Pollard Banknote Limited Annual Report Cover 2018.ai
DATE:_Tuesday, March 19, 2019, 14:12
REV:_01
Back Cover
Cover
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
ANNUAL REPORT
2018
ANNUAL REPORT
2018
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Pollard Banknote Limited Annual Report Cover 2018.ai
DATE:_Tuesday, March 19, 2019, 14:12
REV:_01
Inside Pages
Inside Front Page
Inside Back Page
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
Head Office
Manufacturing
Facilities
140 Otter Street
Winnipeg, Manitoba, R3T 0M8
t: 204-474-2323
f: 204-453-1375
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
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91311
Adair, Iowa, USA
1000 Flag Road, 50002
Omaha, Nebraska, USA
9335 48th Street, 68152
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard EXECUTIVE CHAIR
Dave Brown 1
Jerry Gray 1,2
Garry Leach 1
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
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
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
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LETTER TO SHAREHOLDERS
flow
from operating activities.
Enclosed please find our 2018 Annual Report. 2018 was a successful year on a
number of fronts, including achieving record revenue of more than $331 million,
generating almost $30 million in income from operations and over $39 million in
cash
We are very pleased with our
accomplishments during 2018, both financially and operationally. Our vision is to
be the partner of choice in the lottery and charitable gaming market by offering
retail and digital games and solutions that attract and engage players and we
believe this is being achieved through the development of industry leading
innovative products and services.
Sales of our main product, instant tickets, were relatively flat compared to 2017
primarily due to the temporary reduction of order volumes in the fourth quarter.
Notwithstanding this short-term dip, the long-term outlook in consumer demand
for instant tickets remains very strong and provides the business foundation for
future growth. We continue to develop our ancillary product portfolio to expand
our revenue and earnings including areas such as loyalty clubs (PlayOnTM), in-
lane retail distribution (ScanActivTM), Lottery Management Systems (SureTrack®)
and digital apps among others. Our proprietary print products such as Scratch
FX® and ClearPlayTM are industry leaders and help position Pollard Banknote as
a true innovative trailblazer.
Our acquisition strategy was very successful during this past year with the
completion of two transactions: International Gamco, Inc. (“Gamco”) and the
business of Schafer Systems, Inc (“Schafer”). These acquisitions meet our
benchmarks of being financially accretive as well as strategically important in
expanding our expertise and breadth of product offering.
Sales
2018 revenue reached a new record at over $331 million, an increase of $46
million or 16%, the second year in a row of 16% top line growth. Sales of instant
tickets were relatively stable compared to the record volumes and average
selling prices achieved in 2017, with higher revenue in the first three quarters of
the year primarily being offset by lower order volumes in the fourth quarter. Our
lower volumes in the fourth quarter were due to the timing of certain customer
orders and does not reflect any systemic change in our underlying contracts or
retail consumer demand. Sales of our key proprietary print products continue to
play a critical role in our strategic sales objectives and ancillary sales increased
revenue slightly from 2017, with higher digital revenue including iLottery being
partially offset by a reduction in licensed games revenue.
The bulk of our increased revenue was due to our acquisitions, with the additions
of Schafer (November 1) and Gamco (February 1) and a full 12 months of
revenue from Diamond Game (versus five months in 2017) adding approximately
$44 million in revenue to our top line. The Canadian dollar on average was
steady in value relative to the U.S. dollar compared to 2017.
We received a number of contract renewals and extensions throughout 2018,
retaining all of our instant ticket customers during the year. Key contract
extensions include a ten-year extension with the British Columbia Lottery
Corporation (one of our very first instant ticket customers), a four-year extension
with the Michigan State Lottery and other important renewals with such lotteries
as Texas, Iowa and many others. New lottery contract wins include the instant
ticket contract to provide exclusive products for the lottery of Norway. After
factoring in existing renewal options, the weighted average life of our existing
instant ticket contract portfolio is in excess of 4 years, providing the foundation
for solid recurring revenue and organic growth.
Our iLottery operations continued to produce very positive results, driven by our
industry leading Michigan operation. At the same time as growing this digital
distribution channel, Michigan’s growth in sales of instant tickets at traditional
retail outlets is outpacing other lotteries in the Untied States, highlighting the
importance of iLottery to grow the player base and benefit overall lottery sales.
In addition to Michigan, our iLottery joint venture is now operating in Virginia, won
a new contract in 2018 for the New Hampshire iLottery and was awarded the
contract to operate the North Carolina iLottery, which we expect to go live in late
2019.
Our charitable games revenue was significantly higher in 2018, exceeding $55
million, reflecting our acquisition of Gamco, but also as a result of moderate
growth in the overall industry. Key jurisdictions have shown growth at the retail
level and with the addition of the valuable Gamco branded pull-tab tickets, we are
in a unique position to develop a stronger presence in this market.
During 2018 North Dakota opened its market for eGaming pull-tab machines
which provided an opportunity for our Diamond Game and Gamco operations to
provide an effective solution. Utilizing the Gamco Oasis branded machine, our
teams worked together to develop and successfully deploy approximately 250
machines into this market, illustrating the revenue synergies available to our
organization. As this new market continues to grow, we look forward to the
placement of more machines and bringing the market exciting new games.
Operations
Our gross margin increased by $10.0 million or 15.2% primarily due to the impact
of our acquisitions of Gamco and Schafer and the full year effect of Diamond
Game. Our instant ticket gross margin was relatively flat compared to 2017 due
to the temporary shortfall in orders in the fourth quarter. Our gross margin
percentage declined slightly year over year, 22.8% compared to 23%, due
primarily to the impact of the lower orders in the fourth quarter.
Administration expenses increased $3.5 million, or approximately 12%, partially
due to the inclusion of a full year of Diamond Game operations and our
acquisitions of Gamco and Schafer. In addition, increased personnel costs were
incurred relating to our growth strategies and product development of our digital
innovations and increased investment in our technology infrastructure. These
increases were partially offset by a decline in acquisition costs and lower
severance costs associated with our acquisitions relative to 2017. Selling
expenses increased $3.8 million over 2017 primarily due to the inclusion of a full
year of Diamond Game, our acquisitions of Gamco and Schafer and ongoing
investments in additional personnel to support our expanded portfolio of products
and services offered to the lottery market.
During 2018 we recommissioned our original press line in Ypsilanti to provide
extra capacity and scheduling flexibility for our instant ticket product line. We are
currently adding additional equipment to this press line to increase its efficiencies
and capacity, which will provide us with more than sufficient capacity to produce
expected volumes while ensuring additional room for growth.
A number of important capital projects were undertaken during the year in
addition to the press recommissioning including the expansion of our in-house
plate making operations, additional investments in finishing equipment including
folding and packaging equipment and upgrades in a number of technical
infrastructure areas. These investments will improve the efficiencies of our
operations while at the same time continuing our cost reduction initiatives.
Acquisitions
Acquisitions are a key objective in our strategic plan by ensuring the quality and
breadth of our products and services are industry leading. Over the last 18
months we have successfully made three important additions to the Pollard
Banknote family.
Diamond Game completed its first full year within Pollard Banknote and
continues to exceed our expectations. In addition to developing the North
Dakota market, Diamond Game is actively working on a number of new
jurisdictions for their electronic gaming machines and to expand the machine
count in existing market places. We expect additional machines to be installed
during the year in pilot programs which is often the first step in further expansion.
Our Gamco purchase on February 1, 2018, has proceeded very well and the
integration of the business with our existing American Games operation has gone
smoothly. The market reception of the combined businesses has been very
positive and we believe the portfolio of multiple branded pull-tabs provides us a
unique opportunity for future revenue synergies.
On November 1, 2018, we completed the acquisition of the Schafer Systems
operating business. Schafer is the market leader in instant ticket lottery
dispensing and related merchandising products and has significant relationships
with the leading lotteries in the United States. While still early, we are very
pleased with the management team and employees of Schafer and see great
potential to combine Schafer’s merchandising expertise with our unique portfolio
of innovative instant tickets to provide unparalleled growth opportunities for
lotteries. Further expansion into Canada and internationally are other areas of
potential growth for the Schafer business.
We continue to actively search for additional opportunities to acquire strategic
and financially accretive businesses that can further our goal of being the partner
of choice for lotteries around the world.
Capital
We work to ensure an appropriate capital structure that will provide the funds to
meet our strategic objectives and during this past year we achieved some
important objectives in that regard.
In June we renewed our credit facility for a three-year term, significantly
increasing the amount of capital available, lowering costs and increasing the
flexibility of our relationship with our senior banking group. At December 31,
2018, we had approximately $60 million of unused availability in our credit facility.
In February 2018, we completed a very successful common share offering
raising approximately $36 million before costs. This was our first return to the
equity capital markets since our initial public offering more than 10 years ago and
we remain committed to expanding our equity base to support our long-term
growth.
The nature of our operations generates significant organic cash flow which is a
key building block in our liquidity and funding strategy. In 2018 our cash flow
from operating activities was $39.7 million, a significant 77% conversion rate of
cash relative to Adjusted EBITDA. These funds are used to finance our
investments in capital improvements, product development and the ongoing
operations of Pollard as well as providing capital to assist in our acquisitions.
Outlook for 2019
Our outlook for 2019 remains very positive. The lottery and charitable gaming
industries remain healthy with continued growing demand for instant tickets and
other regulated gaming products. Lotteries and charitable organizations are
looking for additional products and services to generate proceeds for the good
causes they support and this in turn provides opportunities for Pollard Banknote.
We believe our growth and development over 2018 and the past few years has
positioned us to be the partner of choice and we will continue to pursue this
strategy.
Our investments in innovative products and services to meet these growing
customer demands will continue, both through the internal development of
unique state-of-the art solutions and leading-edge print products as well as
enhancing our offerings through strategic acquisitions.
We anticipate our businesses will continue to generate strong cash flow in 2019
which will provide the funding for our key initiatives including critical capital
investments, working capital growth and ongoing debt repayment. On March 13,
2019, our Board of Directors increased our dividend by 33%, recognizing the
strength of our underlying businesses and strong cash flow.
2018 was another successful year for Pollard Banknote and we owe this success
to many people: over 1,700 enthusiastic employees work diligently to achieve our
vision; numerous lottery and charitable gaming organizations partner with us to
help generate proceeds for various good causes; many industry leading suppliers
help us develop innovative solutions; our Board of Directors provide insightful
leadership and encouragement; and shareholders entrust us with
their
confidence to grow Pollard Banknote and ensure we are the partner of choice in
the lottery and charitable gaming industry for years to come. We thank you for
your support and look forward to another year of growth in 2019.
********
On January 4, 2019, Lawrie Pollard, our past President and Chairman Emeritus,
passed away peacefully at age 90 after 71 years of devoted service to our
company. Lawrie was a true visionary who led our organization into the lottery
business and without his foresight, drive and passion, Pollard Banknote would
not be the organization it is today. Lawrie always enjoyed engaging with people
he met through Pollard Banknote, including his employees, his business partners
and his shareholders. 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.
Dave Brown
Dave Brown is President and CEO of Richardson Capital and Managing Director of RBM
Capital Limited. Previously, he was Corporate Secretary of James Richardson & Sons,
Limited, and a partner in the independent law and accounting firm of Gray & Brown. He
also serves on the Board of Directors of GMP Capital, Inc. and Richardson Financial Group,
and on the Board of Trustees of The Boyd Group Income Fund. He graduated from the
University of Manitoba law school and is a Chartered Professional Accountant and member
of the Manitoba Bar.
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. (Honours) from the University of Manitoba and is a former member of the
Institute of Chartered Accountants of Manitoba.
December 31, 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
March 13, 2019
This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2018, is prepared as at March 13, 2019, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2018.
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, purchase accounting amortization, unrealized foreign exchange gains and losses and
certain non-recurring items including severance costs and acquisition 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, 2018. 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 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. With the acquisition of International Gamco, Inc. (“Gamco”), on February
1, 2018, management believes Pollard has also become the second largest bingo paper and pull-tab
supplier to the charitable gaming industry in North America.
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, interactive digital gaming, PlayonTM VIP lottery program, Social InstantsTM,
retail management services, ScanACTIVTM and vending machines including charitable game systems
marketed under the Diamond Game and Oasis trade names. 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 275 independent
distributors with the majority of revenue generated from repeat business.
Product line breakdown of revenue
Year ended
December 31,
2018
Year ended
December 31,
2017
Lottery(1)
Charitable (2)
Gaming systems (3)
75.5%
16.6%
7.9%
86.7%
9.7%
3.6%
(1) Includes the business of Schafer Systems Inc. which was acquired on October 31, 2018.
(2) Includes International Gamco, Inc. which was acquired on February 1, 2018.
(3) INNOVA Gaming Group Inc. (“INNOVA”, “Diamond Game”) was acquired on August 3, 2017.
3
Geographic breakdown of revenue
Year ended
December 31,
2018
Year ended
December 31,
2017
56%
23%
21%
56%
22%
22%
United States
Canada
International
Acquisition of International Gamco, Inc.
On February 1, 2018, Pollard Holdings Inc., a wholly-owned subsidiary of Pollard, acquired 100% of the
common shares of International Gamco, Inc.. The purchase price was funded by proceeds from Pollard’s
credit facility and cash on hand. The acquisition has been accounted for using the acquisition method.
The fair values of the identifiable assets and liabilities have been based on management’s best estimates
and valuation techniques as at February 1, 2018, the acquisition date. As per the sales agreement, the
purchase price was decreased by the amount of other current liabilities assumed, which were specified
in the agreement. The majority of these other current liabilities were paid in March 2018.
During the period between February 1, 2018 and December 31, 2018, Gamco generated revenues of
$27.1 million and net income of $1.1 million, after depreciation and amortization of the fair values of
identifiable assets acquired, which have been recorded in the consolidated financial statements. If Gamco
had been acquired on January 1, 2018, incremental revenue of $2.2 million and net loss of $4.8 million
(which includes $4.8 million of transaction related expenditures, net of income tax) would have been
recognized in the year ended December 31, 2018.
Share offering
On February 1, 2018, Pollard announced that it had entered into an agreement with a syndicate of
underwriters led by Canaccord Genuity Corp. (together, the “Underwriters”) to purchase on a bought
deal basis 1,800,000 common shares of Pollard at a price of $18.45 per share. Pollard also granted the
Underwriters an over-allotment option exercisable at any time up to 30 days following the closing of the
offering, to purchase up to an additional 270,000 common shares.
The offering, including the full over-allotment, closed on February 21, 2018. The total gross proceeds,
prior to any commissions and offering expenses, from the sale of 2,070,000 common shares was
approximately $38.2 million.
Pollard used the net proceeds to repay indebtedness under the Company’s credit facility and subordinated
debt.
Acquisition of Schafer Systems
On October 31, 2018, Pollard Systems Inc., a wholly-owned indirect subsidiary of Pollard, acquired
substantially all of the operating assets and business of Schafer Systems Inc. (“Schafer”), a leading global
provider of lottery ticket dispensers and play stations, for a purchase price of approximately US$23.2
million. The purchase price was funded by proceeds from Pollard’s credit facility and cash on hand. The
acquisition has been accounted for using the acquisition method. The fair values of the identifiable assets
4
and liabilities have been based on management’s best estimates and valuation techniques as at October
31, 2018, the acquisition date. Pollard Systems Inc. was renamed Schafer Systems (2018) Inc. upon
completion of the transaction.
During the period between October 31, 2018 and December 31, 2018, Schafer generated revenues of
$2.2 million and net income of $0.2 million, after depreciation and amortization of the fair values of
identifiable assets acquired, which have been recorded in the consolidated financial statements. If Schafer
had been acquired on January 1, 2018, incremental revenue of $11.8 million and net income of $1.9
million would have been recognized in the year ended December 31, 2018.
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, 2018.
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
Earnings per share (basic and diluted)
Total Assets
Total Non-Current Liabilities
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$331.9
256.2
$285.6
$246.4
219.9
197.2
75.7
22.8%
32.2
9.7%
13.4
4.0%
14.9
4.5%
48.8
14.7%
$0.58
65.7
23.0%
28.6
10.0%
9.4
3.3%
16.8
5.9%
44.0
15.4%
49.2
20.0%
20.9
8.5%
8.0
3.2%
12.3
5.0%
29.7
12.1%
$0.71
$0.52
December 31,
2018
December 31,
December 31,
2017
2016
$305.6
$142.9
5
$228.3
$124.8
$176.8
$94.4
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(millions of dollars)
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange (gain) loss
Acquisition costs
Severance costs
Income taxes
Adjusted EBITDA
Lotteries and charitable gaming
Diamond Game
Total Adjusted EBITDA
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$14.9
$16.8
$12.3
13.1
3.9
(1.4)
2.7
1.7
7.2
$44.0
$40.0
4.0
$44.0
10.6
3.6
(1.6)
-
-
4.8
$29.7
$29.7
-
$29.7
18.0
4.2
4.6
0.8
0.4
5.9
$48.8
$38.4
10.4
$48.8
6
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, 2018
Sales
Product Line Sales
Fiscal 2018
(in millions of dollars)
Lottery,
$250.6
Product Line Sales
Product Line Sales
Fiscal 2016
Fiscal 2017
(in millions of dollars)
(in millions of dollars)
Charitable,
$55.2
Gaming
Systems,
$26.1
Instant
Lottery,
Tickets,
$247.6
$218.7
Charitable,
Charitable
$27.7
Gaming
Products,
$27.7
Gaming
Systems,
$10.3
During the year ended December 31, 2018 (“Fiscal 2018” or “2018”), Pollard achieved sales of $331.9
million, compared to $285.6 million in the year ended December 31, 2017 (“Fiscal 2017” or “2017”).
Factors impacting the $46.3 million sales increase were:
Higher instant ticket sales volumes in the first three quarters of 2018, which were substantially offset by
lower sales volumes in the fourth quarter of 2018, increased sales slightly by $1.3 million compared to
Fiscal 2017. Additionally, higher instant ticket average selling price increased sales by $1.8 million when
compared to 2017. An increase in ancillary instant ticket products and services volumes grew revenue
by $0.5 million. This increase primarily resulted from sales due to the addition of Schafer, beginning
November 1, 2018, and higher iLottery revenues, partially offset by lower licensed product sales in 2018.
After the first nine months of 2018 our instant ticket volumes were on track to be significantly higher
than Fiscal 2017. However, a temporary reduction in orders from our customers in the fourth quarter
resulted in Fiscal 2018 sales and production volumes roughly equaling 2017. Our order volumes for the
first quarter of 2019 have returned to similar levels of the first three quarters of 2018. In addition,
approximately 15% of the instant tickets produced in the fourth quarter 2018 were not recognized in
sales due to the timing of shipments but are anticipated to be recognized in the first quarter of 2019.
The addition of Diamond Game in August 2017 added $15.5 million in sales to Fiscal 2018 when compared
to 2017. An increase in charitable gaming volumes, primarily as a result of the acquisition of Gamco,
including its Oasis division’s sale of electronic pull-tab machines into the North Dakota market, increased
sales by $26.7 million from 2017. A higher average selling price for charitable games in 2018 further
increased sales by $1.1 million.
7
Sales Breakdown
Fiscal 2018
Sales Breakdown
Fiscal 2017
International
21%
Canada
23%
United
States
56%
United
States
56%
International
22%
Canada
22%
During Fiscal 2018, Pollard generated approximately 69.8% (2017 – 69.4%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2018 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.292 compared to an average
rate of $1.304 during Fiscal 2017. This 1.0% decrease in the U.S. dollar value resulted in an approximate
decrease of $1.5 million in revenue relative to Fiscal 2017. Also during 2018 the value of the Canadian
dollar weakened against the Euro resulting in an approximate increase of $0.9 million in revenue relative
to 2017.
Cost of sales and gross profit
Cost of sales was $256.2 million in Fiscal 2018 compared to $219.9 million in Fiscal 2017. Cost of sales
was higher in Fiscal 2018 primarily as a result of the inclusion of Gamco and Schafer, and a full year of
Diamond Game, as well as the slight increase in instant ticket sales volumes.
Gross profit was $75.7 million (22.8% of sales) in Fiscal 2018 compared to $65.7 million (23.0% of sales)
in Fiscal 2017. This increase of $10.0 million in gross profit was primarily the result of the addition of
Gamco and Schafer, and a full year of Diamond Game, which increased gross margin by approximately
$11 million. Gross profit generated from the lotteries and charitable gaming business (excluding
acquisitions) declined approximately $1 million due to lower licensed games sales and lower gross margin
on slightly lower instant ticket production volumes year over year. The significant reduction in the fourth
quarter instant ticket production volumes resulted in the total production volume for Fiscal 2018 being
slightly lower than Fiscal 2017. The gross profit percentage was slightly lower due to the small decrease
in instant ticket production volumes and a reduction in license product sales, partially offset by higher
iLottery sales.
Administration expenses
Administration expenses increased to $32.2 million in Fiscal 2018 from $28.6 million in Fiscal 2017. The
increase of $3.6 million was partially a result of the inclusion of Gamco and Schafer, and a full year of
Diamond Game. Additional reasons for the increase were higher compensation expenses to support
Pollard’s growth strategies of acquisition and digital innovation, as well as increased professional fees
and IT infrastructure related expenses totaling approximately $2 million. These increases were partially
offset by the $1.9 million reduction in acquisition costs and $1.3 million reduction in severance costs as
compared to 2017.
8
Selling expenses
Selling expenses increased to $13.4 million in Fiscal 2018 from $9.4 million in Fiscal 2017 primarily due
to the addition of Gamco and Diamond Game for an entire year in 2018, as well as higher compensation
costs. These increases were partially offset by a decrease in contract support costs.
Other expenses
Other expenses decreased to $0.4 million in Fiscal 2018 from $0.7 million in 2017, primarily due to the
increase in the income from the EBITDA support agreement with a full year of Diamond Game, partially
offset by the increased loss on equity investment.
Foreign exchange
The net foreign exchange loss was $4.7 million in Fiscal 2018 compared to a net gain of $0.9 million in
Fiscal 2017. The 2018 net foreign exchange loss consisted of a $4.6 million unrealized loss primarily as
a result of the increased Canadian equivalent value of U.S. dollar denominated accounts payable and
long-term debt with the weakening of the Canadian dollar relative to the U.S. dollar. In 2018 Pollard
added almost $29 million of U.S. dollar denominated debt, with the acquisitions of Gamco and Schafer,
which is subject to revaluation through the income statement. At December 31, 2018, the Canadian
dollar had weakened relative to the U.S. dollar, resulting in the substantial unrealized foreign exchange
loss.
In addition to the unrealized foreign exchange loss in 2018, Pollard incurred a realized foreign exchange
loss of $0.1 million as a result of foreign currency denominated accounts receivable collected being
converted into Canadian dollars at unfavorable foreign exchange rates.
The 2017 net foreign exchange gain consisted of a $1.4 million unrealized gain primarily as a result of
the decreased Canadian equivalent value of U.S. dollar 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 $0.5 million as a result of foreign currency denominated
account receivables collected being converted into Canadian dollars at unfavorable foreign exchange
rates.
Adjusted EBITDA
Adjusted EBITDA was $48.8 million in Fiscal 2018 compared to $44.0 million in Fiscal 2017. The primary
reasons for the increase in Adjusted EBITDA of $4.8 million were the increase in gross profit of $14.9
million (net of amortization and depreciation), a decrease in other expenses of $0.3 million and a decrease
in realized foreign exchange loss of $0.4 million. These increases to Adjusted EBITDA were partially
offset by higher administration expenses (net of acquisition and severance costs) of $6.8 million and an
increase in selling expenses of $4.0 million.
Our lotteries and charitable gaming business, excluding our 2018 acquisition of Gamco, generated
approximately $5.0 million lower Adjusted EBITDA compared to Fiscal 2017. Gross profit decreased by
approximately $3.0 million (excluding depreciation and amortization) due to lower licensed games sales
and higher costs of goods sold despite slightly lower instant ticket production volumes. Higher
administration costs (excluding acquisition costs) increased by approximately $2.0 million primarily due
to higher compensation expenses to support Pollard’s growth strategies of acquisition and digital
innovation, as well as increased professional fees and IT infrastructure related expenses.
9
These decreases in lotteries and charitable gaming Adjusted EBITDA were partially offset by acquisitions
of Gamco and Schafer, and the full year impact of Diamond Game, totaling approximately $9.8 million.
Interest expense
Interest expense increased to $4.2 million in Fiscal 2018 from $3.9 million in Fiscal 2017 primarily as a
result of the additional interest expense related to increased long-term debt incurred with the acquisitions
of Gamco and Schafer.
Amortization and depreciation
Amortization and depreciation, including depreciation of property and equipment and the amortization of
intangible assets, totaled $18.0 million during Fiscal 2018 which increased from $13.1 million during
Fiscal 2017. The increase was a result of the addition of Diamond Game, Gamco and Schafer including
the amortization and depreciation relating to the purchase price allocations to tangible and intangible
assets acquired.
Income taxes
Income tax expense was $5.9 million in Fiscal 2018, an effective rate of 28.5%, which was higher than
our domestic rate of 27.0% due primarily to non-deductible amounts relating to expenses incurred in the
acquisitions and the effect of foreign exchange. Partially offsetting these increases was the lower federal
income tax rates in the United States.
Income tax expense was $7.2 million in Fiscal 2017, an effective rate of 30.0%, which was higher than
our domestic rate of 27.0% due primarily to adjustments relating to the acquisition of Diamond Game,
the effect of higher tax rates in the United States in 2017 on current taxes and non-deductible amounts
primarily relating to expenses incurred in the acquisition of Diamond Game. Partially offsetting these
increases was the reduction in the future federal income tax rates in the United States which reduced
related deferred taxes.
Net income
Net income was $14.9 million in Fiscal 2018 compared to net income of $16.8 million in Fiscal 2017. Our
lotteries and charitable gaming business generated lower net income compared to 2017 due to the lower
instant ticket production and sales volumes combined with the large unrealized foreign exchange loss.
Partially offsetting these decreases were the net income associated with the 2018 acquisitions and the
inclusion of a full year of Diamond Game.
Specifically the reasons for the decrease in net income were the increase in net foreign exchange loss of
$5.6 million, the increase in administration expenses of $3.6 million, the increase in selling expenses of
$4.0 million and the increase in interest expense of $0.3 million. Partially offsetting these decreases in
net income were the increase in gross profit of $10.0 million, the decrease in other expenses of $0.3
million and the decrease in income taxes of $1.3 million.
Earnings per share (basic and diluted) decreased to $0.58 per share in Fiscal 2018 from $0.71 per share
in Fiscal 2017.
10
Liquidity and Capital Resources
Cash provided by operating activities
For the year ended December 31, 2018, cash flow provided by operating activities was $39.7 million
compared to $28.4 million in Fiscal 2017. Higher net income before income taxes and after non-cash
adjustments in Fiscal 2018 contributed an additional $9.5 million to the increase in cash provided by
operating activities compared to Fiscal 2017.
For the fiscal year 2018, changes in the non-cash component of working capital increased cash flow from
operations by $4.0 million. The increase was due primarily to a decrease in accounts receivables, partially
offset by an increase in inventory and a decrease in accounts payable and accrued liabilities. For the
fiscal year 2017, changes in the non-cash component of working capital decreased cash flow from
operations by $2.9 million. The decrease was due primarily to increases in inventory and prepaid
expenses and deposits, partially offset by an increase in accounts payable and accrued liabilities.
Cash used for interest payments increased to $4.5 million in 2018 as compared to $3.7 million in 2017.
Cash used for pension plan contributions increased to $5.5 million in 2018 as compared to $5.3 million
in 2017. Cash used for income taxes paid was $10.2 million in 2018 compared to $6.1 million in 2017.
Income tax payments in 2018 included the final installments for the 2017 tax year and initial installments
for 2018. Increasing taxable income in 2017 resulted in a higher installment requirement.
Cash used for investing activities
In the year ended December 31, 2018, cash used for investing activities was $77.1 million compared to
$51.2 million in the year ended December 31, 2017. In Fiscal 2018, Pollard used $21.6 million, net of
cash acquired, to purchase Gamco and $30.4 million to purchase Schafer. In addition, Pollard expended
$15.1 million in capital expenditures, $2.8 million on its investment in its iLottery joint venture and $7.1
million on additions to intangible assets.
In Fiscal 2017, Pollard used $39.3 million, net of cash acquired, to purchase Diamond Game. In addition,
Pollard invested $6.9 million in capital expenditures, $2.2 million in its iLottery joint venture and $2.2
million on additions to intangible assets.
Cash provided by financing activities
Cash provided by financing activities was $42.6 million in the year ended December 31, 2018, compared
to $21.3 million in the year ended December 31, 2017.
During Fiscal 2018, Pollard raised $35.4 million, net of expenses, from the issuance of common shares,
which was used, in part, to repay $16.7 million of subordinated debt. In addition, Pollard received net
proceeds from long-term debt of $27.9 million, partially to fund the acquisitions of Gamco and Schafer.
These cash receipts were partially offset by $0.6 million of financing costs and dividends paid of $3.1
million.
During Fiscal 2017, Pollard received net proceeds from long-term debt of $13.5 million and $10.6 million
from subordinated debt, which partially funded the acquisition of Diamond Game. These cash receipts
were partially offset by $0.3 million of financing costs and dividends paid of $2.8 million.
11
As at December 31, 2018, Pollard had unused committed credit facility of $58.9 million, in addition to
$11.2 million in available cash resources. These amounts, in addition to cash flow provided by operating
activities, are available to be used for future working capital requirements, contractual obligations, capital
expenditures, dividends and to assist in financing future acquisitions.
ANALYSIS OF RESULTS FOR THE PERIOD OCTOBER 1, 2018 TO DECEMBER 31, 2018
FOURTH QUARTER OF 2018
SELECTED FINANCIAL INFORMATION
(millions of dollars)
Three months ended Three months ended
December 31, 2017
December 31, 2018
(unaudited)
(unaudited)
Sales
Cost of sales
Gross profit
Administration
Selling
Other income
Income from operations
Finance costs
Income (loss) before income taxes
Income taxes:
Current (recovery)
Future
Net income (loss)
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange loss
Acquisition costs
Severance costs
Income taxes (recovery)
Adjusted EBITDA
Lotteries and charitable gaming
Diamond Game
Adjusted EBITDA
$70.2
56.9
13.3
7.9
3.6
(0.1)
1.9
4.2
(2.3)
(0.4)
-
(0.4)
($1.9)
5.3
1.2
3.1
0.2
-
(0.4)
$7.5
$4.9
2.6
$7.5
$79.6
62.1
17.5
7.5
2.6
-
7.4
1.3
6.1
1.5
0.3
1.8
$4.3
4.5
1.3
0.5
0.3
0.3
1.8
$13.0
$10.1
2.9
$13.0
12
Sales
During the three months ended December 31, 2018, Pollard achieved sales of $70.2 million, compared
to $79.6 million in the three months ended December 31, 2017. Factors impacting the $9.4 million sales
decrease were:
Instant ticket sales volumes for the fourth quarter of 2018 were significantly lower, 31.9%, than the
fourth quarter of 2017, which decreased sales by $19.4 million. The reduction in instant ticket volumes
was two-fold. Production orders were down almost 15% from the fourth quarter of 2017 due to a
temporary decline in orders from our customer portfolio as a number of our larger customers had lower
orders during the quarter. The reduction in order volumes was temporary and reflects the variability of
order patterns and the nature of our sales mix with relatively few orders of a large dollar amount. With
the start of the first quarter of 2019 our production volumes and order levels have returned to similar
levels experienced in the first three quarters of 2018.
Secondly, approximately 14% of the tickets produced in the quarter did not meet the revenue recognition
standards primarily because shipments to the lotteries were not required until early 2019. This is similar
to the situation that occurred in the first quarter of 2017 when timing of customer receipts delayed the
revenue recognition of produced tickets until the next quarter. We anticipate a majority of these deferred
sales volumes to be shipped and recognized in the first quarter of 2019. The impact of these factors
resulted in an approximate reduction in Adjusted EBITDA of $6.0 million. A decrease in the average
selling prices of instant tickets further reduced sales by $0.4 million.
Partially offsetting these decreases was an increase in our ancillary instant ticket products and services
volumes, primarily sales from the addition of Schafer, increased iLottery revenues, and partially offset by
lower licensed product sales. The net of these increased revenue by $1.5 million.
The increase in charitable gaming volumes, primarily as a result of the addition of Gamco, increased sales
by $7.1 million from 2017, including its Oasis division’s sale of electronic pull-tab machines into the North
Dakota market. Also the higher average selling price for charitable games in 2018 further increased sales
by $0.4 million.
During the three months ended December 31, 2018, Pollard generated approximately 80.5% (2017 –
67.1%) 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 2018 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.311, compared to an average rate of $1.275 during the fourth quarter of 2017.
This 2.9% increase in the value of the U.S. dollar resulted in an approximate increase of $1.4 million in
revenue relative to 2017.
Cost of sales and gross profit
Cost of sales was $56.9 million in the fourth quarter of 2018 compared to $62.1 million in the fourth
quarter of 2017. Cost of sales was lower in the quarter as a result of the decrease in instant ticket
volumes discussed above. Partially offsetting the decrease was increases in cost of goods sold incurred
with the inclusion of Gamco and Schafer as compared to the fourth quarter of 2017.
Gross profit was $13.3 million (18.9% of sales) in the fourth quarter of 2018 compared to $17.5 million
(22.0% of sales) in the fourth quarter of 2017. This decrease in gross profit was primarily the result of
the decrease in instant ticket production and sales volumes. The decrease in our order volumes was
temporary and reflects the variability of our order patterns and the nature of our sales mix with relatively
13
few orders of a large dollar amount. With the start of the first quarter of 2019 our production volumes
and order levels have returned similar to the levels experienced in the first three quarters of 2018.
Partially offsetting this reduction in gross profit was the gross profit earned by Gamco and Schafer and
increased iLottery gross profits. The gross profit percentage was lower due to the decrease in instant
tickets volumes, partially offset by increased sales of ancillary instant ticket products and services,
including higher iLottery sales, and the inclusion of Gamco and Schafer.
Administration expenses
Administration expenses increased to $7.9 million in the fourth quarter of 2018 compared to $7.5 million
in the fourth quarter of 2017. The increase was partially a result of the inclusion of Schafer and Gamco
in 2018. Additional reasons for the increase were higher compensation expenses to support Pollard’s
growth strategies of digital innovation, as well as increased professional fees. These increases were
partially offset by a reduction in Diamond Game compensation and severance costs compared to 2017.
Selling expenses
Selling expenses increased to $3.6 million in the fourth quarter of 2018 from $2.6 million in the fourth
quarter of 2017. The increase was primarily as a result of the inclusion of Schafer and Gamco, in addition
to higher selling related costs in Diamond Game when compared to 2017. Partially offsetting these
increases was a decrease in contract support costs.
Foreign exchange
The net foreign exchange loss was $3.0 million in the fourth quarter of 2018 compared to a net loss of
$nil in the fourth quarter of 2017. The 2018 net foreign exchange loss consisted of a $3.1 million
unrealized loss primarily as a result of the increased Canadian equivalent value of U.S. dollar denominated
accounts payable and long-term debt due to the weakening of the Canadian dollar relative to the U.S.
dollar. The Canadian dollar weakened approximately 5.5% since the beginning of the fourth quarter of
2018 and this movement, combined with higher U.S. dollar denominated debt relating to the acquisitions,
generated a substantial unrealized foreign exchange loss. The unrealized foreign exchange 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
exchanges rates.
The 2017 net foreign exchange loss consisted of a $0.5 million unrealized loss which was primarily as a
result of the decreased Canadian equivalent value of U.S. denominated accounts receivables with the
weakening of the Canadian dollar relative to the U.S. dollar. This loss was fully offset by the realized
foreign exchange gain of $0.5 million, as a result of foreign currency denominated account receivables
collected being converted into Canadian dollars at favorable foreign exchanges rates.
Adjusted EBITDA
Adjusted EBITDA was $7.5 million in the fourth quarter of 2018 compared to $13.0 million in the fourth
quarter of 2017. The primary reason for the reduction were the lower sales and production volumes of
instant tickets noted above which negatively impacted Adjusted EBITDA by approximately $6.0 million.
In addition, the increase in administration expenses (net of severance and acquisition costs) of $0.8
million, an increase in selling expenses of $1.0 million and the decrease in the realized foreign exchange
14
gain of $0.4 million further lowered Adjusted EBITDA. The 2018 acquisitions increased Adjusted EBITDA
by approximately $3.0 million.
Interest expense
Interest expense was $1.2 million in the fourth quarter of 2018 consistent with $1.3 million in the fourth
quarter of 2017.
Amortization and depreciation
Amortization and depreciation, including depreciation of property, plant and equipment and the
amortization of intangible assets, increased to $5.3 million during the fourth quarter of 2018 as compared
to $4.5 million during the fourth quarter of 2017. The increase was a result of the additions of Diamond
Game, Gamco and Schafer including the amortization and depreciation relating to the purchase price
allocations to tangible and intangible assets acquired.
Income taxes (recovery)
Income tax recovery was $0.4 million in the fourth quarter of 2018, an effective rate of 16.3% which
was lower than our domestic rate of 27.0% due primarily to non-deductible amounts relating to expenses
incurred in the acquisitions and the effect of foreign exchange. Partially offsetting these decreases were
the lower federal income tax rates in the United States.
Income tax expense was $1.8 million in the fourth quarter of 2017, an effective rate of 28.8% which was
higher than our domestic rate of 27.0% due primarily to adjustments relating to the acquisition of
Diamond Game, the effect of higher tax rates in the United States in 2017 on current taxes, the effect of
foreign exchange and non-deductible amounts primarily relating to expenses incurred in the acquisition
of Diamond Game. Partially offsetting these increases was the reduction in the future federal income tax
rates in the United States which reduced related deferred taxes.
Net income (loss)
Net loss was $1.9 million in the fourth quarter of 2018 compared to net income of $4.3 million in the
fourth quarter of 2017. The primary reasons for the decrease in net income were the lower gross profit
of $4.2 million, due to the reduction in instant ticket sales and production volumes partially offset by the
impact of the 2018 acquisitions, the increase in foreign exchange loss of $3.0 million, the increase in
administration expenses of $0.4 million and the increase in selling expenses of $1.0 million. Partially
offsetting these decreases was the reduction in income taxes of $2.2 million.
Earnings (loss) per share (basic and diluted) decreased to ($0.08) per share in the fourth quarter of 2018
from $0.18 per share in the fourth quarter of 2017.
15
Quarterly Information
(unaudited)
(millions of dollars)
Q4
2018
Q3
2018
Q2
2018
Q1
2018
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Sales
$70.2
$94.5
$86.8
$80.4
$79.6
$70.6
$77.9
$57.5
Adjusted EBITDA
7.5
14.2
14.1
13.0
13.0
11.6
13.1
6.3
Net income (loss)
(1.9)
7.2
5.0
4.6
4.3
4.7
6.0
1.8
The significant decrease in instant ticket volumes in the fourth quarter of 2018 reduced sales, Adjusted
EBITDA and net income. Net income was further reduced by the large unrealized foreign exchange loss
in the quarter.
The trend of increased sales, Adjusted EBITDA and net income, starting the fourth quarter of 2017
through to the third quarter of 2018, was primarily as a result of higher instant ticket volumes and the
additions of Diamond Game and Gamco.
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 significantly impact 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.
The overall impact of seasonality does not have a material impact on the carrying amounts in working
capital.
16
As at December 31, 2018, Pollard’s investment in non-cash working capital decreased $4.0 million
compared to December 31, 2017, primarily as a result of the decreased investment in accounts
receivables, partially offset by an increase in inventory and a decrease in accounts payable and accrued
liabilities.
December 31, December 31,
2018
2017
Working Capital
Total Assets
Total Non-Current Liabilities
$65.5
$305.6
$142.9
$44.6
$228.3
$124.8
Credit Facility
Pollard’s credit facility was renewed effective June 22, 2018. The credit facility provides loans of up to
$160.0 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 $160.0
million Canadian equivalent. The credit facility also includes an accordion feature which can increase the
facility by $25.0 million. 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, 2018,
the outstanding letters of guarantee were $1.3 million. The remaining balance available for drawdown
under the credit facility was $58.9 million.
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including debt to income before interest, income taxes, amortization and depreciation
(“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at December 31, 2018, 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. Under the terms of the agreement the facility is committed for a three-year period, renewable
June 22, 2021. Principal payments are not required until maturity. The facility can be prepaid without
penalties.
Pollard believes that its credit facility and ongoing cash flow from operations will be sufficient to allow it
to meet ongoing requirements for investment in capital expenditures, working capital, dividends and
acquisitions.
Subordinated Debt
On June 23, 2017, Pollard entered into a loan agreement with Pollard Equities Limited for a subordinated
term loan with a seven year term, repayable at any time (subject to meeting certain financial covenants
under the secured credit facility). The loan was provided to assist with the purchase of Diamond Game.
A total of $25.1 million was drawn in the third quarter of 2017. Interest on the subordinated debt
commenced with the first draw at a rate of 8%. Quarterly principal payments on the loan facility
commenced the month following the first draw, which occurred August 4, 2017.
In addition to the mandatory quarterly payments, Pollard has made three lump sum prepayments. On
September 20, 2017, Pollard repaid $7.5 million in outstanding principal and on February 23, 2018,
Pollard repaid an additional $7.5 million in outstanding principal. On June 29, 2018, Pollard repaid in full
the remainder of the outstanding principal in the amount of $7.5 million.
17
Outstanding Share Data
As at December 31, 2018 outstanding share data was as follows:
Common shares
25,625,658
In February 2018, 2,070,000 common shares were issued through a share offering.
In October 2018, 12,500 common shares were issued through the exercise of stock options.
As at March 13, 2019, outstanding share data was as follows:
Common shares
25,625,658
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 October 17, 2018, 12,500 stock options were exercised.
As at December 31, 2018, the total share options issued and outstanding were 237,500.
Dividends
On March 13, 2019, the Board of Directors increased the rate of dividend from $0.03 per quarter per
common share to $0.04 per quarter per common share, declaring a dividend of $0.04 per common share
payable on April 15, 2019, for the quarter ending March 31, 2019.
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
2019
2020
2021
2022
2023
Long-term debt
$129.4
$4.8
$5.6
$119.0
-
-
Operating leases
$20.0
$5.7
$4.9
$3.8
$3.2
$2.4
Total
$149.4
$10.5
$10.5
$122.8
$3.2
$2.4
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, 2018, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $52.9 million and the accrued benefit plan obligations were $73.3
million. Pollard’s total annual funding contribution for its defined pension plans in 2019 is expected to be
approximately $4.7 million, compared to $4.7 million in 2018, including $1.2 million in additional solvency
payments.
18
One of Pollard’s Canadian pension plans was subject to a solvency valuation beginning with its December
31, 2016, valuation. The solvency valuation is required to be updated annually. As at the December 31,
2017, valuation there was a deficit of $9.4 million, due to the low current levels of the mandated interest
rate used to discount the future liabilities. As a result, Pollard is subject to additional special pension plan
payments of approximately $1.2 million per year through to 2026. These additional solvency payments
do not impact pension expense and therefore will not affect our net income or Adjusted EBITDA and 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
Pollard Equities Limited and affiliates
During the year ended December 31, 2018, Pollard paid property rent of $3.2 million (2017 - $3.2 million)
and $0.5 million (2017 - $0.4 million) in plane charter costs to affiliates of Equities. In addition, Pollard
paid Equities $0.4 million (2017 - $1.0 million) of interest on Pollard’s subordinated debt.
During the year ended December 31, 2018, Equities paid Pollard $0.07 million (2017 - $0.07 million) for
accounting and administration fees.
At December 31, 2018, Pollard owed Equities and its affiliates $0.6 million (2017 - $1.9 million) for rent,
interest, expenses and other items.
Neogames S.à r.l. and affiliates
During the year ended December 31, 2018, Pollard reimbursed operating costs and paid software
royalties of $3.3 million (2017 - $2.9 million) to its iLottery partner, which are recorded in cost of sales.
At December 31, 2018, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $0.9 million (2017 - $0.7 million) for reimbursement of operating costs and
capital expenditures, and its share of operating profits.
Critical Accounting Policies and Estimates
Described in the notes to Pollard’s 2018 audited consolidated financial statements are the accounting
policies and estimates that Pollard believes are critical to its business. Please refer to note 2 (c) to the
audited consolidated financial statements for the year ended December 31, 2018, for a discussion of the
significant accounting estimates and judgements.
Future Changes in Accounting Policies
In January 2016, the International Accounting Standards Board (“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
19
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.
Pollard has undertaken a preliminary review of all lease contracts and has applied the new measurement
model for lessees. Pollard leases a number of manufacturing facilities in Canada and the United States.
The present value of the remaining lease payments will be recognized on the balance sheet as right to
use assets and related lease liabilities upon adoption. The nature of expenses related to those leases will
now change because Pollard will recognize a depreciation charge on the right to use assets and an
interest expense on the related lease liabilities. Pollard intends to adopt the standard using the modified
retrospective approach, using the practical expedient of setting the initial right to use asset and the
corresponding lease liability equal. No restatement is required under this approach. Pollard has
preliminarily estimated that the transitional impact on the consolidated statements of financial position
will result in recognizing right to use assets and corresponding lease liabilities of $18.7 million.
In June 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The
Interpretation aims to reduce diversity in how companies recognize and measure a tax liability or tax
asset when there is uncertainty over income tax treatments. The Interpretation is effective for annual
periods beginning on or after January 1, 2019 and is to be applied retrospectively. Pollard does not expect
the Interpretation to have a significant impact on the consolidated financial statements upon adoption.
In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint Ventures.
The amendments clarify that long-term interests in associates and joint ventures, to which the equity
method is not applied, are in the scope of both IFRS 9 Financial Instruments (including impairment
testing) and IAS 28 in terms of the application of IFRS 9 loss absorption and the impairment requirements
of IAS 28. These amendments are effective for annual periods beginning on or after January 1, 2019.
Pollard does not expect the amendments to have a significant impact on the consolidated financial
statements upon adoption.
In February 2018, the IASB issued amendments to IAS 19 Employee Benefits. The amendments were
issued to specify how an entity determines pension expenses when changes to a defined benefit plan
occur. When a change to a plan takes place, including an amendment, curtailment or settlement, IAS 19
requires an entity to remeasure its employee benefit plan liability or asset. The amendments require an
entity to use the updated assumptions from this remeasurement to determine current service cost and
the net finance cost for the remainder of the reporting period after the change to the plan. The
amendments are for annual and interim reporting periods beginning on or after January 1, 2019 and are
to be applied prospectively. Pollard does not expect the amendments to have a significant impact on the
consolidated financial statements upon adoption.
Industry Risks and Uncertainties
Pollard is exposed to numerous risks and uncertainties which are described in this MD&A and Pollard’s most
recent Annual Information Form dated March 13, 2019, which is available under Pollard’s profile on SEDAR
(www.sedar.com).
20
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.
Credit risk
Credit risk is 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 by approximately $0.02 million for year
ended December 31, 2018 (2017 - $0.15 million). A 50 basis point strengthening/weakening in the
foreign exchange rate between the Canadian dollar and Euro would decrease/increase the income before
21
income taxes due to changes in operating cashflow by approximately $0.08 million for year ended
December 31, 2018 (2017 - $0.07 million).
Five 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, 2018, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $36.1 million (2017 - $1.3
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 $0.2
million (2017 - $0.01 million).
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2018, 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 $0.6 million for the year ended December 31, 2018 (2017 - $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.
In accordance with IFRS 9, Pollard has applied the expected credit loss model in evaluating the credit
risk associated with its accounts receivable. As part of this analysis, Pollard groups its customers into two
tranches: government lottery organizations and charitable gaming distribution networks. For sales to
government lottery organizations, Pollard has assessed the loss allowance at zero based on the nature
of the customer organizations, and no history of losses, collection issues, or significantly overdue
receivables, as well as other customer-specific and forward-looking macroeconomic factors. Pollard has
performed the same assessment for charitable gaming distribution network customers, resulting in the
provision of a loss allowance of $0.2 million, which is netted against accounts receivables.
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 $160.0 million for its
Canadian operations and up to US$12.0 million for its U.S. subsidiaries. At December 31, 2018, the
unused balance available for drawdown was $58.9 million (2017 - $34.2 million).
The 2019 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.
22
Outlook
The lottery industry remains very robust, with continued consumer demand presenting lotteries with the
foundation for growing their revenue and proceeds raised for good causes. Showing particularly strong
growth is the instant ticket product line. Higher price points, greater prize payouts, varying ticket sizes
and play mechanics, all continue to drive higher retail sales and ultimately greater demand for our instant
tickets over the long term. We also believe our ancillary and support products for instant tickets will see
increased demand. These items, such as iLottery and digital games, loyalty solutions and other related
services, also help expand sales of instant tickets creating more opportunities for Pollard.
We believe our first quarter 2019 Adjusted EBITDA will return to expected levels and we anticipate this
trend to continue. Orders can vary in the short-term and on a quarter to quarter basis can impact our
results. We believe growing our volumes and market share will help mitigate this variability.
Revenue recognition standards and delivery terms can impact when we are able to recognize our instant
ticket production in revenue. Over a longer period of time these variations are lessened but over the
short term it can have an impact on our financial results. We anticipate the majority of the instant ticket
volumes that were deferred at the end of 2018 to be recognized in the first quarter of 2019.
Much of our revenue is based on long term contracts and our current contract portfolio is well positioned
with no large contracts up for expiry in 2019. We renewed or extended all our major contracts that came
due in 2018. Many of our contracts allow the lottery to choose from multiple suppliers, which provides
Pollard the opportunity to win market share from other suppliers by providing successful products for the
lottery. Over the past few years this has been one of the keystones of our growth and we will continue
to focus on this strategy in 2019. We have previously disclosed that there were a number of large instant
ticket contracts that came up for bid in 2018 where Pollard was not a major supplier. These contract bid
processes remain underway as we enter 2019.
The ability to develop and sell proprietary products and services is a key success factor for Pollard. Our
specialty instant tickets such as Scratch FX® and laminated products such as PlayBooks® have been very
important in supporting lotteries in their growth initiatives and we are planning to continue to invest in
the resources to develop more innovative products and services. Ticket features such as Clear PlayTM
and the development and roll out of our PlayOnTM player engagement solution are examples of the
development necessary to remain partner of choice.
We expect our first quarter 2019 revenue to be boosted due to the deferral of completed tickets from
2018 being delivered in the first three months of 2019. This additional sales volume will supplement the
revenue from sales of tickets produced in the first quarter.
We anticipate our 2019 CAPEX to be at similar levels expended in 2018 once adjusted for the full year of
ownership of our recent acquisitions. Included in our planned capital expenditures are new eGaming
machines for our Diamond Game and Oasis operations. These expenditures can vary depending on
timing of new machine placements and new contract wins. We expect our operations to generate strong
free cash flow after consideration of CAPEX and expect to use these funds to pay down bank debt and
to contribute to any additional acquisitions.
Charitable gaming remains steady, with ongoing orders from private distributors supporting pull-tab and
bingo paper sales. Third party data has indicated some retail sales growth of these products which is a
positive sign. The charitable gaming business generates strong cash flow, as it requires minimal capital
investment.
23
In early 2018 we increased our instant ticket capacity by recommissioning our original press line in
Ypsilanti. We are in the process of adding supplementary equipment to this original press line which will
add incremental capacity in 2019 to help ensure we will have the capability to effectively and efficiently
handle future sales growth.
In January 2019, the United States Department of Justice (“DOJ”) issued a new interpretation of its
previous 2011 interpretation relating to the applicability of the Wire Act to internet gaming including
operations conducted by state lotteries. The 2011 interpretation had determined that the Wire Act, which
prohibited gambling or associated gambling activity from utilizing interstate wire communication facilities,
including the internet, only applied to sports betting. As a result, a number of state lotteries initiated
iLottery businesses to sell their lottery products over the internet within each of their own states to local
residents. The new January 2019 interpretation reverses this view and, in effect, indicates the Wire Act
is not restricted to just sports gambling. The DOJ granted an initial 90-day grace period from the date
of release of their ruling (January 14, 2019) for various organizations to assess the impact. Subsequently
the DOJ granted an additional 60-day grace period for a total of 150 days. This new interpretation
reverses the 2011 ruling and raises uncertainty as to how the Wire Act will be applied to existing and
future gaming activities including those run by state sponsored lotteries.
On February 15, 2019, Pollard Banknote Limited and NeoPollard Interactive LLC. filed a motion with the
United States District Court for the District of New Hampshire (“District Court”) requesting a formal
declatory judgement clarifying that the Wire Act only applies to sports betting. Simultaneously, the State
of New Hampshire also filed a motion with the District Court requesting the same definitive clarification.
We believe the January 2019 DOJ interpretation is incorrect on a number of key issues relating to existing
and long-time legacy lottery gaming products and we are confident a definitive ruling from the District
Court will reconfirm that iLottery and other gaming operations conducted by state lotteries are not subject
to the Wire Act and can therefore continue to operate as they have for many years. Notwithstanding the
uncertainty brought on with the Department of Justice reinterpretation, interest in iLottery operations
continues to rise among many lottery organizations. We expect opportunities to provide these services
to lotteries will continue to grow and are actively pursuing a number of them in 2019.
The integration of our recently acquired Schafer retail merchandising business is proceeding as expected
and we are looking for opportunities to maximize instant ticket sales through innovative use of point of
sale dispensers. The integration of our International Gamco business with our American Games business
is also progressing well. At the same time, Diamond Game is pursuing a number of new market
opportunities for its eGaming machines and will be increasing the number of machines in developing
markets.
Our strategic vision includes pursuing acquisitions to expand our product offerings and we are actively
looking at a number of tactical additions that would further enhance Pollard’s position as partner of choice
for the lottery and charitable gaming industries.
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
24
designed appropriately and are effective at providing reasonable assurance of achieving the disclosure
objectives.
Pollard has limited its design of disclosure controls and procedures to exclude controls, policies and
procedures of Schafer, as it was acquired not more than 365 days before the end of the financial period
to which this MD&A relates.
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.
Pollard has limited its design of ICFR to exclude controls, policies and procedures of Schafer, as it was
acquired not more than 365 days before the end of the financial period to which this MD&A relates.
No changes were made in Pollard’s internal control over financial reporting during the year ended
December 31, 2018, 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, 2018, is available on SEDAR at
www.sedar.com.
Pollard Banknote Limited
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474-2323
www.Pollardbanknote.com
25
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, 2019
ROBERT ROSE
Chief Financial Officer
Consolidated Financial Statements of
POLLARD BANKNOTE
LIMITED
Years ended December 31, 2018 and 2017
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Pollard Banknote Limited
Opinion
the consolidated statements of
We have audited the consolidated financial statements of Pollard Banknote Limited (the Entity), which
comprise
financial position as at December 31, 2018 and
December 31, 2017, the consolidated statements of income, comprehensive income, changes in equity
and cash flows for the years then ended, and notes to the financial statements, including a summary of
significant accounting policies (hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Entity as at December 31, 2018 and December 31, 2017, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance
with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit
of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit
of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. Other information comprises:
‐
‐
the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Annual Report 2018”.
Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit, and remain alert for indications that the other
information appears to be materially misstated.
1
KPMG LLP One Lombard Place Suite 2000 Winnipeg MB R3B 0X3 Telephone (204) 957-1770 Fax (204) 957-0808 www.kpmg.ca 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. Document Classification: KPMG Confidential
We obtained the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions, as at the date of this auditors’ report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Annual Report 2018” is expected to be made available to us after the date
of this auditors’ report. If, based on the work we will perform on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that fact to those charged
with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has
no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes
our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
-
Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
- Obtain an understanding of internal control relevant to the audit 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.
2
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
- Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditors’
report to the related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of
our auditors’ report. However, future events or conditions may cause the Entity to cease to continue
as a going concern.
- Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
- Communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
- Provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is Robert Kowalchuk.
Winnipeg, Canada
March 13, 2019
3
Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
Assets
Current assets
Cash
Restricted cash
Accounts receivable
Inventories (note 7)
Prepaid expenses and deposits
Income tax receivable
Total current assets
Non-current assets
Property, plant and equipment (note 8)
Equity investment (note 9)
Goodwill (note 10)
Intangible assets (note 11)
Deferred income taxes (note 12)
Total non-current assets
December 31,
2018
December 31,
2017*
$
$
11,174
10,158
34,675
45,353
6,943
2,279
110,582
71,606
1,164
69,667
50,086
2,495
195,018
5,603
5,780
40,749
32,008
6,331
–
90,471
54,319
877
51,768
27,746
3,093
137,803
Total assets
$
305,600
$
228,274
Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Dividends payable
Income taxes payable
Contract liabilities (note 18)
Current portion long-term debt (note 13)
Current portion subordinated debt (note 14)
Total current liabilities
Non-current liabilities
Long-term debt (note 13)
Subordinated debt (note 14)
Contract liabilities (note 18)
Other non-current liabilities
Pension liability (note 15)
Deferred income taxes (note 12)
Total non-current liabilities
Shareholders’ equity
Share capital (note 16)
Reserves
Deficit
Total shareholders’ equity
Commitments and contingencies (note 17)
December 31,
2018
December 31,
2017*
$
$
43,058
768
408
814
40
–
45,088
115,756
–
43
466
20,357
6,252
142,874
108,605
12,698
(3,665)
117,638
36,766
706
3,373
702
784
3,585
45,916
83,771
13,149
789
753
22,959
3,368
124,789
73,209
2,965
(18,605)
57,569
Total liabilities and shareholders’ equity
$
305,600
$
228,274
* Pollard has initially applied IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial
Instruments at January 1, 2018. Under the transition methods chosen, comparative information has not
been restated. See note 3.
See accompanying notes to consolidated financial statements.
On behalf of the Board:
“Dave Brown” 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 (note 18)
Cost of sales
Gross profit
Administration
Selling
Other expenses (note 19)
Income from operations
Finance costs (note 20)
Finance income (note 20)
Income before income taxes
Income taxes (note 12)
Current
Deferred (reduction)
2018
2017*
$
331,868
$
285,654
256,131
75,737
32,154
13,395
464
29,724
9,836
(881)
20,769
5,175
742
5,917
219,916
65,738
28,609
9,412
675
27,042
4,172
(1,104)
23,974
7,902
(712)
7,190
Net income
Net income per share (basic) (note 21)
Net income per share (diluted) (note 21)
$
$
$
14,852
$
16,784
0.58 $
0.58
$
0.71
0.71
* Pollard has initially applied IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial
Instruments at January 1, 2018. Under the transition methods chosen, comparative information has not
been restated. See note 3.
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
$
14,852
$
16,784
2018
2017*
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
9,733
(952)
Defined benefit plans remeasurements, net of
income tax (reduction) (note 12 & note 15)
Other comprehensive income (loss)
2,720
12,453
(7,397)
(8,349)
Comprehensive income
$
27,305
$
8,435
* Pollard has initially applied IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial
Instruments at January 1, 2018. Under the transition methods chosen, comparative information has not
been restated. See note 3.
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Year ended December 31, 2018
Balance at December 31, 2017
$
73,209
2,965
(18,605)
57,569
Share
capital
Translation
reserve
Deficit
Total
equity
Adjustment on initial application of IFRS 15, net of
income tax (note 3)
–
–
332
Adjusted balance at January 1, 2018
73,209
2,965
(18,273)
Net income
Other comprehensive income
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax (note 12 & note 15)
Total other comprehensive income
Total comprehensive income
$
$
–
–
–
–
–
–
14,852
9,733
–
–
2,720
9,733
9,733
2,720
17,572
–
110
332
57,901
14,852
9,733
2,720
12,453
27,305
35,396
110
Issue of common shares (note 16)
35,396
–
Share based compensation
Dividends to owners of Pollard Banknote Limited
–
–
–
–
(3,074)
(3,074)
Balance at December 31, 2018
$
108,605
12,698
(3,665)
117,638
Year ended December 31, 2017
Balance at January 1, 2017
Net income
Other comprehensive loss
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax reduction
Total other comprehensive loss
Total comprehensive income (loss)
Share based compensation
$
$
Dividends to owners of Pollard Banknote Limited
–
–
–
–
–
–
–
Share
capital
Translation
reserve
Deficit
$
73,209
3,917
(25,289)
–
16,784
Total
equity
51,837
16,784
(952)
–
(952)
–
(7,397)
(7,397)
(952)
(952)
–
–
(7,397)
9,387
122
(8,349)
8,435
122
(2,825)
(2,825)
Balance at December 31, 2017
$
73,209
2,965
(18,605)
57,569
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 loss (gain)
Loss on sale of property, plant and equipment
Loss on equity investment (note 9)
Pension expense (note 15)
Contract liabilities (note 18)
Interest paid
Income tax paid
Pension contribution
Change in non-cash operating working capital
(note 23)
Investing activities
Additions to property, plant and equipment (note 8)
Acquisition of Integrity Bingo
Acquisition of INNOVA Gaming Group, Inc. (note 6)
Acquisition of International Gamco, Inc. (note 6)
Acquisition of Schafer (note 6)
Equity investment (note 9)
Additions to intangible assets (note 11)
Financing activities
Proceeds from issue of share capital (note 16)
Net proceeds from long-term debt (note 13)
Net proceeds from (repayments of) subordinated debt
Change in other non-current liabilities
Deferred financing charges paid (note 13)
Change in dividend payable
Dividends paid
Foreign exchange gain (loss) on cash held in foreign currency
Change in cash position
Cash position, beginning of year
2018
2017*
$
14,852
$
16,784
5,917
18,017
4,243
4,533
–
2,631
6,449
(773)
(4,484)
(10,187)
(5,534)
3,997
39,661
(15,090)
–
–
(21,558)
(30,447)
(2,842)
(7,145)
(77,082)
35,396
27,878
(16,734)
(328)
(561)
62
(3,074)
42,639
353
5,571
5,603
7,190
13,155
3,962
(1,436)
74
1,727
5,082
(163)
(3,699)
(6,127)
(5,312)
(2,879)
28,358
(6,948)
(502)
(39,318)
–
–
(2,204)
(2,246)
(51,218)
–
13,520
10,602
383
(342)
–
(2,825)
21,338
(375)
(1,897)
7,500
Cash position, end of year
$
11,174
$
5,603
* Pollard has initially applied IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments at
January 1, 2018. Under the transition methods chosen, comparative information has not been restated. See note 3.
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, 2018 and 2017
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, 2018,
comprise Pollard, Pollard’s subsidiaries and its interest in other entities. Pollard is primarily involved
in the manufacture and sale of lottery and gaming products.
The controlling entity of Pollard is Pollard Equities Limited (“Equities”), a privately held company. On
February 1, 2018, Pollard completed a share offering, which reduced Equities’ ownership to
approximately 67.5% of Pollard’s increased outstanding share amount. Further details are provided
in note 16.
The operations of International Gamco, Inc. (“Gamco”), acquired during the first quarter of 2018,
are included in the consolidated financial statements from February 1, 2018. Further details are
provided in note 6.
The operations of Schafer Systems (2018) Inc., acquired during the fourth quarter of 2018, are
included in the consolidated financial statements from October 31, 2018. Further details are provided
in note 6.
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, 2019, 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
2.
Basis of preparation (continued):
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.
(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. Pollard also chooses 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 10.
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. Further
details are provided in note 15.
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 12.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
2.
Basis of preparation (continued):
Acquisition accounting:
For acquisition accounting purposes, all identifiable assets and liabilities acquired in a business
combination are recognized at fair value at the date of acquisition. Estimates are used to
calculate the fair value of these assets and liabilities.
3.
Accounting standards implemented in 2018:
(a) Revenue from contracts with customers:
In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15 Revenue from
Contracts with Customers. The new standard specifies a single, five-step revenue recognition model
that requires entities to recognize revenue when control of the promised goods or services is
transferred to customers at an amount that reflects the consideration to which the entity expects to
be entitled to in exchange for those goods or services. The standard also requires more informative,
relevant disclosures. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue.
Under certain contracts, Pollard is compensated for its products based on its customers’ sales of
those products at retail. Prior to IFRS 15, Pollard recognized sales under these contracts at the time
the product was sold at retail. Under IFRS 15 Pollard has concluded that control transfers to its
customers at delivery of the product to the customer. This will accelerate the recognition of sales
under these contracts to the time of receipt of shipment. Pollard’s sales under these contracts could
vary year over year depending on the timing of shipments.
Pollard adopted the new standard retrospectively, with the cumulative effect of initially applying the
standard recognized at January 1, 2018, in opening deficit. The impact of transition to IFRS 15 on
opening deficit at January 1, 2018, was a reduction of $332, net of $123 of income taxes. The impact
on the statement of financial position included an increase in accounts receivable of $3,260, a
decrease in inventories of $2,805 and an increase in the deferred income tax liability of $123.
For the year ended December 31, 2018, Pollard’s revenue increased by $3,052 and cost of sales
increased by $2,104 as a result of the accelerated revenue recognition point on contracts where
Pollard is compensated for its products based on its customers’ sales at retail. As a result of the
transitional adjustment, Pollard’s sales in the year ended December 31, 2018, decreased by $3,184
and cost of sales decreased by $2,789, as these sales were previously recorded in opening deficit
upon adoption at January 1, 2018.
As a result of the adoption of IFRS 15, Pollard’s accounting policies for Revenue from Contracts with
Customers have been updated in note 4 and applied from January 1, 2018. Additional revenue
disclosures are presented in note 18.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
3.
Accounting standards implemented in 2018 (continued):
(b) Financial instruments:
In July 2014, the IASB issued IFRS 9 Financial Instruments, which replaced 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.
Pollard adopted the new standard retrospectively. The adoption of IFRS 9 did not result in any
transition adjustments being recognized as at January 1, 2018. The adoption of the new standard
had no material impact on Pollard’s consolidated financial statements.
The standard contains three classification categories for financial assets: measured at amortized
cost, fair value through other comprehensive income (“FVOCI”) and fair value through profit or loss
(“FVTPL”). The classification of financial assets under IFRS 9 is based on the business model in which
a financial asset is managed and its contractual cash flow characteristics. The standard eliminates
the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale. Most
of the requirements in IAS 39 for classification and measurement of financial liabilities were carried
forward in IFRS 9; as a result, the adoption did not change Pollard’s accounting policies for financial
liabilities. The classification changes for each class of Pollard’s financial assets and financial liabilities
upon adoption at January 1, 2018 are summarized in the following table:
Financial assets and liabilities
IAS 39
IFRS 9
Cash
Restricted cash
Accounts receivable*
Accounts payable and accrued
Loans and receivables
Loans and receivables
Loans and receivables
Other financial liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
IAS 39/IFRS 9
carrying value
5,603
5,780
44,009
liabilities
Other non-current liabilities
Dividends payable
Long-term debt
Subordinated debt
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
(36,766)
(753)
(706)
(83,771)
(13,149)
*January 1, 2018 figure includes the impact of the transitional adjustment booked to opening
deficit upon adoption of IFRS 15 of $3,260. Further details are provided in note 3(a).
As a result of the adoption of IFRS 9, Pollard’s accounting policies for Financial Instruments have
been updated in note 4 and applied from January 1, 2018. Additional IFRS 9 disclosures are
presented in note 27 and note 28.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
3.
Accounting standards implemented in 2018 (continued):
(c) Share-based payments:
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 had no
material impact on the consolidated financial statements.
(d) Foreign currency transactions and advance consideration:
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 had no material
impact on the consolidated financial statements.
4.
Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements, except as described in note 3.
(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, 2018
December 31, 2017
Pollard Holdings, Inc.
Pollard (U.S.) Ltd.
Pollard Games, Inc.
Pollard iLottery Inc.
Diamond Game Enterprises
Diamond Game Enterprises Canada ULC
International Gamco, Inc.
Schafer Systems (2018) Inc.
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
–
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
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, 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.
(b) Business combinations:
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the fair value of the assets given, equity instruments and liabilities incurred or
assumed at the date of exchange. Acquisition costs for business combinations are expensed as
incurred and included in administration expenses. Identifiable assets acquired and liabilities
assumed are measured at their fair value at the acquisition date. The excess of the fair value of
consideration transferred over the fair value of the identifiable net assets acquired is recorded
as goodwill.
(c) Restricted cash:
Pollard, under certain contractual arrangements, controls cash that is not available for use.
Pollard records an equal, offsetting liability classified within accounts payable and accrued
liabilities. Restricted cash includes player deposits held for the benefit of Pollard’s iLottery
customer, in addition to funds held for security purposes and certain contractual 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.
(d) Revenue recognition:
Pollard previously recognized revenue under IAS 18 when persuasive evidence of an arrangement
existed, significant risk and benefits of ownership were transferred, the sales price to the
customer was fixed or was determined, and collection of the resulting receivable was reasonably
assured. The significant risks of ownership and benefits of ownership were normally transferred
in accordance with the shipping terms agreed to with the customer.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
Under IFRS 15 Revenue from Contracts with Customers, revenue is recognized when a customer
obtains control of the goods or services. Pollard determines revenue recognition through the
following steps: a) identification of the contract with a customer, b) identification of the
performance obligations in the contract, c) determination of the transaction price, d) allocation
of the transaction price to the performance obligations in the contract and e) recognition of
revenue when Pollard satisfies a performance obligation.
Many of Pollard’s contracts have a single performance obligation, including the sale of instant
tickets and related products, pull-tab (or break-open) tickets, bingo paper, pull-tab vending
machines, ancillary products such as pull-tab counting machines and gaming machines. The
single performance obligation in these contracts is the promise to transfer the individual goods.
Revenue is recognized at a point in time when the customer obtains control of a product, which
typically takes place when legal title and physical possession of the product is transferred to the
customer. These conditions are usually fulfilled upon delivery. However, under certain contracts,
Pollard is compensated for its products based on its customers’ sales of those products at retail.
Prior to IFRS 15, Pollard recognized sales under these contracts at the time the product was sold
at retail. Under IFRS 15, Pollard has concluded that control transfers to its customers at delivery
of the product to the customer. This accelerates the recognition of sales under these contracts
to the time of receipt of shipment. Pollard’s sales under these contracts could vary year over
year depending on the timing of shipments.
Certain Pollard contracts include multiple performance obligations, including license and royalty
sales, iLottery services, loyalty programs, digital and lottery management services, training and
consulting. Where such arrangements exist, the transaction price is allocated to the performance
obligations based upon the relative fair value of the various elements. The fair values of each
element are determined based on the current market price of each of the elements when sold
separately. Revenue is then recognized upon satisfaction of each performance obligation. Where
Pollard provides software and related infrastructure, revenue is recognized over time based on
the relevant measure of progress of the asset being transferred to the customer.
Pollard earns revenue from leasing gaming machines and other equipment, and capitalizes the
costs of installing gaming equipment. Revenue from the provision of gaming services is generally
recognized as a daily fee or as a percentage of revenue generated by the gaming machines.
Product support services, maintenance and periodic upgrades revenue is recognized over time
as the related services are performed.
Contract liabilities consist of customer advances for services to be rendered in the future and is
recognized as income in future periods. Labour costs associated with performing routine
maintenance on participating gaming machines is expensed as incurred and included in cost of
sales.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
Volume rebates are accrued and recorded as a reduction to sales based on historical experience
and management’s expectations regarding sales volume.
(e) 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 operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion.
(f) 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 fair value of the consideration transferred over the
fair value of the identifiable net assets acquired of Pollard’s subsidiaries. Goodwill is not amortized
but is subject to an annual impairment test to ensure its recoverable value remains greater than,
or equal to, book value.
(g) 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 and related fringes 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
Computer software and licenses
Computer software consists of the cost of acquiring, developing and implementing these systems.
Cost of implementation include third party costs as well as direct labour and related fringes
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.
Customer assets and patents
Customer assets and patents that have finite useful lives are measured at cost less accumulated
amortization and accumulated impairment losses.
Intangible assets, with finite useful lives, 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
7 to 16 years
Term of patent
3 to 10 years or term of license
3 to 9 years
Amortization methods, estimated useful lives and residual value are reviewed each annual
reporting date and adjusted prospectively if appropriate.
Trademarks, trade names and brands
Trademarks, trade names and brands have been deemed to have an indefinite life and are not
amortized. For purposes of impairment testing, the fair value of the trademarks, trade names
and brands are determined using the relief from royalty method.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
(h) 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
Charitable gaming machines
Furniture, fixtures and computers
Rate
10 to 39 years
Term of lease
2 to 11 years
3 to 8 years
3 to 9 years
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
(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.
(k) Financial instruments:
IFRS 9 Financial Instruments, replaced the previous 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.
Financial assets are initially measured at fair value. On initial recognition, Pollard classifies its
financial assets at either amortized cost, FVOCI or FVTPL, depending on its business model for
managing the financial assets and the contractual cash flow characteristics of the financial assets.
Financial assets are not reclassified subsequent to their initial recognition, unless Pollard changes
its business model for managing financial assets. Financial liabilities are classified at amortized
cost.
A financial asset is classified as measured at amortized cost if it meets both of the following
conditions: a) the asset is held within a business model whose objective is to hold assets to
collect contractual cash flows and b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
outstanding.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
A financial asset is classified as measured at FVOCI if it meets both of the following conditions:
a) it is held within a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets and b) its contractual terms give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal amount outstanding.
All financial assets not classified as measured at amortized cost or FVOCI are measured at FVTPL.
This includes all derivative financial assets. On initial recognition, Pollard may irrevocably
designate a financial asset that otherwise meets the requirements to be measured at amortized
cost or at FVOCI as FVTPL, if doing so eliminates or significantly reduces an accounting mismatch
that would otherwise arise.
Hedge accounting
Pollard has adopted the new general hedging accounting model in IFRS 9. 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.
From time to time, Pollard enters into hedging arrangements in order to mitigate this exposure
to foreign exchange fluctuations. Pollard determines the existence of an economic relationship
between the hedging instrument and hedged item based on the currency, amount and timing of
their respective cash flows. An assessment is made whether the derivative designated in each
hedging relationship is expected to be and has been effective in offsetting changes in cash flows
of the hedged item using the hypothetical derivative method.
The fair value of each contract is included on the consolidated balance sheet as either a financial
asset or liability. Changes in fair value are recorded in either other comprehensive income or the
consolidated statement of income, depending on the nature of the hedged item.
If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold,
expires, is terminated or is exercised, then hedge accounting is discontinued prospectively. When
hedge accounting for cash flow hedges is discontinued, the amount that has been accumulated
in the hedging reserve remains in equity until, for a hedge of a transaction resulting in recognition
of a non-financial item, it is included in the non-financial item’s cost on its initial recognition or,
for other cash flow hedges, it is reclassified to the consolidated statement of income in the same
period or periods as the hedged expected future cash flows affects income or loss. If the hedged
future cash flows are no longer expected to occur, the amounts that have been accumulated in
the hedging reserve are immediately reclassified to the consolidated statement of income.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
(l)
Impairment:
Financial assets
IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss (“ECL”) model.
The new impairment model applies to financial assets measured at amortized cost, contract
assets and debt investments at FVOCI, but not to investments in equity instruments.
Pollard applies the simplified approach to providing for expected credit losses, which requires the
use of the lifetime expected credit loss provision for all accounts receivable. Expected credit
losses are measured as the difference in the present value of the contractual cash flows that are
due under the contract and the cash flows that Pollard expects to receive. The expected cash
flows reflect all available information, including Pollard’s historical experience, the past due
status, and forward-looking macroeconomic factors. Further details are provided in note 27 and
note 28.
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
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
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.
(m) 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.
(n) 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”).
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.
(o) 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
Defined contribution plans
Pollard’s U.S. subsidiaries maintain four 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.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
(p) 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 and U.S. state franchise 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.
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.
(q) 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
4.
Significant accounting policies (continued):
(r) Finance costs and finance income:
Finance costs comprise interest expense on borrowings including amortization of deferred
financing costs, mark-to-market losses on foreign exchange contracts and net foreign exchange
losses.
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.
(s) Leases:
The determination of whether an arrangement is or contains a lease is based on the substance
of the arrangement and requires an assessment of whether the arrangement conveys a right to
use the asset. When substantially all risk and rewards of ownership are transferred from the
lessor to the lessee, lease transactions are accounted for as finance leases. All other leases are
accounted for as operating leases.
Certain Pollard subsidiaries, as lessees, have entered into leases which are classified as finance
leases. These leases are presented in the consolidated financial statements according to their
nature. The interest element of the lease payment is recognized over the term of the lease based
on the effective interest rate method and is included in finance expenses.
5.
Future accounting standards:
(a) Leases:
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
5.
Future accounting standards (continued):
Pollard has undertaken a preliminary review of all lease contracts and has applied the new
measurement model for lessees. Pollard leases a number of manufacturing facilities in Canada
and the United States. The present value of the remaining lease payments will be recognized on
the balance sheet as right to use assets and related lease liabilities upon adoption. The nature
of expenses related to those leases will now change because Pollard will recognize a depreciation
charge on the right to use assets and an interest expense on the related lease liabilities. Pollard
intends to adopt the standard using the modified retrospective approach, using the practical
expedient of setting the initial right to use asset equal to the corresponding lease liability. No
restatement is required under this approach. Pollard has preliminarily estimated that the
transitional impact on the consolidated statements of financial position will result in recognizing
right to use assets and corresponding lease liabilities of $18,721.
(b) Uncertainty over income tax treatments:
In June 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments.
The Interpretation aims to reduce diversity in how companies recognize and measure a tax
liability or tax asset when there is uncertainty over income tax treatments. The Interpretation is
effective for annual periods beginning on or after January 1, 2019 and is to be applied
retrospectively. Pollard does not expect the Interpretation to have a significant impact on the
consolidated financial statements upon adoption.
(c) Investments in associates and joint ventures:
In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint
Ventures. The amendments clarify that long-term interests in associates and joint ventures, to
which the equity method is not applied, are in the scope of both IFRS 9 Financial Instruments,
including impairment testing, and IAS 28 in terms of the application of IFRS 9 loss absorption
and the impairment requirements of IAS 28. These amendments are effective for annual periods
beginning on or after January 1, 2019. Pollard does not expect the amendments to have a
significant impact on the consolidated financial statements upon adoption.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
5.
Future accounting standards (continued):
(d) Employee benefits:
In February 2018, the IASB issued amendments to IAS 19 Employee Benefits. The amendments
were issued to specify how an entity determines pension expenses when changes to a defined
benefit plan occur. When a change to a plan takes place, including an amendment, curtailment
or settlement, IAS 19 requires an entity to remeasure its employee benefit plan liability or asset.
The amendments require an entity to use the updated assumptions from this remeasurement to
determine current service cost and the net finance cost for the remainder of the reporting period
after the change to the plan. The amendments are for annual and interim reporting periods
beginning on or after January 1, 2019 and are to be applied prospectively. Pollard does not
expect the amendments to have a significant impact on the consolidated financial statements
upon adoption.
6.
Acquisitions:
(a) INNOVA Gaming Group Inc.:
On August 3, 2017, 10188557 Canada Inc. (the “Offeror”), a wholly-owned subsidiary of Pollard,
acquired 17,929,021 common shares of INNOVA Gaming Group Inc. (“INNOVA” or “Diamond
Game”) which had been validly tendered under the offer to acquire all of the outstanding
common shares (the “Offer”) for $2.50 in cash per common share. The Offer was extended until
August 15, 2017.
On August 15, 2017, an additional 1,167,946 common shares were acquired under the extension
of the Offer for $2.50 in cash per common share. A total of 19,096,967 common shares or
95.13% of the issued and outstanding common shares were acquired under the Offer. On August
18, 2017, Pollard mailed to all remaining holders of common shares a Notice of Compulsory
Acquisition pursuant to the provisions of Section 206 of the Canada Business Corporations Act to
complete the acquisition of 100% of the common shares. On September 18, 2017, the
Compulsory Acquisition was completed and the Offeror acquired the remaining 976,932 common
shares not already held by the Offeror, thereby becoming the holder of 100% of the common
shares. On September 19, 2017, INNOVA was formally delisted from the Toronto Stock
Exchange. The acquisition was completed for aggregate consideration of $50,185.
The purchase price was funded by proceeds from Pollard’s credit facility and additional
subordinated debt. The acquisition has been accounted for using the acquisition method. The
fair values of the identifiable assets and liabilities have been based on management’s best
estimates and valuation techniques as at August 3, 2017, the acquisition date.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
6.
Acquisitions (continued):
Purchase price
Cash acquired
Net consideration paid
Additional net tangible assets acquired
Accounts receivable
Inventories
Prepaid expenses and deposits
Property and equipment
Deferred income tax asset
Accounts payable and accrued liabilities
Income tax payable
Deferred revenue
Long-term debt
Deferred income tax liability
Net tangible assets acquired (excluding cash)
Trademarks
Software
Patents
Customer contracts
Identifiable intangible assets acquired
Goodwill acquired
$
$
50,185
(10,867)
39,318
$
$
$
$
$
3,702
1,739
2,255
10,288
5,912
(5,915)
(189)
(2,505)
(1,467)
(4,892)
8,928
2,616
2,733
436
10,247
16,032
14,358
Subsequent to the preliminary assignment of fair values to identifiable assets and liabilities
acquired, Pollard assessed there to be a high degree of uncertainty that it will be able to recognize
value from a portion of the deferred tax asset initially valued. As a result, in the year ended
December 31, 2017, Pollard reduced the deferred income tax asset by $3,128, from $9,040 to
$5,912 and increased the goodwill from $11,230 to $14,358.
The goodwill acquired is largely attributable to the assembled workforce and the expected
synergies from the combined businesses. This goodwill is not expected to be deductible for tax
purposes.
During the period ended June 30, 2018, the acquisition accounting was finalized.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
6.
Acquisitions (continued):
(b) International Gamco, Inc.:
On February 1, 2018, Pollard Holdings Inc., a wholly-owned subsidiary of Pollard, acquired 100%
of the common shares of International Gamco, Inc. (“Gamco”). The purchase price was funded
by proceeds from Pollard’s credit facility and cash on hand. The acquisition has been accounted
for using the acquisition method. The fair values of the identifiable assets and liabilities have
been based on management’s best estimates and valuation techniques as at February 1, 2018,
the acquisition date. As per the sales agreement, the net purchase price was decreased by the
amount of other current liabilities assumed, which were specified in the agreement. The majority
of these other current liabilities were paid in March 2018.
Purchase price
Cash acquired
Net consideration paid
Additional net tangible assets acquired
Restricted cash - other current liabilities
Accounts receivable
Inventories
Prepaid expenses and deposits
Property, plant and equipment
Patents
Deferred income tax asset
Accounts payable and accrued liabilities
Income taxes payable
Other current liabilities
Deferred income tax liability
Net tangible assets acquired (excluding cash)
Trade name
Game library
Customer relationships
Identifiable intangible assets acquired
Goodwill acquired
$
$
$
$
$
$
$
21,648
(90)
21,558
5,999
1,554
4,831
244
7,025
36
1,362
(1,853)
(156)
(5,999)
(2,532)
10,511
526
579
4,058
5,163
5,884
During the measurement period, the fair value of acquired accounts payable and accrued
liabilities was increased by $601 with an offsetting increase to goodwill in the year ended
December 31, 2018.
During the measurement period, the fair value of acquired prepaid expenses and deposits was
decreased by $85 with an offsetting increase to goodwill in the year ended December 31, 2018.
During the measurement period, the fair value of acquired inventories was increased by $320
with an offsetting decrease to goodwill in the year ended December 31, 2018.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
6.
Acquisitions (continued):
During the measurement period, the fair value of the acquired deferred income tax liability was
increased by $160 with an offsetting increase to goodwill in the year ended December 31, 2018.
Acquisition costs related to the Gamco purchase in the year ended December 31, 2018, were
$227. These costs were included in administration expenses.
During the period between February 1, 2018 and December 31, 2018, Gamco generated
revenues of approximately $27,114 and net income of $1,081, after depreciation and
amortization of the fair values of identifiable assets acquired, which have been recorded in the
consolidated financial statements. If Gamco had been acquired on January 1, 2018, incremental
revenue of $2,217 and net loss of $4,755 (which includes $4,826 of transaction related
expenditures, net of income tax) would have been recognized in the year ended December 31,
2018.
The goodwill acquired is largely attributable to the assembled workforce and the expected
synergies from the combined businesses, including a greater share of the charitable gaming
market. This goodwill is not expected to be deductible for tax purposes.
During the period ended December 31, 2018, the acquisition accounting was finalized.
(c) Schafer Systems Inc.:
On October 31, 2018, Pollard Systems Inc., a wholly-owned indirect subsidiary of Pollard,
acquired substantially all of the operating assets and business of Schafer Systems Inc.
(“Schafer”), the leading global provider of lottery ticket dispensers and play stations. Pollard
Systems Inc. was renamed Schafer Systems (2018) Inc. upon completion of the transaction. The
purchase price was funded by proceeds from Pollard’s credit facility and cash on hand. The
acquisition has been accounted for using the acquisition method. The fair values of the
identifiable assets and liabilities have been based on management’s best estimates and valuation
techniques as at October 31, 2018, the acquisition date.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
6.
Acquisitions (continued):
Consideration paid
Net tangible assets acquired
Accounts receivable
Inventories
Property, plant and equipment
Accounts payable and accrued liabilities
Net tangible assets acquired
Customer relationships
Brand
Patents
Identifiable intangible assets acquired
Goodwill acquired
$
$
$
$
$
$
30,447
1,042
2,566
5,409
(374)
8,643
11,426
1,013
132
12,571
9,233
Acquisition costs related to the Schafer purchase in the year ended December 31, 2018, were
$374. These costs were included in administration expenses.
During the period between October 31, 2018 and December 31, 2018, Schafer generated
revenues of approximately $2,153 and net income of $152, after depreciation and amortization
of the fair values of identifiable assets acquired, which have been recorded in the consolidated
financial statements. If Schafer had been acquired on January 1, 2018, incremental revenue of
$11,831 and net income of $1,897 would have been recognized in the year ended December 31,
2018.
The goodwill acquired is largely attributable to the assembled workforce, market share and the
expected synergies and cost savings after integration of the combined businesses. This goodwill
is expected to be deductible for tax purposes. The fair values of identifiable assets and liabilities
acquired are preliminary and are subject to change if new information becomes available.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
7.
Inventories:
Raw materials
Work-in-process
Finished goods
December 31,
2018
December 31,
2017
$
$
$
18,537
2,861
23,955
11,755
930
19,323
45,353
$
32,008
During 2018, Pollard recorded inventory write-downs of $302 representing an increase in the
obsolescence reserves and reversal of previous write-downs of $53 due to changes in foreign
exchange rates.
During 2017, Pollard recorded inventory write-downs of $457 representing an increase in the
obsolescence reserves and reversal of previous write-downs of $26 due to changes in foreign
exchange rates.
The cost of sales reflects the costs of inventory including direct material, direct labour and
manufacturing overheads.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
8.
Property, plant and equipment:
Cost
Land Buildings
Leasehold
improve-
ments
Equipment
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
Balance at January 1, 2017
$
803
12,068
3,306
154,054
4,879
1,579
176,689
Acquisitions
Additions/net transfers
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2017
Acquisitions
Additions/net transfers
Disposals
Effect of movements in
exchange rates
Balance at December 31,
–
–
–
–
–
88
–
–
–
284
8,468
1,527
293
10,288
5,674
422
480
6,948
–
(10,087)
(63)
(309)
(6)
8
–
(10,093)
–
(364)
$
803
12,156
3,527
157,800
6,830
2,352
183,468
881
7,496
–
–
47
195
–
145
–
1,460
–
74
3,832
6,549
(65)
2,269
–
225
12,434
510
6,376
15,090
–
26
–
(65)
44
2,605
2018
$ 1,731
19,992
5,061
170,385
7,366
8,997
213,532
Accumulated
depreciation
Land Buildings
Leasehold
improve-
ments
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
Equipment
Balance at January 1, 2017
$
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2017
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2018
$
$
–
–
–
–
–
–
–
–
–
4,912
1,915
119,085
3,871 –
129,783
369
–
–
424
8,469
522 –
9,784
–
(10,013)
(6) –
(10,019)
(189)
(206)
(4)
–
(399)
5,281
2,150
117,335
4,383 –
129,149
444
–
2
242
11,129
233
–
12,048
–
74
(47) –
–
(47)
691
9 –
776
5,727
2,466
129,108
4,625 –
141,926
Carrying amounts
Land Buildings
ments Equipment
Leasehold
improve-
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
At December 31, 2017
$
803
6,875
At December 31, 2018
$ 1,731
14,265
1,377
2,595
40,465
41,277
2,447
2,741
2,352
54,319
8,997
71,606
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
9. 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,
2018
December 31,
2017
$
$
$
877
2,842
(2,631)
76
468
2,204
(1,727)
(68)
1,164
$
877
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 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.
10. Goodwill:
December 31,
2018
December 31,
2017
Balance, beginning of year
Acquisition of Diamond Game (note 6)
Acquisition of Integrity
Acquisition of Gamco (note 6)
Acquisition of Schafer (note 6)
Effects of movements in exchange rates
$
51,768 $
–
–
5,884
9,233
2,782
Balance, end of year
$
69,667 $
37,513
14,358
189
–
–
(292)
51,768
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
10. Goodwill (continued):
Impairment assessment methodology
Pollard performs its annual goodwill impairment test as at December 31. Goodwill has been allocated
as follows to Pollard’s CGUs:
Lotteries
American Games
Diamond Game
Gamco
Schafer
Total
December 31,
2018
December 31,
2017
$
30,816 $
7,012
15,741
6,513
9,585
$
69,667 $
30,816
6,457
14,495
–
–
51,768
Goodwill allocated to the American Games, Diamond Game, Gamco and Schafer CGUs are subject to
foreign exchange revaluation.
For each CGU, 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 certain growth rates 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
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
10. Goodwill (continued):
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:
Lotteries
American Games
Diamond Game
Gamco
Schafer
Growth rates
12.0%
11.0%
15.0%
12.0%
14.7%
Growth rates are based on estimated sustainable long-term growth rates of the CGUs. A terminal
value of 2% was applied in the value in use calculations for all of the above 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, 2018 and 2017
11. Intangible assets:
Cost
Balance at January 1,
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
2017
$
18,645
5,187
–
1,148
7,139
32,119
10,247
436
2,616
–
69
–
–
–
2,733
16,032
867
936
Balance at December 31,
2017
$
28,991
5,696
15,484
167
–
99
–
4
–
25
2,641
1,539
62
1,248
1,310
–
17
145
1,210
12,004
50,542
–
579
17,769
Acquisitions
Additions (net of
investment tax credits)
Additions – internally
developed (net of
investment tax credits)
Effect of movements in
exchange rates
Acquisitions
Additions (net of
investment tax credits)
Additions – internally
developed (net of
investment tax credits)
Effect of movements in
exchange rates
Balance at December 31,
–
742
–
429
678
1,849
–
1,769
–
46
–
323
–
5,296
5,296
–
460
2,598
2018
$
46,244
6,651
4,503
1,639
19,017
78,054
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
11. Intangible assets (continued):
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
Accumulated amortization
Balance at January 1,
2017
Amortization for the
year
Effect of movements in
exchange rates
Balance at December 31,
2017
Amortization for the
year
Effect of movements in
exchange rates
Balance at December 31,
$
13,297
4,781
1,789
128
(16)
(1)
$
15,070
4,908
3,152
204
120
6
2018
$
18,342
5,118
–
–
–
–
–
–
–
1,106
1,019
20,203
104
–
595
2,616
(6)
(23)
1,210
1,608
22,796
36
1,555
4,947
–
99
225
1,246
3,262
27,968
Carrying amounts
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
At December 31, 2017
At December 31, 2018
$ 13,921
$ 27,902
788
1,533
2,641
4,503
–
333
10,396
15,815
27,746
50,086
Amortization of intangible assets in 2018 of $4,947 (2017 – $2,616), was included in cost of sales.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
12. Income taxes:
Income tax expense
Current
Deferred (reduction)
Total
2018
5,175
742
5,917
$
$
2017
7,902
(712)
7,190
$
$
Income tax recognized in other comprehensive income (loss)
Amount
before
tax
Tax
expense
2018
Amount
net of tax
Amount
before
tax
Tax
benefit
2017
Amount
net of tax
Defined benefit plans
remeasurement
gain (loss)
$
3,695
(975)
2,720 $
(9,875)
2,478
(7,397)
Reconciliation of effective tax rate
Net income for the year
Total income tax expense
Income before income taxes
Income tax using Pollard's domestic tax rate
Effect of tax rates in foreign jurisdictions
Non-deductible amounts
Changes in enacted United States federal
income tax rates
Adjustments for tax of prior periods related
to Diamond Game acquisition
Other items
Effect of non-taxable items related to
foreign exchange
2018
2018
2017
$
$
27.0%
(2.5%)
2.7%
0.0%
0.0%
(2.4%)
14,852
5,917
20,769
5,608
(508)
553
–
–
(500)
2017
16,784
7,190
23,974
6,473
996
887
$
$
27.0%
4.1%
3.7%
(9.4%)
(2,261)
5.1%
1.4%
1,217
331
3.7%
764
(1.9%)
(453)
28.5% $
5,917
30.0% $
7,190
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
12. Income taxes (continued):
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
2018
2017
2018
2017
2018
2017
$
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Unused tax losses
Contract liabilities
Other
23
2,954
259
7,409
1,126
2,153
56
101
48 $
685
432
7,738
393
1,855
182
98
(9,319)
(6,067)
(57)
(1,227)
(7,762) $
(2,082)
–
(1,488)
(9,296)
(3,113)
202
6,182
(7,714)
(1,397)
432
6,250
(874)
–
(272)
(22)
(303)
–
–
(71)
252
2,153
(216)
79
90
1,855
182
27
Tax assets (liabilities)
$
14,081
11,431 $
(17,838)
(11,706) $
(3,757)
(275)
Movement in temporary differences during the year
January 1,
2017
Recognized
in profit or
loss
Acquisitions
Recognized in
other
comprehensive
income
Balance
December 31,
2017
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange (gains)
$
and losses
Unused tax losses
Contract liabilities
Other
(6,907)
(3,157)
364
4,300
419
–
–
72
2,104
911
52
(1,506)
(2,911)
849
16
978
(329)
193
(159)
(127)
–
1,662
341
82
–
–
–
2,478
–
–
–
–
(7,714)
(1,397)
432
6,250
90
1,855
182
27
Tax assets (liabilities)
$
(4,909)
1,139
1,017
2,478
(275)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
12. Income taxes (continued):
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange
(gains) and losses
Unused tax losses
Contract liabilities
Other*
January 1,
2018
Recognized
in profit or
loss
$
(7,714)
(1,397)
432
6,250
(406)
(477)
(71)
(536)
Acquisitions
(1,176)
(1,239)
(159)
1,443
90
1,855
182
(96)
162
239
(125)
–
–
–
–
(39)
Recognized in
other
comprehensive
income
Balance
December 31,
2018
–
–
–
(975)
–
–
–
–
(9,296)
(3,113)
202
6,182
252
2,094
57
(135)
Tax assets (liabilities)
$
(398)
(1,214)
(1,170)
(975)
(3,757)
* January 1, 2018 figure includes the impact of the transitional adjustment booked to opening deficit
upon adoption of IFRS 15 of $123. Further details are provided in note 3(a).
Recognized in the consolidated statements of comprehensive income as follows:
Deferred income tax expense (reduction)
Finance income (loss)
2018
742
472
1,214
$
$
2017
(712)
(427)
(1,139)
$
$
Amounts included in finance income relate to unrealized foreign exchange.
Unrecognized deferred tax assets
Deferred tax assets have not been recognized in respect to certain tax losses because it is not
probable that future taxable profit will be available against which Pollard can use the benefits
therefrom. The amount of tax losses not recognized at December 31, 2018 was $9,965 (2017 –
$8,426), with an estimated tax effect of $2,690 (2017 – $2,332). These tax losses, related to the
acquisition of Diamond Game in 2017, will expire between 2034 and 2038.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
13. Long-term debt:
December 31,
2018
December 31,
2017
Credit facility, interest of 4.0% to 4.3%, payable
monthly, maturing 2021
$
116,177
$
83,972
Equipment debt, interest of 6.72%, payable monthly,
maturing 2019
Equipment lease, interest of 3.89% to 5.55%
payable monthly, maturing 2019
Deferred financing charges, net of amortization
Less current portion
4
36
(421)
115,796
(40)
189
647
(253)
84,555
(784)
$
115,756
$
83,771
Credit facility
Deferred
financing
Equipment
debt
Equipment
lease
Total
Balance at January 1, 2018
$
83,972
(253)
189
647
84,555
Net proceeds (payments)
Payment of deferred financing
charges
Total changes from financing
cash flows
28,705
–
(187)
(640)
27,878
–
(561)
–
–
(561)
28,705
(561)
(187)
(640)
27,317
Effect of movements in
exchange rates
Amortization of deferred
financing charges
Total other changes
3,500
–
3,500
–
393
393
Balance at December 31, 2018
$
116,177
(421)
2
–
2
4
29
–
29
3,531
393
3,924
36
115,796
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
13. Long-term debt (continued):
Credit facility
Deferred
financing
Equipment
debt
Equipment
lease
Total
Balance at January 1, 2017
$
71,003
(151)
–
–
70,852
Net proceeds (payments)
Payment of deferred financing
charges
Total changes from financing
cash flows
14,164
–
(193)
(451)
13,520
–
(342)
–
–
(342)
14,164
(342)
(193)
(451)
13,178
Effect of movements in
exchange rates
Acquisitions
Amortization of deferred
financing charges
Total other changes
(1,195)
–
–
(1,195)
–
–
240
240
3
379
–
10
1,088
(1,182)
1,467
–
240
525
382
1,098
Balance at December 31, 2017
$
83,972
(253)
189
647
84,555
Credit facility
Effective June 22, 2018, Pollard renewed its credit facility. The credit facility provides loans of up to
$160,000 for its Canadian operations and US$12,000 for its U.S. subsidiaries. The credit facility also
includes an accordion feature which can increase the facility by $25,000. The borrowings for the
Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $160,000
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,
2018, the outstanding letters of guarantee drawn under the credit facility were $1,337 (2017 –
$1,909).
Included in the total credit facility balance is a U.S. dollar denominated balance of US$43,600 (2017
– US$14,700).
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including debt to income before interest, income taxes, amortization and
depreciation (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at December
31, 2018, Pollard is in compliance with all financial covenants.
As of December 31, 2018, Pollard had unused credit facility available of $58,860 (2017 – $34,202).
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
13. Long-term debt (continued):
Pollard’s credit facility is secured by a first security interest in all of the present and after acquired
property of Pollard. Under the terms of the agreement the facility is committed for a three-year
period, renewable June 22, 2021. Principal payments are not required until maturity. The facility can
be prepaid without penalties.
Equipment debt and leasing
Pollard’s subsidiary, Diamond Game, entered into agreements to purchase equipment payable in
monthly installments including interest. The equipment purchased includes charitable gaming
machines, machinery and equipment, and computer equipment all relating to the operations of
Diamond Game.
14. Subordinated debt:
Subordinated debt, interest of 8.00% payable
quarterly, maturing 2024
Less current portion
December 31,
2018
December 31,
2017
$ –
$ –
–
$
$
16,734
16,734
(3,585)
$ –
$
13,149
On June 23, 2017, Pollard entered into a loan agreement with Equities for a subordinated term loan
with a seven year term, repayable at any time (subject to meeting certain financial covenants under
the secured credit facility). The loan was provided to assist with the purchase of Diamond Game. A
total of $25,092 was drawn in the third quarter of 2017. Interest on the subordinated debt
commenced with the first draw at a rate of 8%. Quarterly principal payments on the loan facility
commenced the month following the first draw, which occurred August 4, 2017.
In addition to the mandatory quarterly payments, Pollard has made three lump sum prepayments.
On September 20, 2017, Pollard repaid $7,462 in outstanding principal and on February 23, 2018,
Pollard repaid an additional $7,471 in outstanding principal. On June 29, 2018, Pollard repaid in full
the remainder of the outstanding principal in the amount of $7,471.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
15. Pension liability:
December 31,
2018
December 31,
2017
Fair value of benefit plan assets
Present value of benefit plan obligations
Net pension liability
$
$
52,946 $
(73,303)
50,506
(73,465)
(20,357) $
(22,959)
Pollard sponsors non-contributory defined benefit plans providing pension benefits to its employees.
Pollard has four defined benefit 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. Two of the plans of the U.S. subsidiaries require valuations annually with the last
valuations being as of January 1, 2018. One of the Canadian plans of Pollard currently requires
valuation every year with the last valuation as of December 31, 2017. Pollard’s other Canadian plan’s
valuation was as of January 1, 2017. Pollard’s U.S. subsidiaries also maintain four defined contribution
plans. The pension expense for these defined contribution plans is the annual funding contribution
by the subsidiaries.
Pollard expects to contribute approximately $4,706 to its defined benefit plans in 2019. Included in
the 2019 estimated contributions is $1,212 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,
2018
December 31,
2017
62.0%
35.8%
2.2%
60.8%
36.2%
3.0%
100.0%
100.0%
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
15. Pension liability (continued):
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 gains (losses)
Effect of movements in exchange rates
2018
2017
$
$
50,506
1,788
4,720
(1,548)
(3,024)
504
44,372
1,834
4,623
(1,773)
1,825
(375)
Fair value, end of year
$
52,946
$
50,506
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
2018
2017
$
$
$
$
73,465
4,839
2,512
(1,548)
(6,790)
825
57,896
3,934
2,294
(1,773)
11,671
(557)
73,303
$
73,465
(20,357) $
(22,959)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
15. 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:
2018
2017
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
$
$
4,839
2,512
1,236
(2,655)
5,932
517
Net pension plans cost
$
6,449
$
Actuarial assumptions
The principal actuarial assumptions used in measuring at the reporting date are as follows:
3,934
2,294
(3,659)
2,190
4,759
323
5,082
Discount rate
Rate of compensation increase
2018
2017
3.9% to 4.6%
0% to 3.0%
3.4% to 3.8%
0% to 3.0%
Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2018, Pollard used CPM2014 Private Sector projected CPM-B mortality table for
its Canadian subsidiary’s pension plans and the RP-2018 healthy mortality tables for its U.S.
subsidiary’s pension plans. As of December 31, 2017, Pollard used CPM2014 Private Sector projected
CPM-B mortality table for its Canadian subsidiary’s pension plans and the RP-2017 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, 2018 and 2017
15. 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 (1% movement)
Future mortality (one year)
$
$
$
(13,112) $
$
$
1,906
933
17,390
(1,745)
(944)
Increase
Decrease
Remeasurements
Remeasurement gains (losses) arising on plan
assets
$
(3,024) $
1,825
2018
2017
Remeasurement (gains) losses arising on plan
liabilities from:
Demographic assumptions
Financial assumptions
Experience adjustments
Remeasurement (gains) losses arising on plan
liabilities
$
$
$
23
(8,601)
1,788
589
8,698
2,384
(6,790) $
11,671
Remeasurements recognized in other comprehensive income
Amount accumulated in deficit, beginning of year
Recognized during the year, net of income tax
Amount accumulated in deficit, end of year
$
$
(19,393) $
2,720
(11,996)
(7,397)
(16,673) $
(19,393)
2018
2017
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
16. Share capital:
Authorized
Unlimited common shares
Unlimited preferred shares
Shares
Amount $
Issued
Balance at January 1, 2017 and December 31, 2017
Issuance of common shares
Stock option exercise
$
23,543,158
2,070,000
12,500
73,209
35,351
45
Balance at December 31, 2018
25,625,658
$
108,605
Ownership restrictions:
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
16. Share capital (continued):
The shareholder must pay all the costs of the investigation incurred by any such Gaming Regulatory
Authority.
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, 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, 2018, Pollard is in compliance with all financial covenants.
There were no other changes in Pollard’s approach to capital management during the current period.
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 6, 2018, a dividend of $0.03 per share was declared, payable on January 15, 2019, to
the shareholders of record on December 31, 2018.
Issue of common shares:
On February 1, 2018, Pollard announced that it had entered into an agreement with a syndicate of
underwriters led by Canaccord Genuity Corp. (together, the “Underwriters”) to purchase on a bought
deal basis 1,800,000 common shares of Pollard at a price of $18.45 per share. Pollard also granted
the Underwriters an over-allotment option exercisable at any time up to 30 days following the closing
of the offering, to purchase up to an additional 270,000 common shares. On February 21, 2018,
Pollard issued 2,070,000 common shares. The proceeds, net of commissions and offering expenses,
was $35,351.
On October 17, 2018, 12,500 common shares were issued in conjunction with the exercise of stock
options. The proceeds were $45.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
16. Share capital (continued):
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.
The Board of Directors previously approved awards of 250,000 options in total to purchase common
shares of Pollard for certain key management personnel. Options were granted on three grant dates,
with the exercise price being the common share price on the exercise price determination date. All
of the outstanding options have seven year terms, vesting 25% per year over the first four years.
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
Number of options granted
Share price
Exercise price
Exercise price determination date
Expected volatility
Option life (expected weighted average
life)
Risk-free interest rate (based on
Canadian government bonds)
April 24,
2017
October 3,
2016
March 10,
2014
$
$
$
2.27
125,000
$
10.00 $
10.00 $
April 21,
2017
29.3%
1.87
25,000
8.12
8.12
September
30, 2017
30.7%
$
$
$
0.82
100,000
3.63
3.63
March 7,
2014
33.7%
4.75 years
0.6% to
0.7%
4.75 years
0.6% to
0.7%
4.75 years
1.7% to
2.1%
Number
2018
Weighted
average
exercise price
Number
2017
Weighted average
exercise price
Balance, beginning of year
Granted during the year
Exercised during the year
250,000 $
$
–
(12,500)
Balance, end of year
237,500 $
7.26
–
3.63
7.46
125,000 $
125,000 $
4.53
10.00
–
–
250,000 $
7.26
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
16. Share capital (continued):
On October 17, 2018, 12,500 stock options were exercised by a member of Pollard’s key management
at an exercise price of $3.63 per share. As a result, 12,500 common shares were issued.
As of December 31, 2018, no share options had expired. Of the 237,500 options outstanding at
December 31, 2018, 68,750 were exercisable.
17. 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:
2019
2020
2021
2022
2023
$
5,704
4,888
3,832
3,205
2,353
Pollard is contingently liable for outstanding letters of guarantee in the amount of $1,337 at
December 31, 2018 (2017 – $1,909). These letters of guarantee are part of Pollard’s credit facility
and are secured as disclosed in note 13.
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. During 2019, Pollard entered into a new lease. The base rental
rate is approximately US$375, which is based on the current market value as 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
17. Commitments and contingencies (continued):
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 its lease for an additional five year term) for annual rent of $313 per year. The rental
rate was based on current market value as determined through independent appraisal. 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.
18. Revenue and contract balances:
In the following tables, revenue from contracts with customers is disaggregated by geographical
segment and product line:
Revenue – geographical segment
Year ended December 31, 2018
Canada
United States
International
Total
Lotteries and
charitable
gaming
Diamond Game
Total
$
65,750
170,643
69,369
$
11,343
14,763
–
$
77,093
185,406
69,369
$
305,762
$
26,106
$
331,868
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
18. Revenue and contract balances (continued):
Revenue – geographical segment
Year ended December 31, 2017
Canada
United States
International
Total
Lotteries and
charitable
gaming
Diamond Game
Total
$
59,176
154,442
61,769
$
$
5,126
5,141
–
64,302
159,583
61,769
$
275,387
$
10,267
$
285,654
Revenue – product line
Year ended December 31, 2018
Lotteries and
charitable
gaming
Diamond Game
Total
Lottery
Charitable
Gaming systems
$ 250,580
55,182
–
$
–
–
26,106
$
250,580
55,182
26,106
Total
$
305,762
$ 26,106
$
331,868
Revenue – product line
Year ended December 31, 2017
Lotteries and
charitable
gaming
Diamond Game
Total
Lottery
Charitable
Gaming systems
$
247,649
27,738
–
$
–
–
10,267
$
247,649
27,738
10,267
Total
$
275,387
$ 10,267
$
285,654
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
18. Revenue and contract balances (continued):
The following tables provide information about receivables, contract assets, and contract liabilities
from contracts with customers:
Contract balances
December 31,
2018
January 1,
2018
Trade receivables, which are included in accounts
receivable
$
27,061 $
36,263
Contract assets, which are included in accounts
receivable (1)
Contract liabilities (2)
3,128
857
3,260
1,491
(1) Pollard recognized contract assets upon adoption IFRS 15 as an adjustment to the opening
balance at January 1, 2018.
(2) Contract liabilities were previously classified as deferred revenue.
Contract liabilities
Balance, beginning of year
Increases due to cash received
Revenue recognized during the year
Balance, end of year
Less current portion
19. Other expenses:
Year ended
December 31, 2018
$ 1,491
982
(1,616)
857
(814)
$ 43
Loss on equity investment (note 9)
EBITDA support agreement income
Loss on sale of property, plant and equipment
Other income
2018
2,631
(2,000)
–
(167)
$
464
$
$
$
2017
1,727
(825)
74
(301)
675
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
19. Other expenses (continued):
EBITDA support agreement
One of Pollard’s subsidiaries, Diamond Game, previously entered into an EBITDA support agreement
with Amaya Inc. pursuant to which, subject to certain terms and conditions, Amaya Inc. will pay
Diamond Game each year for up to five years from July 1, 2015, an amount equal to the shortfall, if
any, between (i) Diamond Game’s EBITDA directly or indirectly derived from the deployment of
Diamond Game’s products at certain entertainment centers or in connection with Diamond Game’s
relationship with a certain customer, and (ii) $2,000. This agreement remains in effect after the
acquisition of Diamond Game’s common shares by Pollard.
20. Finance costs and finance income:
Finance costs
Foreign exchange loss
Interest
Finance income
Foreign exchange gain
21. Net income per share:
2018
5,593
4,243
$
9,836
$
2018
881
881
$
$
$
$
$
$
2017
210
3,962
4,172
2017
1,104
1,104
2018
2017
Net income attributable to shareholders for basic
and diluted net income per share
$
14,852
$
16,784
Weighted average number of shares (basic)
Weighted average impact of share options
25,439,952
247,397
23,543,158
212,329
Weighted average number of shares (diluted)
25,687,349
23,755,487
Net income per share (basic)
Net income per share (diluted)
$
$
0.58
0.58
$
$
0.71
0.71
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
22. Personnel expenses:
Wages and salaries
Benefits and government payroll remittances
Profit share
Expenses related to defined contribution plans
Expenses related to defined benefit plans
$
$
2018
100,622
16,760
2,010
517
5,932
2017
84,718
12,327
2,792
323
4,759
$
125,841
$
104,919
23. Supplementary cash flow information:
Change in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses and deposits
Income taxes
Accounts payable and accrued liabilities
Contract liabilities
24. Related party transactions:
Pollard Equities Limited and affiliates
2018
2017
$
$
14,002
(7,799)
(509)
(531)
(1,222)
56
632
(3,184)
(1,236)
(1,086)
2,877
(882)
$
3,997
$
(2,879)
During the year ended December 31, 2018, Pollard paid property rent of $3,187 (2017 – $3,177) and
$528 (2017 – $379) in plane charter costs to affiliates of Equities. In addition, during the year, Pollard
paid Equities $421 (2017 – $1,006) interest on Pollard’s subordinated debt.
During the year, Equities paid Pollard $72 (2017 – $72) for accounting and administration fees.
At December 31, 2018, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, expenses and other items of $560 (2017 – $1,900).
Neogames S.à r.l. and affiliates
During the year ended December 31, 2018, Pollard reimbursed operating costs and paid software
royalties of $3,321 (2017 – $2,878) to its iLottery partner, which are recorded in cost of sales.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
24. Related party transactions (continued):
At December 31, 2018, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $940 (2017 – $698) for reimbursement of operating costs and capital
expenditures, and its share of operating profits.
Key management personnel
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
2018
3,543
$
20
619
4,182
$
2017
3,115
22
512
3,649
$
$
As at December 31, 2018, the Directors and Named Executive Officers of Pollard, as a group,
beneficially owned or exercised control or direction over 17,456,558 common shares of Pollard.
25. Sales to major customers:
For the year ended December 31, 2018, sales to one customer amounted to 12.7 percent of
consolidated sales and 11.1 percent to a second customer. In 2017, sales to one customer amounted
to 12.0 percent of consolidated sales and 11.7 percent to a second customer.
26. Segmented information:
Pollard has two reportable segments: Lotteries and charitable gaming and Diamond Game, which are
Pollard’s strategic business units. The strategic business units offer different products and services,
and are managed separately. For each of the strategic business units, Pollard’s Co–CEO’s review
internal management reports on a monthly basis. The Diamond Game segment was acquired August
3, 2017, therefore in 2017, Pollard had only one segment for a portion of the year.
The Lotteries and charitable gaming segment derives its revenues from the manufacture of instant
tickets and related products. The Diamond Game segment derives its revenues from the development
of game systems.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
26. Segmented information (continued):
Year ended December 31, 2018
Lotteries and
charitable
gaming
Diamond Game
Total
Revenues from external customers
Operating costs and expenses
Earnings before income taxes
Total assets
$
305,762
288,673
17,089
242,692
$
26,106
22,426
3,680
62,908
$
331,868
311,099
20,769
305,600
Sales:
Canada
U.S.
Other
Property, plant and equipment and goodwill:
Canada
U.S.
27. Financial instruments:
2018
2017
$
77,093
185,406
69,369
64,302
159,583
61,769
331,868
$
285,654
December 31,
2018
December 31,
2017
66,227
75,046
$
63,188
42,899
141,273
$
106,087
$
$
$
$
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
27. Financial instruments (continued):
The fair value of the other non-current liabilities approximates the carrying value based on the
expected settlement amount of these liabilities.
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, 2018, the cash and restricted cash recorded at fair value was classified as level
one of the fair value hierarchy.
28. 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, 2018 and 2017
28. Financial risk management (continued):
Credit risk
The following table outlines the details of the aging of Pollard’s receivables and the related allowance
for losses:
Current
Past due for 1 to 60 days
Past due for more than 60 days
Less: Allowance for losses
December 31,
2018
December 31,
2017
$
$
30,929
2,647
1,289
(190)
37,786
2,635
366
(38)
$
34,675
$
40,749
In accordance with IFRS 9, Pollard has applied the expected credit loss model in evaluating the credit
risk associated with its accounts receivable. As part of this analysis, Pollard has grouped its customers
into two tranches: government lottery organizations and charitable gaming distribution networks. For
sales to government lottery organizations, Pollard has assessed the loss allowance at zero based on
the nature of the customer organizations, and no history of losses, collection issues, or significantly
overdue receivables, as well as other customer-specific and forward-looking macroeconomic factors.
Pollard has performed the same assessment for charitable gaming distribution network customers,
resulting in the provision of a loss allowance, as shown in the table above.
Liquidity risk
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,
2018:
Total
2019
2020
2021
2022
2023
Long-term debt
Operating leases
$
129,387
19,981
4,818
5,704
5,606
4,887
118,963
3,832
–
3,205
–
2,353
$
149,368
10,522
10,493
122,795
3,205
2,353
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2018 and 2017
28. Financial risk management (continued):
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. The 2019 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 by approximately $23 for year
ended December 31, 2018 (2017 – $147). 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 $75 for year ended December
31, 2018 (2017 – $65).
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, 2018, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
denominated in U.S. dollars by approximately $36,147 (2017 – $1,305). 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 $181 for the year ended December
31, 2018 (2017 – $7).
Pollard utilizes a number of strategies to mitigate its exposure to currency risk. Five 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, 2018, 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 $581 for the year ended December 31, 2018 (2017 – $423).
Pollard Banknote Limited Annual Report Cover 2018.ai
DATE:_Tuesday, March 19, 2019, 14:12
REV:_01
Inside Pages
Inside Front Page
Inside Back Page
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
Head Office
Manufacturing
Facilities
140 Otter Street
Winnipeg, Manitoba, R3T 0M8
t: 204-474-2323
f: 204-453-1375
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
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91311
Adair, Iowa, USA
1000 Flag Road, 50002
Omaha, Nebraska, USA
9335 48th Street, 68152
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard EXECUTIVE CHAIR
Dave Brown 1
Jerry Gray 1,2
Garry Leach 1
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
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
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
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Pollard Banknote Limited Annual Report Cover 2018.ai
DATE:_Tuesday, March 19, 2019, 14:12
REV:_01
Back Cover
Cover
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
ANNUAL REPORT
2018
ANNUAL REPORT
2018
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