25% per year over the first four years. The
exercise price of the options was equal to the closing price of the common shares on March 7, 2014.
On September 7, 2016, the Board of Directors approved the award of 25,000 options to purchase
common shares of Pollard for a key management member. The options were granted on October 3,
2016, and have a seven year term, vesting 25% per year over the first four years. The exercise price
of the options was equal to the closing price of the common shares on September 30, 2016.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
14. Share capital (continued):
The grant date fair value of these options was determined based on the Black-Scholes formula.
Expected volatility is estimated by considering historic average share price volatility. The inputs used
in the measurement of the fair values of the share based compensation granted are the following:
Option grant date
Fair value at grant date
Share price
Exercise price
Expected volatility
Option life (expected weighted average life)
Risk-free interest rate (based on Canadian
government bonds)
October 3,
2016
1.87
8.12
8.12
30.7%
4.75 years
$
$
$
March 10,
2014
0.82
3.63
3.63
33.7%
4.75 years
$
$
$
0.6% to 0.7%
1.7% to 2.1%
As of December 31, 2016, no share options had been exercised or expired. Of the 125,000 options
outstanding at December 31, 2016, 50,000 were exercisable. The weighted average exercise price
for the outstanding options was $4.53.
Subsequent to year end, on March 13, 2017, the Board of Directors approved the award of 125,000
options to purchase common shares of Pollard for key management personnel. The options will be
granted on March 16, 2017, and have a seven year term, vesting 25% per year over the first four
years. The exercise price of the options will be equal to the closing price of the common shares on
March 15, 2017.
15. Commitments and contingencies:
Pollard and certain subsidiaries rent premises and equipment under long-term operating leases. The
following is a schedule by fiscal year of rental payment commitments under operating leases
outstanding:
2017
2018
2019
2020
2021
Thereafter
$
4,930
4,450
3,381
3,093
2,716
4,107
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
15. Commitments and contingencies (continued):
Pollard is contingently liable for outstanding letters of guarantee in the amount of $1,205 at
December 31, 2016 (2015 - $1,257). These letters of guarantee are part of Pollard’s credit facility
and are secured as disclosed in note 11.
During 2008 Pollard entered into a sale leaseback with an affiliate of Equities for land and building in
Council Bluffs, Iowa. The property was sold for $4,081 and leased back for ten years at an annual
lease rate of approximately US$260. The sale value was determined through independent appraisal.
Also in 2008 Pollard entered into a lease with an affiliate of Equities for a manufacturing facility in
Winnipeg, Manitoba. The lease was for a 12 year 6 month period, ending March 31, 2021, at an
annual base rate of approximately $2,453. In 2015, Pollard agreed to exercise its renewal clause.
The renewal covers the period from April 2021 to September 2023 with an approximate annual lease
rate of $2,400, including an annual amortization of a leasehold improvement allowance of
approximately $1,000. The total leasehold allowance is $2,500. The base rental rate was based on
current market value as determined through independent appraisal.
During 2011 Pollard entered into a sale leaseback with an affiliate of Equities for land and building in
Winnipeg, Manitoba. The property was sold for $3,473 and leased back for five years (with an option
to renew for an additional five year term) at an annual lease rate of approximately $313. The sale
value was determined through independent appraisal. During 2016, Pollard exercised its option to
renew its lease for an additional five year term for annual rent of $363 per year. The rental rate was
based on current market value as determined through independent appraisal.
Pollard is involved in litigation and claims associated with operations, the aggregate amounts of which
are not determinable. While it is not possible to estimate the outcome of the proceedings,
management is of the opinion that any resulting settlements would not materially affect the financial
position of Pollard. Should a loss occur on resolution of these claims, such loss would be accounted
for as a charge to income in the period in which the settlement occurs.
Pollard has agreed to indemnify Pollard’s current and former directors and officers from and against
liability and costs in respect of any action or suit against them in connection with the execution of
their duties of office, subject to certain usual limitations. No claims with respect to such occurrences
have been made and, as such, no amount has been recorded in these financial statements with
respect to these indemnifications.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
16. Other (income) expense:
Loss on equity investment (note 7)
Gain on sale of investment in associate
Other income
2016
730
(516)
(246)
$
(32)
$
$
$
2015
32
-
(316)
(284)
During 2016, Pollard entered into an agreement to sell its investment in Shenzhen Palm Commerce
& Pollard Banknote Technology Co., Ltd. to Palm Commerce Information and Technology (China)
Co., Ltd., the majority shareholder, for proceeds of US$400, which are recorded in accounts
receivable as at December 31, 2016.
17. Finance costs and finance income:
Finance costs
Foreign exchange loss
Interest
Amortization of deferred financing costs
Finance income
Foreign exchange gain
Mark-to-market gain on foreign currency contracts
2016
681
3,374
226
$
4,281
$
2016
1,042
-
$
1,042
$
$
$
$
$
2015
3,120
2,917
345
6,382
2015
7
483
490
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
18. Net income per share:
2016
2015
Net income attributable to shareholders for basic
and diluted net income per share
$
12,269
$
7,463
Weighted average number of shares (basic)
Weighted average impact of share options
23,543,158
106,216
23,543,158
100,000
Weighted average number of shares (diluted)
23,649,374
23,643,158
Net income per share (basic)
Net income per share (diluted)
19. Personnel expenses:
Wages and salaries
Benefits and government payroll remittances
Profit share
Expenses related to defined contribution plans
Expenses related to defined benefit plans
20. Supplementary cash flow information:
Change in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses and deposits
Income taxes receivable
Accounts payable and accrued liabilities
$
$
$
0.52
0.52
$
$
0.32
0.32
$
2016
70,851
11,645
2,028
249
4,168
2015
66,716
10,571
1,432
252
4,288
$
88,941
$
83,259
2016
2015
$
(14,724) $
(3,657)
182
(417)
1,696
(1,290)
2,356
(1,117)
(2,199)
(565)
$
(16,920) $
(2,815)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
21. Related party transactions:
During the year ended December 31, 2016, Pollard paid property rent of $3,146 (2015 - $3,092) and
$357 (2015 - $272) in plane charter costs to affiliates of Equities. In addition, during the year, Pollard
paid Equities $592 (2015 - $613) interest on Pollard’s subordinated debt.
During the year, Equities paid Pollard $72 (2015 - $72) for accounting and administration fees.
During the year ended December 31, 2016, Pollard reimbursed operating costs and paid software
royalties of $1,755 (2015 - $484) to its iLottery partner, which are recorded in cost of sales and $633
(2015 - $115) of development costs.
At December 31, 2016, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, interest and other expenses of $907 (2015 - $795). Also included
in accounts payable and accrued liabilities is a net amount owing to Pollard’s iLottery partner of $789
(2015 - $1,125) for reimbursement of operating costs and capital expenditures, and its share of
operating profits.
Key management personnel are those having authority and responsibility for planning, directing and
controlling the activities of the company. The Board of Directors and the Executive Committee are
considered key management personnel.
Key management personnel compensation comprised:
Wages, salaries and benefits
Profit share
Expenses related to defined benefit plans
2016
2,631
14
447
$
3,092
$
2015
2,571
9
483
3,063
$
$
As at December 31, 2016, the Directors and Named Executive Officers of Pollard, as a group,
beneficially owned or exercised control or direction over 17,444,771 common shares of Pollard.
22. Sales to major customers:
For the year ended December 31, 2016, sales to one customer amounted to 17 percent of
consolidated sales, in 2015 no customer amounted to 10 percent.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
23. Segmented information:
Pollard’s operations consist of one reporting segment principally in the manufacturing, development
and sale of lottery and charitable gaming products. The manufacturing, development and sale of
lottery and charitable products have been aggregated as one reportable segment as they have similar
economic characteristics, including similar gross profit margins. Geographic distribution of sales,
property, plant and equipment and goodwill are as follows:
Sales:
Canada
U.S.
Other
Property, plant and equipment and goodwill:
Canada
U.S.
24. Financial instruments:
2016
2015
$
49,399
134,130
62,885
52,530
108,969
59,531
246,414
$
221,030
December 31,
2016
December 31,
2015
43,893
40,526
$
84,419
$
44,266
43,831
88,097
$
$
$
$
The fair value of a financial instrument is the estimated amount that Pollard would receive or pay to
terminate the instrument agreement at the reporting date. The following methods and assumptions
were used to estimate the fair value of each type of financial instrument by reference to various
market value data and other valuation techniques as appropriate.
The fair values of accounts receivable, accounts payable and accrued liabilities and dividends payable
approximate their carrying values given their short-term maturities.
The fair value of the long-term debt approximates the carrying value due to the variable interest rate
of the debt.
The fair value of the subordinated debt approximates the carrying value based on the terms
associated with the debt.
The fair value of the other non-current liabilities approximates the carrying value based on the
expected settlement amount of these liabilities.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
24. Financial instruments (continued):
Certain financial instruments recorded at fair value on the statements of financial position are
classified using a fair value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
Level 1 - valuation based on the quoted prices observed in active markets for identical assets or
liabilities
Level 2 - valuation techniques based on inputs that are quoted prices of similar instruments in
active markets; quoted prices for identical or similar instruments in markets that are not active;
other than quoted prices used in a valuation model that are observable for that instrument; and
inputs that are derived principally from or corroborated by observable market data by correlation
or other means
Level 3 - valuation techniques with significant unobservable market inputs
A financial instrument is classified to the lowest level of the hierarchy for which a significant input
has been considered in measuring fair value.
As at December 31, 2016, the cash and restricted cash recorded at fair value was classified as level
one of the fair value hierarchy.
25. Financial risk management:
Pollard has exposure to the following risks from its use of financial instruments:
Credit risk
Liquidity risk
Currency risk
Interest rate risk
Pollard’s risk management policies are established to identify and analyze the risks, to set appropriate
risk limits and controls and to monitor risks and adherence to limits. The Audit Committee oversees
how management monitors compliance with Pollard’s risk management policies and procedures. The
Audit Committee is assisted in its oversight role by Internal Audit, who undertakes regular reviews
of risk management controls and utilizes the annual risk assessment process as the basis for the
annual internal audit plan.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
25. Financial risk management (continued):
Credit risk
The following table outlines the details of the aging of Pollard’s receivables and the related allowance
for doubtful accounts:
Current
Past due for 1 to 60 days
Past due for more than 60 days
Less: Allowance for doubtful accounts
Liquidity risk
December 31,
2016
December 31,
2015
$
$
36,670
1,530
449
(64)
19,193
4,295
717
(54)
$
38,585
$
24,151
Liquidity risk is the risk that Pollard will not be able to meet its financial obligations as they fall due.
The following table outlines Pollard’s maturity analysis of the undiscounted cash flows, including
related interest payments, of certain non-current financial liabilities and leases as of December 31,
2016:
Total
2017
2018 - 2019
2020 - 2021
After
$
Long-term debt
Subordinated debt
Pension liability
Operating leases
74,695
7,306
13,524
22,677
2,271
1,839
1,300
4,930
72,424
3,309
2,600
7,831
-
2,158
2,600
5,809
-
-
7,024
4,107
$
118,202
10,340
86,164
10,567
11,131
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. In addition, Pollard maintains a committed credit facility including up to
$75,000 for its Canadian operations and up to US$12,000 for its U.S. subsidiaries. At December 31,
2016, the unused balance available for drawdown under the credit facility was $18,908 (2015 -
$17,591).
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2016 and 2015
25. Financial risk management (continued):
The 2017 requirements for capital expenditures, working capital and dividends are expected to be
financed from cash flow provided by operating activities and the unused credit facility. Pollard enters
into contractual obligations in the normal course of business operations.
Currency risk
Pollard sells a significant portion of its products and services to customers in the United States and
to some international customers where sales are denominated in U.S. dollars. In addition, a
significant portion of its cost inputs are denominated in U.S. dollars. Pollard also generates revenue
in currencies other than the Canadian and U.S. dollar, primarily in Euros.
A 50 basis point strengthening/weakening in the foreign exchange rate between the Canadian and
U.S. dollar would decrease/increase the income before income taxes due to changes in operating
cashflow by approximately $64 for year ended December 31, 2016 (2015 - $47). A 50 basis point
strengthening/weakening in the foreign exchange rate between the Canadian dollar and Euro would
decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $64 for year ended December 31, 2016 (2015 - $52).
In addition, translation differences arise when foreign currency monetary assets and liabilities are
translated at foreign exchange rates that change over time. As at December 31, 2016, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
denominated in U.S. dollars by approximately $1,552 (2015 - $4,101). A 50 basis point
weakening/strengthening in the value of the Canadian dollar relative to the U.S. dollar would result
in a decrease/increase in income before taxes of approximately $8 for the year ended December 31,
2016 (2015 - $21).
Pollard utilizes a number of strategies to mitigate its exposure to currency risk. Two manufacturing
facilities are located in the U.S. and a significant amount of cost inputs for all production facilities are
denominated in U.S. dollars, offsetting a large portion of the U.S. dollar revenue in a natural hedge.
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign
currency risk. At December 31, 2016, Pollard had no outstanding foreign currency contracts.
Interest rate risk
Pollard is exposed to interest rate risk relating to its fixed and floating rate instruments. Fluctuation
in interest rates will have an effect on the valuation and repayment of these instruments.
A 50 basis point decrease/increase in interest rates would result in an increase/decrease in income
before income taxes of approximately $355 for the year ended December 31, 2016 (2015 - $367).
Investor
Relations
Robert Rose
140 Otter Street
t: 204-474-2323
e: winnipeg@pollardbanknote.com
Stock
Exchange Listing
The Toronto Stock Exchange - PBL
Independent
Auditors
KPMG LLP,
Winnipeg, Manitoba
Transfer
Agent
Computershare Trust Company of Canada,
Toronto, Ontario
Toronto-Dominion Bank,
Winnipeg, Manitoba
Bank of Montreal,
Calgary, Alberta
Bankers
Canadian Western Bank,
Edmonton, Alberta
140 Otter Street
Winnipeg, Manitoba, R3T 0M8
t: 204-474-2323
f: 204-453-1375
Head Office
Winnipeg, Manitoba, Canada
1499 Buffalo Place, R3T 1L7
140 Otter Street, R3T 0M8
Barrhead, Alberta, Canada
6203 46th Street, T7N 1A1
Sault Ste. Marie, Ontario, Canada
300-45 White Oak Drive East, P6B 4J7
Ypsilanti, Michigan, USA
775 James L. Hart Parkway, 48197
Manufacturing
Facilities
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard EXECUTIVE CHAIR
Jerry Gray 1,2
Garry Leach 1
John Pollard 3
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
3 Member of the Audit Committee
John Pollard
CO-CHIEF EXECUTIVE OFFICER
Douglas Pollard
CO-CHIEF EXECUTIVE OFFICER
Paul Franzmann
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
Pedro Melo
EXECUTIVE VICE PRESIDENT, INFORMATION TECHNOLOGY
Riva Richard
GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT,
LEGAL AFFAIRS
Robert Rose
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Jennifer Westbury
EXECUTIVE VICE PRESIDENT, SALES AND CUSTOMER
DEVELOPMENT
Robert Young
EXECUTIVE VICE PRESIDENT, OPERATIONS
Senior
Management
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
ANNUAL REPORT
2016