6-K 1 d416915d6k.htm 6-K 6-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of, September 2012

 

 

Commission File Number 000-29898

Research In Motion Limited

(Translation of registrant’s name into English)

 

 

295 Phillip Street, Waterloo, Ontario, Canada N2L 3W8

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F:

Form 20-F  ¨             Form 40-F  x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

 

 

 


DOCUMENTS INCLUDED AS PART OF THIS REPORT

Document

 

  1 Consolidated Financial Statements for the Three and Six Months Ended September 1, 2012.

 

  2 Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended September 1, 2012.

 

  3 Canadian Forms 52-109F2 - Certification of Interim Filings.

This Report on Form 6-K is incorporated by reference into the Registration Statements on Form S-8 of the Registrant, which were originally filed with the Securities and Exchange Commission on March 28, 2002 (File No. 333-85294), October 21, 2002 (File No. 333-100684), April 28, 2008 (File No. 333-150470) and on October 3, 2011 (File No. 333-177149).

 

2


Research In Motion Limited

Incorporated under the Laws of Ontario

(United States dollars, in millions)(unaudited)

Consolidated Balance Sheets

 

     As at  
     September 1,     March 3,  
     2012     2012  

Assets

    

Current

    

Cash and cash equivalents

   $ 1,511      $ 1,527   

Short-term investments

     554        247   

Accounts receivable, net

     2,194        3,062   

Other receivables

     363        496   

Inventories

     785        1,027   

Income taxes receivable

     284        135   

Other current assets

     438        365   

Deferred income tax asset

     172        197   
  

 

 

   

 

 

 
     6,301        7,056   

Long-term investments

     278        337   

Property, plant and equipment, net

     2,612        2,748   

Goodwill

     —          304   

Intangible assets, net

     3,272        3,286   
  

 

 

   

 

 

 
   $ 12,463      $ 13,731   
  

 

 

   

 

 

 

Liabilities

    

Current

    

Accounts payable

   $ 622      $ 744   

Accrued liabilities

     1,940        2,382   

Deferred revenue

     301        263   
  

 

 

   

 

 

 
     2,863        3,389   

Deferred income tax liability

     212        232   

Income taxes payable

     16        10   
  

 

 

   

 

 

 
     3,091        3,631   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ Equity

    

Capital stock and additional paid-in capital

    

Preferred shares, authorized unlimited number of non-voting, cumulative, redeemable and retractable

     —          —     

Common shares, authorized unlimited number of non-voting, redeemable, retractable Class A common shares and unlimited number of voting common shares

    

Issued—524,159,844 voting common shares (March 3, 2012—524,159,844)

     2,451        2,446   

Treasury stock

    

September 1, 2012—7,790,520 (March 3, 2012—8,711,010)

     (267     (299

Retained earnings

     7,160        7,913   

Accumulated other comprehensive income

     28        40   
  

 

 

   

 

 

 
     9,372        10,100   
  

 

 

   

 

 

 
   $ 12,463      $ 13,731   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

On behalf of the Board:

 

Thorsten Heins

   Barbara Stymiest

Director

   Director


Research In Motion Limited

(United States dollars, in millions)(unaudited)

Consolidated Statements of Shareholders’ Equity

 

     Capital Stock
and  Additional
Paid-In Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Balance as at March 3, 2012

   $ 2,446      $ (299   $ 7,913      $ 40      $ 10,100   

Net loss

     —          —          (753     —          (753

Other comprehensive loss

     —          —          —          (12     (12

Shares issued:

          

Stock-based compensation

     42        —          —          —          42   

Tax deficiencies related to stock-based compensation

     (5     —          —          —          (5

Treasury stock vested

     (32     32        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 1, 2012

   $ 2,451      $ (267   $ 7,160      $ 28      $ 9,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.


Research In Motion Limited

(United States dollars, in millions, except per share data)(unaudited)

Consolidated Statements of Operations

 

     Three Months Ended      Six Months Ended  
     September 1,     August 27,      September 1,     August 27,  
     2012     2011      2012     2011  

Revenue

   $ 2,873      $ 4,168       $ 5,687      $ 9,076   

Cost of sales

     2,126        2,556         4,152        5,308   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     747        1,612         1,535        3,768   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses

         

Research and development

     367        381         735        804   

Selling, marketing and administration

     559        683         1,111        1,387   

Amortization

     184        141         360        273   

Impairment of goodwill

     —          —           335        —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     1,110        1,205         2,541        2,464   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (363     407         (1,006     1,304   

Investment income, net

     —          7         3        14   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (363     414         (1,003     1,318   

Provision for (recovery of) income taxes

     (128     85         (250     294   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (235   $ 329       $ (753   $ 1,024   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share

         

Basic

   $ (0.45   $ 0.63       $ (1.44   $ 1.95   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ (0.45   $ 0.63       $ (1.44   $ 1.95   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.


Research In Motion Limited

(United States dollars, in millions, except per share data)(unaudited)

Consolidated Statements of Comprehensive Income

 

     Three Months Ended     Six Months Ended  
     September 1,     August 27,     September 1,     August 27,  
     2012     2011     2012     2011  

Net Income (loss)

   $ (235   $ 329      $ (753   $ 1,024   

Other Comprehensive Income (loss)

        

Net change in unrealized gains (losses) on available-for-sale investments

     —          (2     —          (2

Net change in fair value of derivatives designated as cash flow hedges during the period, net of income taxes of $5 million and $14 million for the three and six months ended (August 27, 2011 - income tax recovery of $12 million and $43 million)

     14        (39     42        (121

Amounts reclassified to income during the period, net of income taxes of $10 million and $18 million for the three and six months ended (August 27, 2011 - income tax recovery of $12 million and $25 million)

     (31     36        (54     70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

   $ (17   $ (5   $ (12   $ (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (252   $ 324      $ (765   $ 971   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.


Research In Motion Limited

(United States dollars, in millions)(unaudited)

Consolidated Statements of Cash Flows

 

     Six Months Ended  
     September 1,     August 27,  
     2012     2011  

Cash flows from operating activities

    

Net income (loss)

   $ (753   $ 1,024   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Amortization

     1,001        709   

Deferred income taxes

     10        17   

Income taxes payable

     6        (20

Stock-based compensation

     42        38   

Impairment of goodwill

     335        —     

Other

     11        3   

Net changes in working capital items

     483        (800
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,135        971   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Acquisition of long-term investments

     (161     (145

Proceeds on sale or maturity of long-term investments

     85        285   

Acquisition of property, plant and equipment

     (240     (509

Acquisition of intangible assets

     (537     (804

Business acquisitions, net of cash acquired

     (105     (130

Acquisition of other assets

     —          (778

Acquisition of short-term investments

     (397     (131

Proceeds on sale or maturity of short-term investments

     204        333   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,151     (1,879
  

 

 

   

 

 

 

Cash flows from financing activities

    

Issuance of common shares

     —          8   

Tax deficiencies related to stock-based compensation

     (5     (1

Purchase of treasury stock

     —          (37
  

 

 

   

 

 

 

Net cash used in financing activities

     (5     (30
  

 

 

   

 

 

 

Effect of foreign exchange gain (loss) on cash and cash equivalents

     5        (2
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents for the period

     (16     (940

Cash and cash equivalents, beginning of period

     1,527        1,791   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,511      $ 851   
  

 

 

   

 

 

 

See notes to consolidated financial statements.


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and preparation

These interim consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“U.S. GAAP”). They do not include all of the disclosures required by U.S. GAAP for annual financial statements and should be read in conjunction with Research In Motion’s (“RIM” or the “Company”) audited consolidated financial statements (the “financial statements”) for the year ended March 3, 2012, which have been prepared in accordance with U.S. GAAP. In the opinion of management, all normal recurring adjustments considered necessary for fair presentation have been included in these financial statements. Operating results for the three and six months ended September 1, 2012 are not necessarily indicative of the results that may be expected for the full year ending March 2, 2013.

The Company’s fiscal year end date is the 52 or 53 weeks ending on the last Saturday of February, or the first Saturday of March. The fiscal years ending March 2, 2013 and March 3, 2012 comprise 52 weeks and 53 weeks, respectively.

2. CASH, CASH EQUIVALENTS AND INVESTMENTS

The Company’s cash equivalents and investments, other than cost method investments of $7 million (March 3, 2012—$37 million) and equity method investments of $50 million (March 3, 2012—$48 million), consist of money market and other debt securities, which are classified as available-for-sale for accounting purposes and are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive income until such investments mature or are sold. The Company uses the specific identification method of determining the cost basis in computing realized gains or losses on available-for-sale investments which are recorded in investment income. In the event of a decline in value which is other-than-temporary, the investment is written down to fair value with a charge to income. The Company does not exercise significant influence with respect to any of these investments.

 

1


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The components of cash, cash equivalents and investments were as follows:

 

    Cost Basis     Unrealized
Gains
    Unrealized
Losses
    Other-than-
temporary
impairment
    Fair Value     Cash and
Cash
Equivalents
    Short-term
Investments
    Long-term
Investments
 

As at September 1, 2012

                 

Bank balances

  $ 394      $ —        $ —        $ —        $ 394      $ 394      $ —        $ —     

Money market funds

    5        —          —          —          5        5        —          —     

Bankers’ acceptances/Bearer
deposit notes

    163        —          —          —          163        163        —          —     

Term deposits/certificates

    99        —          —          —          99        91        8        —     

Commercial paper

    522        1        —          —          523        468        55        —     

Non-U.S. treasury bills/notes

    194        —          —          —          194        194        —          —     

U.S. treasury bills/notes

    242        —          —          —          242        50        192        —     

U.S. government sponsored
enterprise notes

    155        —          —          —          155        118        37        —     

Non-U.S. government sponsored
enterprise notes

    23        —          —          —          23        15        8        —     

Corporate notes/bonds

    261        —          —          —          261        13        235        13   

Asset-backed securities

    166        —          —          —          166        —          19        147   

Auction rate securities

    35        1        —          —          36        —          —          36   

Other investments

    82        —          —          —          82        —          —          82   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,341      $ 2      $ —        $ —        $ 2,343      $ 1,511      $ 554      $ 278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at March 3, 2012

                 

Bank balances

  $ 453      $ —        $ —        $ —        $ 453      $ 453      $ —        $ —     

Money market funds

    5        —          —          —          5        5        —          —     

Bankers’ acceptances

    284        —          —          —          284        284        —          —     

Term deposits/certificates

    217        —          —          —          217        202        15        —     

Commercial paper

    402        —          —          —          402        355        47        —     

Non-U.S. treasury bills/notes

    71        —          —          —          71        71        —          —     

U.S. treasury bills/notes

    114        —          —          —          114        40        32        42   

U.S. government sponsored
enterprise notes

    127        —          —          —          127        91        24        12   

Non-U.S. government sponsored
enterprise notes

    18        —          —          —          18        10        8        —     

Corporate notes/bonds

    165        1        —          —          166        16        121        29   

Asset-backed securities

    109        —          —          —          109        —          —          109   

Auction rate securities

    35        1        —          —          36        —          —          36   

Other investments

    109        —          —          —          109        —          —          109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,109      $ 2      $ —        $ —        $ 2,111      $ 1,527      $ 247      $ 337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

2


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

There were no realized gains or losses on available-for-sale securities for the three and six months ended September 1, 2012 and August 27, 2011.

The Company has provided cash collateral of approximately $9 million for its outstanding letters of credit as of September 1, 2012. The cash is on deposit with one of the Company’s banking partners and is included in the bank balances line in the cash, cash equivalents and investments table above.

The contractual maturities of available-for-sale investments as at September 1, 2012 were as follows:

 

     Cost Basis      Fair Value  

Due in one year or less

   $ 1,666       $ 1,666   

Due in one to five years

     160         160   

Due after five years

     35         36   

No fixed maturity date

     5         5   
  

 

 

    

 

 

 
   $ 1,866       $ 1,867   
  

 

 

    

 

 

 

As at September 1, 2012 and March 3, 2012, the Company had no investments with continuous unrealized losses.

The Company engages in securities lending to generate fee income. Collateral, which exceeds the market value of the loaned securities, is retained by the Company until the underlying security has been returned to the Company. As at September 1, 2012, the Company did not have any securities on loan.

3. FAIR VALUE MEASUREMENTS

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use in pricing the asset or liability such as inherent risk, non-performance risk and credit risk. The Company applies the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value into three levels:

 

   

Level 1—Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

 

   

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3—Significant unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

3


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The carrying amounts of the Company’s cash and cash equivalents, accounts receivables, other receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.

In determining the fair value of investments held, the Company primarily relies on an independent third party valuator for the fair valuation of securities. Pricing inputs used by the independent third party valuator are generally received from two primary vendors. The pricing inputs are reviewed for completeness and accuracy, within a set tolerance level, on a daily basis by the third party valuator. The Company also reviews and understands the inputs used in the valuation process and assesses the pricing of the securities for reasonableness.

The fair values of money market funds were derived from quoted prices in active markets for identical assets or liabilities.

For bankers’ acceptances/bearer deposit notes, term deposits/certificates and commercial paper, the independent third party utilizes amortized cost, as the short-term nature of the securities approximates fair value. For non-U.S. treasury bills/notes, U.S. treasury bills/notes, U.S. government sponsored enterprise notes, non-U.S. government sponsored enterprise notes, corporate notes/bonds (other than those classified as Level 3) and asset-backed securities, the independent third party provides fair values determined from quoted prices that it obtains from vendors. The Company then corroborates the fair values received from the independent third party against the results of its internal valuation in order to corroborate the pricing provided by the independent third party.

The Company corroborates the fair values provided by the independent third party for bankers’ acceptances/bearer deposit notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates, and credit ratings. The bankers’ acceptances/bearer deposit notes held by the Company are all issued by major banking organizations and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for term deposits/certificates by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates and credit ratings. The term deposits/certificates held by the Company are all issued by major banking organizations and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for commercial paper by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates, dealer placed rates and credit ratings. The commercial paper held by the Company are all issued by major financing, corporate or capital organizations and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for non-U.S. treasury bills/notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates and credit rating. All non-U.S. treasury bills/notes held by the Company are issued by the federal and/or provincial governments of Canada and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for U.S. treasury bills/notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities as provided by U.S. government bond dealers. All U.S. treasury bills/notes held by the Company are issued by the United States Department of the Treasury and have investment grade ratings.

 

4


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The Company corroborates the fair values provided by the independent third party for U.S. government sponsored enterprise notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities as provided by U.S. government bond dealers or prices as provided by the published index of U.S. Agency securities. The U.S. government sponsored enterprise notes held by the Company are primarily agency notes and collateralized mortgage obligations issued and backed by government organizations such as Freddie Mac and the Federal Home Loan Banks and all have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for non-U.S. government sponsored enterprise notes by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates and credit ratings. The non-U.S. government sponsored enterprise notes held by the Company are primarily issued by investment banks backed by Latin and South American countries and all have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for corporate notes/bonds (other than those classified as Level 3) by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in maturity dates, interest rates, yield curves, swap rates, credit ratings, industry comparable trades and spread history. The corporate notes/bonds held by the Company are all issued by major corporate organizations and have investment grade ratings.

The Company corroborates the fair values provided by the independent third party for asset-backed securities by comparing those provided against fair values determined by the Company utilizing quoted prices from vendors for identical securities, or the market prices of similar securities adjusted for observable inputs such as differences in swap rates and spreads, credit ratings, pricing changes relative to asset class, priority in capital structure, principal payment windows, and maturity dates. All asset-backed securities held by the Company are issued by government or consumer agencies and are primarily backed by commercial automobile and equipment loans and leases. All asset-backed securities held by the Company have investment grade ratings.

Fair values for all investment categories provided by the independent third party that are in excess of 0.5% from the fair values determined by the Company are communicated to the third party for consideration of reasonableness. The independent third party considers the information provided by the Company before determining whether a change in the original pricing is warranted.

The fair values of corporate notes/bonds classified as Level 3, which represent investments in securities for which there is not an active market, are estimated using a discounted cash flow pricing methodology incorporating unobservable inputs such as anticipated monthly interest and principal payments received, existing and estimated defaults, and collateral value. The corporate notes/bonds classified as Level 3 held by the Company consist of securities received in a payment-in-kind distribution from a former structured investment vehicle.

The fair value of auction rate securities is estimated using a discounted cash flow model incorporating estimated weighted-average lives based on contractual terms, assumptions concerning liquidity, and credit adjustments of the security sponsor to determine timing and amount of future cash flows.

 

5


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The fair value of other investments is represented by the trust claim on Lehman Brothers International (Europe) (“LBIE”) bankruptcy assets and is estimated using unobservable inputs such as estimated recovery values and prices observed on market activity for similar LBIE bankruptcy claims.

The fair values of currency forward contracts and currency option contracts have been determined using notional and exercise values, transaction rates, market quoted currency spot rates, forward points and interest rate yield curves. For currency forward contracts and currency option contracts, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Changes in assumptions could have a significant effect on the estimates.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

As at September 1, 2012

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investments

           

Money market funds

   $ 5       $ —         $ —         $ 5   

Bankers’ acceptances/Bearer deposit notes

     —           163         —           163   

Term deposits/certificates

     —           99         —           99   

Commercial paper

     —           523         —           523   

Non-U.S. treasury bills/notes

     —           194         —           194   

U.S. treasury bills/notes

     —           242         —           242   

U.S. government sponsored enterprise notes

     —           155         —           155   

Non-U.S. government sponsored enterprise notes

     —           23         —           23   

Corporate notes/bonds

     —           255         6         261   

Asset-backed securities

     —           166         —           166   

Auction rate securities

     —           —           36         36   

Other investments

     —           —           25         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale investments

   $ 5       $ 1,820       $ 67       $ 1,892   

Currency forward contracts

     —           38         —           38   

Currency option contracts

     —           12         —           12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5       $ 1,870       $ 67       $ 1,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Currency forward contracts

   $ —         $ 25       $ —         $ 25   

Currency option contracts

     —           5         —           5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 30       $ —         $ 30   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

6


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

 

As at March 3, 2012

   Level 1      Level 2      Level 3      Total  

Assets

           

Available-for-sale investments

           

Money market funds

   $ 5       $ —         $ —         $ 5   

Bankers’ acceptances

     —           284         —           284   

Term deposits/certificates

     —           217         —           217   

Commercial paper

     —           402         —           402   

Non-U.S. treasury bills/notes

     —           71         —           71   

U.S. treasury bills/notes

     —           114         —           114   

U.S. government sponsored enterprise notes

     —           127         —           127   

Non-U.S. government sponsored enterprise notes

     —           18         —           18   

Corporate notes/bonds

     —           159         7         166   

Asset-backed securities

     —           109         —           109   

Auction rate securities

     —           —           36         36   

Other investments

     —           —           25         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale investments

   $ 5       $ 1,501       $ 68       $ 1,574   

Currency forward contracts

     —           55         —           55   

Currency option contracts

     —           17         —           17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5       $ 1,573       $ 68       $ 1,646   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Currency forward contracts

   $ —         $ 34       $ —         $ 34   

Currency option contracts

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —         $ 35       $ —         $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the changes in fair value of the Company’s Level 3 assets for the three and six months ended September 1, 2012:

 

     Three Months Ended      Six Months Ended  
     September 1,
2012
    August 27,
2011
     September 1,
2012
    August 27,
2011
 

Balance, beginning of period

   $ 68      $ 69       $ 68      $ 71   

Principal repayments

     (1     —           (1     (2
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 67      $ 69       $ 67      $ 69   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

7


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The Company recognizes transfers in and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurred. There were no significant transfers in or out of Level 1, Level 2 or Level 3 during the three and six months ended September 1, 2012.

The Company’s Level 3 assets consist of auction rate securities, corporate notes/bonds consisting of securities received in a payment-in-kind distribution from a former structured investment vehicle and its unsecured claim on assets held at LBIE at the time of its bankruptcy.

The auction rate securities are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the estimated weighted-average life of each security based on its contractual details and expected paydown schedule based upon the underlying collateral, the value of the underlying collateral which would be realized in the event of a waterfall event, an estimate of the likelihood of a waterfall event and an estimate of the likelihood of a permanent auction suspension. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the probability of a waterfall event is accompanied by a directionally opposite change in the assumption used for the probability of a permanent suspension.

The corporate notes/bonds are valued using a discounted cash flow method incorporating both observable and unobservable inputs. The unobservable inputs utilized in the valuation are the anticipated future monthly principal and interest payments, an estimated rate of decrease of those payments, the value of the underlying collateral, the number of securities currently in technical default as grouped by the underlying collateral, an estimated average recovery rate of those securities and assumptions surrounding additional defaults. Significant changes in these unobservable inputs would result in significantly different fair value measurements. Generally, a change in the assumption used for the anticipated monthly payments is accompanied by a directionally similar change in the average recovery rate and a directionally opposite change in the yearly decrease in payments and additional defaults assumptions.

The unsecured claim on assets held at LBIE at the time of its bankruptcy is valued using an estimated recovery value. The unobservable input in this valuation is the estimated recovery percentage based upon a conservative figure versus the pricing for similar claims as seen in the market and as supplied by brokers.

 

8


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The following table presents the significant unobservable inputs used in the fair value measurement of each of the above Level 3 assets, as well as the impact on the fair value measurement resulting from a significant increase or decrease in each input in isolation:

 

As at September 1, 2012

   Fair
Value
    

Valuation

Technique

  

Unobservable Input

  

Range (weighted average)

  

Effect of significant

increase/(decrease) in

input on fair value

Auction rate securities

     36       Discounted cash flow    Weighted average life    10 - 21 years (16 years)    (Decrease)/increase
         Collateral value (as a % of fair value)    101 - 122% (112%)    Increase/(decrease)
         Probability of waterfall event    10%    Increase/(decrease)
         Probability of permanent suspension    5 -10% (8%)    (Decrease)/increase

Corporate bonds/notes

     6       Discounted cash flow    Anticipated monthly principal and interest payments    $0.2 million    Increase/(decrease)
         Yearly decrease in payments    10%    (Decrease)/increase
         Collateral value (as a % of fair value)    180%    Increase/(decrease)
         Current securities in technical default, by collateral grouping    0 - 100% (18%)    (Decrease)/increase
         Average recovery rate of securities in technical default    30%    Increase/(decrease)
         Additional defaults assumption    0 - 31% (18%)    (Decrease)/increase

Unsecured claim on LBIE assets

     25       Estimated recovery value    Conservative estimate of recovery value based on market pricing for similar claims    70%    Increase/(decrease)

4. CONSOLIDATED BALANCE SHEETS DETAIL

Inventories

Inventories were comprised as follows:

 

     As at  
     September 1,
2012
    March 3,
2012
 

Raw materials

   $ 786      $ 771   

Work in process

     379        520   

Finished goods

     105        167   

Provision for excess and obsolete inventories

     (485     (431
  

 

 

   

 

 

 
   $ 785      $ 1,027   
  

 

 

   

 

 

 

 

9


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

Property, plant and equipment, net

Property, plant and equipment were comprised of the following:

 

     As at  
     September 1,
2012
     March 3,
2012
 

Cost

     

Land

   $ 140       $ 140   

Buildings, leaseholds and other

     1,404         1,393   

BlackBerry operations and other information technology

     2,307         2,194   

Manufacturing equipment, research and development equipment and tooling

     554         524   

Furniture and fixtures

     573         529   
  

 

 

    

 

 

 
     4,978         4,780   

Accumulated amortization

     2,366         2,032   
  

 

 

    

 

 

 

Net book value

   $ 2,612       $ 2,748   
  

 

 

    

 

 

 

Intangible assets, net

Intangible assets were comprised of the following:

 

     As at September 1, 2012  
     Cost      Accumulated
Amortization
     Net Book
Value
 

Acquired technology

   $ 507       $ 231       $ 276   

Intellectual property

     4,190         1,194         2,996   
  

 

 

    

 

 

    

 

 

 
   $ 4,697       $ 1,425       $ 3,272   
  

 

 

    

 

 

    

 

 

 
     As at March 3, 2012  
     Cost      Accumulated
Amortization
     Net Book
Value
 

Acquired technology

   $ 397       $ 182       $ 215   

Intellectual property

     4,217         1,146         3,071   
  

 

 

    

 

 

    

 

 

 
   $ 4,614       $ 1,328       $ 3,286   
  

 

 

    

 

 

    

 

 

 

 

10


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

During the six months ended September 1, 2012, the additions to intangible assets primarily consisted of payments relating to amended or renewed licensing agreements, as well as agreements with third parties for the use of intellectual property, software, messaging services and other BlackBerry related features, as well as intangible assets associated with the business acquisitions discussed in note 5.

Based on the carrying value of the identified intangible assets as at September 1, 2012 and assuming no subsequent impairment of the underlying assets, the annual amortization expense for the remainder of fiscal 2013 and each of the succeeding years is expected to be as follows: 2013—$941 million; 2014—$637 million; 2015—$346 million; 2016—$302 million; and 2017—$238 million.

Goodwill

Changes to the carrying amount of goodwill during the six months ended September 1, 2012 were as follows:

 

     Gross
Amount
     Accumulated
Impairment
Losses
    Net
Amount
 

Balance as at March 3, 2012

   $ 659       $ (355   $ 304   

Goodwill acquired through business combinations during the period

     31         —          31   

Goodwill impairment charge

     —           (335     (335
  

 

 

    

 

 

   

 

 

 

Balance as at September 1, 2012

   $ 690       $ (690   $ —     
  

 

 

    

 

 

   

 

 

 

Goodwill is tested annually for impairment during the fourth quarter or more frequently if it is warranted by changes in events and circumstances that indicate goodwill is more likely than not impaired. These events and circumstances may include a significant change in legal factors or in the business climate, a significant decline in the Company’s share price, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant disposal activity, and the testing of recoverability for a significant asset group. For the purposes of goodwill impairment testing, the Company consists of a single reporting unit.

The Company uses the two-step impairment test to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. The first step involves comparing the Company’s estimated fair value to its carrying amount, including goodwill. If the estimated fair value of the Company exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step of the goodwill impairment test is performed to measure the impairment amount. The second step involves determining an implied fair value of goodwill for the Company, which is calculated by measuring the excess of the estimated fair value of the Company over the aggregated estimated fair values of identifiable assets and liabilities. The conduct of the second step involves significant judgment on the selection of assumptions necessary to arrive at an implied fair value of goodwill. These assumptions include, but are not limited to, development of multi-year cash flow forecasts, the selection of discount rates and the identification and valuation of unrecorded assets. If, after conducting the second step of the test, the carrying amount of goodwill exceeds its implied fair value, a non-cash impairment loss is recognized in an amount equal to that excess.

 

11


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

Due to business conditions and a continued significant decline in the Company’s market capitalization, the Company concluded that goodwill impairment indicators existed and an interim goodwill impairment assessment was required in the first quarter of fiscal 2013. In the first step of the goodwill impairment test, the estimated fair value of the Company was determined utilizing a market-based approach and the Company’s market capitalization was used as a key input for the determination of fair value of the Company. The Company’s market capitalization was determined by multiplying the number of shares outstanding as at June 2, 2012 by the average closing market price of the Company’s common shares over the preceding five-day period. The Company used this duration in order to incorporate the inherent market fluctuations that may affect any individual closing price of the Company’s shares. The Company believes that market capitalization alone does not capture the fair value of the business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of the business. Consequently, the Company developed an estimate for the control premium that a marketplace participant might pay to acquire control of the business in an arm’s-length transaction. The determination of the control premium requires significant judgment and the Company observed recent market transactions as a guide to establish a range of reasonably possible control premiums to estimate the Company’s fair value. The Company believes that the main factors leading to the impairment were a significant decline in its share price, which was influenced by delays in new product introductions, intense competition within the Company’s industry and a sustained decline in the Company’s performance. The result of this analysis concluded that the carrying value of the Company exceeded its estimated fair value as at the balance sheet date of the first quarter of fiscal 2013, and as such, the second step of the goodwill impairment test was performed.

In the second step of the impairment test, the impairment loss was measured by estimating the implied fair value of the Company’s goodwill and comparing it with its carrying value. Using the Company’s fair value determined in the first step of the goodwill impairment test as the acquisition price in a hypothetical acquisition of the Company, the implied fair value of goodwill was calculated as the residual amount of the acquisition price after allocations made to the fair value of net assets, including working capital, plant and equipment and both recognized and unrecognized intangible assets. Based on the results of the second step of the goodwill impairment test, it was concluded that the carrying value of goodwill was impaired. Consequently, the Company recorded a goodwill impairment charge of $335 million in the first quarter of fiscal 2013 to eliminate the entire carrying value of its goodwill, and reported this amount as a separate line item in the consolidated statements of operations.

5. BUSINESS ACQUISITIONS

On March 8, 2012, the Company purchased for cash consideration 88% of the shares of Paratek Microwave Inc. (“Paratek”), representing all remaining shares of Paratek which were not previously held by the Company. Immediately prior to the acquisition date, the Company owned a 12% interest in Paratek. The non-controlling interest had a carrying value of $20 million and was re-measured at a fair value of $20 million, and resulted in no gain or loss. The valuation was based on the application of a minority interest discount to the aggregate purchase consideration paid and then allocating the implied value of Paratek, on a minority interest basis, across the shares outstanding. The acquired technologies will be incorporated into the Company’s products to enhance radio frequency tuning technologies.

 

12


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed during the six months ended September 1, 2012:

 

Assets purchased

  

Current assets

   $ 4   

Property, plant and equipment

     2   

Intellectual property

     4   

Customer relations

     10   

Acquired technology

     96   

Deferred income tax asset

     39   

Goodwill(1)

     31   
  

 

 

 
   $ 186   

Liabilities assumed

     (23

Deferred income tax liability

     (38
  

 

 

 

Net non-cash assets acquired

   $ 125   

Cash acquired

     1   
  

 

 

 

Net assets acquired

   $ 126   
  

 

 

 

Consideration

  

Cash consideration

   $ 93   

Fair value of equity interest previously held

     20   

Contingent consideration(2)

     13   
  

 

 

 
   $ 126   
  

 

 

 

 

  (1) 

Goodwill represents the excess of the acquisition price over the fair value of net assets acquired. None of the goodwill acquired is expected to be deductible for tax purposes and the entire amount was included in the goodwill impairment charge incurred in the first quarter of fiscal 2013, as discussed in note 4.

  (2) 

The Company has agreed to consideration contingent upon the retention of key employees for a period of 24 months from the acquisition date.

The weighted-average amortization period of the acquired technology related to the business acquisition completed during the six months ended September 1, 2012 is approximately 4.7 years.

Pro forma results of operations for the acquisitions have not been presented because the effects of the operations, individually or in aggregate, are not considered to be material to the Company’s consolidated results.

 

13


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

6. COST OPTIMIZATION PROGRAMS

2013 Cost Optimization and Resource Efficiency (“CORE”) Program

In March 2012, the Company commenced the CORE program with the objective of improving the Company’s operations and increasing efficiency. The program includes, among other things, the streamlining of the BlackBerry smartphone product portfolio, the optimization of the Company’s global manufacturing footprint, the outsourcing of global repair services, the alignment of the Company’s sales and marketing teams and a reduction in the number of layers of management. The Company is currently targeting the CORE program to drive at least $1.0 billion in savings by the end of fiscal 2013 based on RIM’s fourth quarter of fiscal 2012 run rate. On June 28, 2012, the Company announced that it would be reducing its global workforce across all functions by approximately 5,000 employees, representing approximately 30% of the total global workforce, and that all impacted employees would receive severance packages and outplacement support. The Company incurred approximately $136 million in total pre-tax charges related to the CORE program in the three months ended September 1, 2012, related to one-time employee termination benefits, facilities costs and manufacturing network simplification costs. The Company expects to incur total restructuring related charges of approximately $350 million by the end of fiscal 2013, primarily related to one-time employee termination benefits associated with the global workforce reduction noted above. Other charges and cash costs may occur as programs are implemented or changes are completed.

The following table sets forth the activity in the Company’s CORE program for the six months ended September 1, 2012:

 

     Employee
Termination
Benefits
    Facilities
Costs
    Manufacturing
Costs
    Total  

Balance as at March 3, 2012

   $ —        $ —        $ —        $ —     

Charges incurred

     64        20        52        136   

Cash payments made

     (58     (2     (8     (68
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 1, 2012

   $ 6      $ 18      $ 44      $ 68   
  

 

 

   

 

 

   

 

 

   

 

 

 

The CORE charges incurred in the three and six months ended September 1, 2012 were as follows:

 

     Total  

Cost of sales

   $ 68   

Research and development

     20   

Selling, marketing and administration

     48   
  

 

 

 

Total program charge

   $ 136   
  

 

 

 

 

14


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

2012 Cost Optimization Program

In June 2011, the Company initiated a cost optimization program (the “2012 Cost Optimization Program”) that included a global workforce reduction of approximately 2,000 employees, representing approximately 10% of the global workforce. The Company incurred approximately $125 million in total pre-tax charges related to the 2012 Cost Optimization Program in fiscal 2012. All of the pre-tax charges were related to one-time employee termination benefits and the identification of redundant facilities. During the six months ended September 1, 2012, the Company made cash payments related to employee termination benefits and facilities costs, as shown in the table below. No further charges are expected to be incurred under this plan.

The following table sets forth the activity in the Company’s 2012 Cost Optimization Program for the six months ended September 1, 2012:

 

     Employee
Termination
Benefits
    Facilities
Costs
    Total  

Balance as at March 3, 2012

   $ 10      $ 44      $ 54   

Cash payments made

     (10     (13     (23

Foreign exchange adjustments

     —          (1     (1
  

 

 

   

 

 

   

 

 

 

Balance as at September 1, 2012

   $ —        $ 30      $ 30   
  

 

 

   

 

 

   

 

 

 

7. PRODUCT WARRANTY

The Company estimates its warranty costs at the time of revenue recognition based on historical warranty claims experience and records the expense in cost of sales. The warranty accrual balance is reviewed quarterly to establish that it materially reflects the remaining obligation based on the anticipated future expenditures over the balance of the obligation period. Adjustments are made when the actual warranty claim experience differs from estimates.

The changes in the Company’s warranty expense and actual warranty experience for the six months ended September 1, 2012 as well as the accrued warranty obligations as at September 1, 2012 are set forth in the following table:

 

Accrued warranty obligations as at March 3, 2012

   $ 408   

Warranty costs incurred for the six months ended September 1, 2012

     (242

Warranty provision for the six months ended September 1, 2012

     182   

Adjustments for changes in estimate for the six months ended September 1, 2012

     8   
  

 

 

 

Accrued warranty obligations as at September 1, 2012

   $ 356   
  

 

 

 

 

15


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

8. INCOME TAXES

For the six months ended September 1, 2012, the Company’s net income tax recovery was $250 million or a net effective income tax rate of 24.9% compared to a net income tax expense of $294 million or a net effective income tax rate of 22.3% in the six months ended August 27, 2011.

The Company has not recorded a valuation allowance against its deferred income tax assets (August 27, 2011—nil).

The Company has not provided for Canadian deferred income taxes or foreign withholding taxes that would apply on the distribution of the earnings of its non-Canadian subsidiaries, as these earnings are intended to be reinvested indefinitely.

The Company’s total unrecognized income tax benefits as at September 1, 2012 was $191 million (March 3, 2012—$146 million). The increase in unrecognized income tax benefits in the six months ended September 1, 2012 primarily relates to a change in the effective tax rate on which the unrecognized income tax benefits could be realized.

As at September 1, 2012, the total unrecognized income tax benefit of $191 million includes approximately $3 million of unrecognized income tax benefits that have been netted against related deferred income taxes. The remaining $188 million of unrecognized income tax benefits have been netted against current income taxes payable and other non-current income taxes payable on the Company’s consolidated balance sheet.

The Company’s total unrecognized income tax benefits that, if recognized, would affect the Company’s effective tax rate as at September 1, 2012 were $191 million (March 3, 2012—$146 million).

A summary of open tax years by major jurisdiction is presented below:

 

Canada (1)

     Fiscal 2009 - 2012   

United States (1)

     Fiscal 2009 - 2012   

United Kingdom

     Fiscal 2009 - 2012   

 

 

(1) 

Includes federal as well as provincial and state jurisdictions, as applicable.

The Company is subject to ongoing examination by tax authorities in the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income taxes. The Canada Revenue Agency (“CRA”) concluded its examination of the Company’s fiscal 2006 to fiscal 2009 Canadian corporate tax filings in the fourth quarter of fiscal 2012. Although the audit concluded with no material adjustments to income taxes payable, there remains uncertainty with respect to certain tax attributes that have resulted from the restructuring of RIM’s international operations. The Company believes it is reasonably possible that approximately $180 million of its gross unrecognized income tax benefit will be realized in the next twelve months, the majority of which relates to the tax attributes resulting from the restructuring of RIM’s international operations. The Company has other non-Canadian income tax audits pending. While the final resolution of these audits is uncertain, the Company believes the ultimate resolution of these audits will not have a material adverse effect on its consolidated financial position, liquidity or results of operations.

 

16


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The Company recognizes interest and penalties related to unrecognized income tax benefits as interest expense that is netted and reported within investment income. The amount of interest accrued as at September 1, 2012 was $8 million (March 3, 2012—$6 million). The amount of penalties accrued as at September 1, 2012 was nil (March 3, 2012—nil).

9. STOCK-BASED COMPENSATION

Stock Option Plan

The Company recorded a charge to income and a credit to paid-in-capital of approximately $3 million and $5 million for the three and six months ended September 1, 2012 ($7 million and $14 million for the three and six months ended August 27, 2011) in relation to stock-based compensation expense.

The Company has presented excess tax deficiencies from the exercise of stock-based compensation awards as a financing activity in the consolidated statements of cash flows.

Stock options previously granted under the plan generally vest over a period of five years and are generally exercisable over a period of six years to a maximum of seven years from the grant date. The Company issues new shares to satisfy stock option exercises. There are 14 million stock options available for future grants under the stock option plan as at September 1, 2012.

A summary of option activity since March 3, 2012 is shown below:

 

     Options Outstanding  
     Number
(in 000’s)
    Weighted-
Average
Exercise
Price
     Average
Remaining
Contractual
Life in Years
     Aggregate
Intrinsic
Value
(millions)
 

Balance as at March 3, 2012

     3,618      $ 73.86         

Forfeited/cancelled/expired during the period

     (826     64.50         
  

 

 

   

 

 

       

Balance as at September 1, 2012

     2,792      $ 76.48         1.42       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest as at September 1, 2012

     2,767      $ 76.28         1.42       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable as at September 1, 2012

     2,480      $ 73.71         1.38       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common shares on September 1, 2012 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on September 1, 2012. During the six months ended September 1, 2012, there were no options exercised.

 

17


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

A summary of unvested stock options since March 3, 2012 is shown below:

 

     Options Outstanding  
     Number
(000’s)
    Weighted-Average
Grant Date Fair
Value
 

Balance as at March 3, 2012

     599      $ 41.53   

Vested during the period

     (179     27.84   

Forfeited during the period

     (108     48.28   
  

 

 

   

 

 

 

Balance as at September 1, 2012

     312      $ 47.09   
  

 

 

   

 

 

 

As at September 1, 2012, there was $6 million of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.3 years. The total fair value of stock options vested during the six months ended September 1, 2012 was $5 million.

Cash received from the stock options exercised for the six months ended September 1, 2012 was nil (August 27, 2011—$8 million). Tax deficiencies incurred by the Company related to the stock options exercised was $1 million for the six months ended September 1, 2012 (August 27, 2011—$1 million).

During the six months ended September 1, 2012 and August 27, 2011, there were no stock options granted.

Restricted Share Unit Plan

The Company recorded compensation expense with respect to Restricted Share Units (“RSUs”) of approximately $15 million and $37 million for the three and six months ended September 1, 2012 ($8 million and $24 million for the three and six months ended August 27, 2011).

 

18


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

A summary of RSU activity since March 3, 2012 is shown below:

 

     RSUs Outstanding  
     Number
(000’s)
    Weighted
Average
Grant Date
Fair Value
     Average
Remaining
Contractual
Life in Years
     Aggregate
Instrinsic
Value
(millions)
 

Balance as at March 3, 2012

     8,595      $ 31.96         

Granted during the period

     1,927        7.35         

Vested during the period

     (920     51.66         

Cancelled during the period

     (938     30.86         
  

 

 

   

 

 

       

Balance as at September 1, 2012

     8,664      $ 24.51         1.52       $ 58   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at September 1, 2012

     8,033      $ 24.71         1.50       $ 54   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate closing share price of the Company’s common shares on September 1, 2012) that would have been received by RSU holders if all RSUs had been vested on September 1, 2012.

Tax deficiencies incurred by the Company related to the RSUs vested was $4 million for the six months ended September 1, 2012 (August 27, 2011—nil).

In order to comply with its obligation to deliver shares upon vesting, RIM purchases shares via a trustee selected by the Company or issues new common shares. During the six months ended September 1, 2012, no shares were purchased (August 27, 2011—846,224 common shares were purchased for total cash consideration of approximately $37 million). These purchased shares are classified as treasury stock for accounting purposes and included in the shareholders’ equity section of the Company’s consolidated balance sheets.

As at September 1, 2012, there was $134 million of unrecognized compensation expense related to RSUs that will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 1.46 years.

During the six months ended September 1, 2012, there were 1,926,785 RSUs granted (August 27, 2011—942,825 RSUs were granted), of which 1,623,299 will be settled upon vesting by the issuance of new common shares.

Deferred Share Unit Plan

The Company issued 0.1 million Deferred Share Units (“DSUs”) in the six months ended September 1, 2012. There were 0.2 million DSUs outstanding as at September 1, 2012 (August 27, 2011—0.1 million). The Company had a liability of $2 million in relation to the DSU plan as at September 1, 2012 (August 27, 2011—$2 million).

 

19


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

10. CAPITAL STOCK

The following details the changes in issued and outstanding common shares for the six months ended September 1, 2012:

 

     Capital Stock and Additional
Paid-In Capital
    Treasury Stock  
     Stock
Outstanding
(000’s)
     Amount     Stock
Outstanding
(000’s)
    Amount  

Common shares outstanding as at March 3, 2012

     524,160       $ 2,446        8,711      $ (299

Stock-based compensation

     —           42        —          —     

Tax deficiencies related to stock-based compensation

     —           (5     —          —     

Treasury stock vested

     —           (32     (920     32   
  

 

 

    

 

 

   

 

 

   

 

 

 

Common shares outstanding as at September 1, 2012

     524,160       $ 2,451        7,791      $ (267
  

 

 

    

 

 

   

 

 

   

 

 

 

The Company had 524 million voting common shares outstanding, 2.8 million options to purchase voting common shares, 7.5 million RSUs and 0.2 million DSUs outstanding as at September 21, 2012.

 

20


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

11. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

     Three Months Ended      Six Months Ended  
     September 1,
2012
    August 27,
2011
     September 1,
2012
    August 27,
2011
 

Net income (loss) for basic and diluted earnings (loss) per share available to common shareholders

   $ (235   $ 329       $ (753   $ 1,024   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average number of shares outstanding (000’s)—basic

     524,160        524,116         524,160        524,049   

Effect of dilutive securities (000’s)—stock-based compensation

     —          50         —          316   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average number of shares and assumed conversions (000’s)—diluted

     524,160        524,166         524,160        524,365   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share—reported

         

Basic

   $ (0.45   $ 0.63       $ (1.44   $ 1.95   

Diluted

   $ (0.45   $ 0.63       $ (1.44   $ 1.95   

As discussed in the stock-based compensation note above, during the six months ended September 1, 2012 there were 1,623,299 RSUs granted that will be settled upon vesting by the issuance of new common shares. These RSUs were not incorporated into the calculation of diluted earnings (loss) per share in the second quarter of fiscal 2013 as to do so would have been antidilutive; however these securities may have a dilutive effect on earnings (loss) per share in future quarters.

 

21


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

12. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

 

     As at  
     September 1,
2012
     March 3,
2012
 

Accumulated net unrealized gains on available-for-sale investments

   $ 2       $ 2   

Accumulated net unrealized gains on derivative instruments designated as cash flow hedges

     26         38   
  

 

 

    

 

 

 

Accumulated other comprehensive income

   $ 28       $ 40   
  

 

 

    

 

 

 

13. FOREIGN EXCHANGE GAINS AND LOSSES

Selling, marketing and administration expenses for the three and six months ended September 1, 2012 included $3 million and $13 million with respect to foreign exchange losses (three and six months ended August 27, 2011—foreign exchange losses of $9 million and $18 million).

14. COMMITMENTS AND CONTINGENCIES

(a) Credit Facility

On September 25, 2012, the Company replaced its existing $500 million senior unsecured revolving credit facility with a syndicate of commercial banks with a $500 million senior secured revolving credit facility (the “Facility”) for working capital and general corporate purposes with the same syndicate. The Facility, which expires on September 6, 2013, is secured by accounts receivable and inventory of the Company and certain of its subsidiaries. The Company has provided cash collateral of approximately $9 million for its outstanding letters of credit as of September 1, 2012. The cash is on deposit with one of the Company’s banking partners and is included in cash and cash equivalents.

(b) Indemnification

The Company enters into certain agreements that contain indemnification provisions under which the Company could be subject to costs and damages, including in the event of an infringement claim against the Company or an indemnified third party. Such intellectual property infringement indemnification clauses are generally not subject to any dollar limits and remain in effect for the term of the Company’s agreements. To date, the Company has not encountered material costs as a result of such indemnifications.

The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company agreed, subject to applicable law, to indemnify its directors and executive officers against all costs, charges and expenses reasonably incurred by such individuals in respect of any civil, criminal or administrative action which could arise by reason of their status as directors or officers. The Company maintains liability insurance coverage for the benefit of its directors and executive officers to reduce its exposure to such obligations. The Company has not encountered material costs as a result of such indemnifications in the current year. See RIM’s Management Information Circular for fiscal 2012 for additional information regarding the Company’s indemnification agreements with its directors and executive officers.

 

22


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

(c) Litigation

The Company is involved in litigation in the normal course of its business, both as a defendant and as a plaintiff. The Company is subject to a variety of claims (including claims related to patent infringement, purported class actions and other claims in the normal course of business) and may be subject to additional claims either directly or through indemnities against claims that it provides to certain of its partners and customers. In particular, the industry in which the Company competes has many participants that own, or claim to own, intellectual property, including participants that have been issued patents and may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those used by the Company in its products. The Company has received, and may receive in the future, assertions and claims from third parties that the Company’s products infringe on their patents or other intellectual property rights. Litigation has been and will likely continue to be necessary to determine the scope, enforceability and validity of third-party proprietary rights or to establish the Company’s proprietary rights. Regardless of whether claims against the Company have merit, those claims could be time-consuming to evaluate and defend, result in costly litigation, divert management’s attention and resources, subject the Company to significant liabilities and could have the other effects that are described in greater detail under “Risk Factors—Risks Related to Intellectual Property” and “Risk Factors—Risks Related to the Company’s Business and its Industry—The Company is subject to general commercial litigation, class action and other litigation claims as part of its operations, and it could suffer significant litigation expenses in defending these claims and could be subject to significant damage awards or other remedies” in RIM’s Annual Information Form for the fiscal year ended March 3, 2012, which is included in RIM’s Annual Report on Form 40-F.

Management reviews all of the relevant facts for each claim and applies judgment in evaluating the likelihood and, if applicable, the amount of any potential loss. Where it is considered probable for a material exposure to result and where the amount of the claim is quantifiable, provisions for loss are made based on management’s assessment of the likely outcome. The Company does not provide for claims that are considered unlikely to result in a significant loss, claims for which the outcome is not determinable or claims where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable.

Additional lawsuits and claims, including purported class actions and derivative actions, may be filed or made based upon the Company’s historical stock option granting practices. Management assesses such claims and where considered likely to result in a material exposure and, where the amount of the claim is quantifiable, provisions for loss are made based on management’s assessment of the likely outcome. The Company does not provide for claims that are considered unlikely to result in a significant loss, claims for which the outcome is not determinable or claims where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when reasonably determinable.

See the “Legal Proceedings and Regulatory Action” section of RIM’s Annual Information Form for additional unaudited information regarding the Company’s legal proceedings, which is included in RIM’s Annual Report on Form 40-F and “Legal Proceedings” in the Management’s Discussion and Analysis of financial condition and results of operations for fiscal 2012.

 

23


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

15. DERIVATIVE FINANCIAL INSTRUMENTS

Values of financial instruments outstanding were as follows:

 

     As at September 1, 2012  
Assets (Liabilities)    Notional
Amount
     Estimated
Fair Value
 

Currency forward contracts—asset

   $ 1,207       $ 38   

Currency option contracts—asset

   $ 592       $ 12   

Currency forward contracts—liability

   $ 1,243       $ (25

Currency option contracts—liability

   $ 396       $ (5
     As at March 3, 2012  
Assets (Liabilities)    Notional
Amount
     Estimated
Fair Value
 

Currency forward contracts—asset

   $ 1,608       $ 55   

Currency option contracts—asset

   $ 608       $ 17   

Currency forward contracts—liability

   $ 2,155       $ (34

Currency option contracts—liability

   $ 480       $ (1

Foreign Exchange

The Company uses derivative instruments to manage exposures to foreign exchange risk resulting from transactions in currencies other than its functional currency, the U.S. dollar. The Company’s risk management objective in holding derivative instruments is to reduce the volatility of current and future income as a result of changes in foreign currency. To limit its exposure to adverse movements in foreign currency exchange rates, the Company enters into foreign currency forward and option contracts. The Company does not use derivative instruments for speculative purposes.

The majority of the Company’s revenues for the three and six months ended September 1, 2012 were transacted in U.S. dollars. However, portions of the revenues are denominated in Canadian dollars, Euros, and British Pounds. Purchases of raw materials are primarily transacted in U.S. dollars. Other expenses, consisting of the majority of salaries, certain operating costs and manufacturing overhead are incurred primarily in Canadian dollars. The Company enters into forward and option contracts to hedge portions of these anticipated transactions to reduce the volatility on income associated with the foreign currency exposures. The Company also enters into forward and option contracts to reduce the effects of foreign exchange gains and losses resulting from the revaluation of certain foreign currency monetary assets and liabilities.

The Company records all derivative instruments at fair value on the consolidated balance sheets. The fair value of these instruments is calculated based on notional and exercise values, transaction rates, market quoted currency spot rates, forward points and interest rate yield curves. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative instrument and the resulting designation.

 

24


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The Company’s accounting policies for these instruments outline the criteria to be met in order to designate a derivative instrument as a hedge and the methods for evaluating hedge effectiveness. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in the value of the hedged items. If an anticipated transaction is deemed no longer likely to occur, the corresponding derivative instrument is de-designated as a hedge and any associated deferred gains and losses in accumulated other comprehensive income are recognized in earnings at that time. Any future changes in the fair value of the instrument are recognized in current earnings.

For any derivative instruments that do not meet the requirements for hedge accounting, or for any derivative instrument for which hedge accounting is not elected, the changes in fair value of the instruments are recognized in income in the current period and will generally offset the changes in the U.S. dollar value of the associated asset, liability, or forecasted transaction.

The Company enters into forward and option contracts to hedge exposures relating to foreign currency anticipated transactions. These contracts have been designated as cash flow hedges, with the effective portion of the change in fair value initially recorded in accumulated other comprehensive income and subsequently reclassified to income in the period in which the cash flows from the associated hedged transactions affect income. Any ineffective portion of the change in fair value of the cash flow hedge is recognized in current period income. For the three and six months ended September 1, 2012, there was $1 million and $8 million in realized gains on forward contracts which were ineffective upon maturity (three and six months ended August 27, 2011—$5 million and $9 million in realized losses). As at September 1, 2012 and August 27, 2011, the outstanding derivatives designated as cash flow hedges were considered to be fully effective. The maturity dates of these instruments range from September 2012 to September 2013. As at September 1, 2012, the net unrealized gain on these forward and option contracts was $36 million (March 3, 2012—net unrealized gain of $51 million). Unrealized gains associated with these contracts were recorded in other current assets and accumulated other comprehensive income. Unrealized losses were recorded in accrued liabilities and accumulated other comprehensive income. As at September 1, 2012, the Company estimates that approximately $35 million of net unrealized gains on these forward and option contracts will be reclassified into income within the next twelve months.

The following table shows the fair values of derivative instruments designated as cash flow hedges on the consolidated balance sheets:

 

    

As at

 
    

September 1, 2012

    

March 3, 2012

 
    

Balance Sheet
Classification

   Fair Value     

Balance Sheet
Classification

   Fair Value  

Currency forward contracts—asset

   Other current assets    $ 29       Other current assets    $ 42   

Currency option contracts—asset

   Other current assets    $ 12       Other current assets    $ 17   

Currency forward contracts—liability

   Accrued liabilities    $ 1       Accrued liabilities    $ 6   

Currency option contracts—liability

   Accrued liabilities    $ 4       Accrued liabilities    $ 1   

 

25


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statements of operations and the consolidated statements of comprehensive income for the three and six months ended September 1, 2012:

 

    Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
   

Location of Gain (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)

  Amount of Gain (Loss) Reclassified from
Accumulated OCI into Income

(Effective Portion)
 
        Three Months Ended
September 1, 2012
    Six Months Ended
September 1, 2012
 

Currency forward contracts

  $ 7      Revenue   $ 36      $ 57   

Currency option contracts

  $ 9      Revenue   $ 1      $ 1   

Currency forward contracts

  $ 5      Cost of sales   $ 1      $ 2   

Currency option contracts

  $ —        Cost of sales   $ —        $ —     

Currency forward contracts

  $ 6      Selling, marketing and administration   $ 1      $ 2   

Currency option contracts

  $ (1   Selling, marketing and administration   $ —        $ —     

Currency forward contracts

  $ 10      Research and development   $ 2      $ 5   

Currency option contracts

  $ —        Research and development   $ —        $ (1
    Amount of Gain (Loss)
Recognized in Income
on Derivative
Instruments (Ineffective
Portion)
   

Location of Gain (Loss) Reclassified
from Accumulated OCI into

Income (Ineffective Portion)

  Amount of Gain (Loss) Reclassified
from Accumulated OCI into Income
(Ineffective Portion)
 
        Three Months Ended
September 1, 2012
    Six Months Ended
September 1, 2012
 

Currency forward contracts

  $ —        Selling, marketing and administration   $ 1      $ 8   

 

26


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The following table shows the impact of derivative instruments designated as cash flow hedges on the consolidated statement of operations for the three and six months ended August 27, 2011:

 

     Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
    Location of Gain (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
   Amount of Gain (Loss) Reclassified from
Accumulated OCI into Income (Effective
Portion)
 
        Three Months Ended
August 27, 2011
    Six Months Ended
August 27, 2011
 

Currency forward contracts

   $ (109   Revenue    $ (53   $ (117

Currency option contracts

   $ (1   Revenue    $ (3   $ (3

Currency forward contracts

   $ 5      Cost of sales    $ 4      $ 10   

Currency forward contracts

   $ 6      Selling, marketing and administration    $ 4      $ 12   

Currency forward contracts

   $ 10      Research and development    $ 6      $ 14   
     Amount of Gain (Loss)
Recognized in Income on
Derivative Instruments
(Ineffective Portion)
    Location of Gain (Loss) Reclassified
from Accumulated OCI into Income
(Ineffective Portion)
   Amount of Gain (Loss) Reclassified from
Accumulated OCI into Income
(Ineffective Portion)
 
        Three Months Ended
August 27, 2011
    Six Months Ended
August 27, 2011
 

Currency forward contracts

   $ —        Selling, marketing and administration    $ (5   $ (9

As part of its risk mitigation strategy, the Company may maintain net monetary asset and/or liability balances in foreign currencies. The Company enters into foreign exchange forward contracts to hedge certain monetary assets and liabilities that are exposed to foreign currency risk. The principal currencies hedged include the Canadian dollar, Euro, and British Pound. These contracts are not subject to hedge accounting, and any gains or losses are recognized in income each period, offsetting the change in the U.S. dollar value of the asset or liability. The maturity dates of these instruments range from September 2012 to February 2013. As at September 1, 2012, net unrealized losses of $16 million were recorded in respect of these instruments (March 3, 2012—net unrealized losses of $14 million). Unrealized gains associated with these contracts were recorded in other current assets and selling, marketing and administration. Unrealized losses were recorded in accrued liabilities and selling, marketing and administration.

The following table shows the fair values of derivative instruments that are not subject to hedge accounting on the consolidated balance sheets:

 

     As at  
     September 1, 2012      March 3, 2012  
     Balance Sheet
Classification
   Fair Value      Balance Sheet
Classification
   Fair
Value
 

Currency forward contracts—asset

   Other current assets    $ 9       Other current assets    $ 13   

Currency forward contracts—liability

   Accrued liabilities    $ 24       Accrued liabilities    $ 28   

Currency option contracts—liability

   Accrued liabilities    $ 1       Accrued liabilities    $ —     

 

27


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

The following table shows the impact of derivative instruments that are not subject to hedge accounting on the consolidated statement of operations for the three and six months ended September 1, 2012:

 

     Location of Gain (Loss) Recognized in
Income on Derivative Instruments
   Amount of Gain (Loss) in Income on
Derivative Instruments
 
      Three Months Ended
September 1, 2012
    Six Months Ended
September 1, 2012
 

Currency forward contracts

   Selling, marketing and administration    $ (29   $ 37   

Currency option contracts

   Selling, marketing and administration    $ 2      $ 3   

The following table shows the impact of derivative instruments that are not subject to hedge accounting on the consolidated statement of operations for the three and six months ended August 27, 2011:

 

     Location of Gain (Loss) Recognized in
Income on Derivative Instruments
   Amount of Gain (Loss) in Income on
Derivative Instruments
 
      Three Months Ended
August 27, 2011
    Six Months Ended
August 27, 2011
 

Currency forward contracts

   Selling, marketing and administration    $ (11   $ (47

Currency option contracts

   Selling, marketing and administration    $ 1      $ 1   

Credit

The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations. The Company mitigates this risk by limiting counterparties to highly rated financial institutions and by continuously monitoring their creditworthiness. The Company’s exposure to credit loss and market risk will vary over time as a function of currency exchange rates. The Company measures its counterparty credit exposure as a percentage of the total fair value of the applicable derivative instruments. Where the net fair value of derivative instruments with any counterparty is negative, the Company deems the credit exposure to that counterparty to be nil. As at September 1, 2012, the maximum credit exposure to a single counterparty, measured as a percentage of the total fair value of derivative instruments with net unrealized gains was 33% (March 3, 2012—30%).

The Company is exposed to market and credit risk on its investment portfolio. The Company reduces this risk by investing in liquid, investment grade securities and by limiting exposure to any one entity or group of related entities. As at September 1, 2012, no single issuer represented more than 10% of the total cash, cash equivalents and investments (March 3, 2012—no single issuer represented more than 9% of the total cash, cash equivalents and investments).

Interest Rate

Cash and cash equivalents and investments are invested in certain instruments of varying maturities. Consequently, the Company is exposed to interest rate risk as a result of holding investments of varying maturities. The fair value of investments, as well as the investment income derived from the investment portfolio, will fluctuate with changes in prevailing interest rates. The Company does not currently utilize interest rate derivative instruments in its investment portfolio.

 

28


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

16. SEGMENT DISCLOSURES

The Company is organized and managed as a single reportable operating segment. The Company’s operations are substantially all related to the research, design, manufacture and sales of wireless communications products, services and software.

Revenue, classified by major geographic segments in which the Company’s customers are located, was as follows:

 

     Three Months Ended     Six Months Ended  
     September 1,
2012
    August 27,
2011
    September 1,
2012
    August 27,
2011
 

Revenue

        

Canada

   $ 227      $ 308      $ 327      $ 678   

United States

     641        1,111        1,335        2,431   

United Kingdom

     339        419        596        897   

Other

     1,666        2,330        3,429        5,070   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,873      $ 4,168      $ 5,687      $ 9,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

        

Canada

     7.9     7.4     5.7     7.5

United States

     22.3     26.6     23.5     26.7

United Kingdom

     11.8     10.1     10.5     9.9

Other

     58.0     55.9     60.3     55.9
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Six Months Ended  
     September 1,
2012
    August 27,
2011
    September 1,
2012
    August 27,
2011
 

Revenue mix

        

Hardware

   $ 1,712      $ 3,027      $ 3,380      $ 6,848   

Service

     1,005        1,003        2,008        1,976   

Software

     65        78        134        159   

Other

     91        60        165        93   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,873      $ 4,168      $ 5,687      $ 9,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Research In Motion Limited

Notes to the Consolidated Financial Statements

(unaudited)

In millions of United States dollars, except share and per share data, and except as otherwise indicated

 

 

     As at  
     September 1,
2012
     March 3,
2012
 

Property, plant and equipment, intangible assets and goodwill

     

Canada

   $ 5,037       $ 5,382   

United States

     547         555   

United Kingdom

     36         37   

Other

     264         364   
  

 

 

    

 

 

 
   $ 5,884       $ 6,338   
  

 

 

    

 

 

 

Total assets

     

Canada

   $ 7,721       $ 8,693   

United States

     2,842         2,337   

United Kingdom

     1,033         1,554   

Other

     867         1,147   
  

 

 

    

 

 

 
   $ 12,463       $ 13,731   
  

 

 

    

 

 

 

17. CASH FLOW INFORMATION

Cash flows resulting from net changes in working capital items are as follows:

 

     Six Months Ended  
     September 1,
2012
    August 27,
2011
 

Accounts receivable, net

   $ 868      $ 384   

Other receivables

     133        (302

Inventories

     244        (754

Income taxes receivable

     (149     —     

Other current assets

     (94     (209

Accounts payable

     (145     367   

Accrued liabilities

     (412     (105

Income taxes payable

     —          (179

Deferred revenue

     38        (2
  

 

 

   

 

 

 
   $ 483      $ (800
  

 

 

   

 

 

 

 

30


Document 2

RESEARCH IN MOTION LIMITED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 1, 2012

September 28, 2012

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the unaudited interim consolidated financial statements and the accompanying notes (the “Consolidated Financial Statements”) of Research In Motion Limited (“RIM” or the “Company”) for the three and six months ended September 1, 2012, as well as the Company’s audited consolidated financial statements and accompanying notes, and MD&A, for the fiscal year ended March 3, 2012. The Consolidated Financial Statements are presented in U.S. dollars and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). All financial information in this MD&A is presented in U.S. dollars, unless otherwise indicated.

RIM has prepared this MD&A with reference to National Instrument 51-102 “Continuous Disclosure Obligations” of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which are different from those of the United States. This MD&A provides information for the three and six months ended September 1, 2012 and up to and including September 28, 2012.

Additional information about the Company, including the Company’s Annual Information Form for the fiscal year ended March 3, 2012, which is included in RIM’s Annual Report on Form 40-F for the fiscal year ended March 3, 2012, can be found on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.

Cautionary Note Regarding Forward-Looking Statements

This MD&A contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including statements relating to:

 

 

the Company’s plans, strategies and objectives, and the anticipated opportunities and challenges in the remainder of fiscal 2013;

 

 

the Company’s expectations regarding new product initiatives and timing, including the next generation BlackBerry 10 platform and BlackBerry 10 smartphones;

 

 

the Company’s expectations regarding the number of applications that will be available for BlackBerry 10 smartphones prior to their launch;

 

 

the Company’s expectations with respect to the sufficiency of its financial resources;

 

 

statements relating to the Company’s earnings and gross margin expectations;

 

 

anticipated demand for, and the Company’s plans and expectations relating to, programs to drive sell-through of the Company’s BlackBerry 7 smartphones and BlackBerry PlayBook tablets;

 

 

the Company’s revenue, loss, unit shipment, gross margin, operating expense and net subscriber expectations in the near term and for the remainder of fiscal 2013;


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

the Company’s plans to streamline its operations and its expectations relating to the benefits of its Cost Optimization and Resource Efficiency (“CORE”) program;

 

 

the Company’s plans and expectations regarding marketing and promotional programs;

 

 

the Company’s estimates of purchase obligations and other contractual commitments;

 

 

assumptions and expectations described in the Company’s critical accounting policies and estimates; and

 

 

the Company’s guidance practices in the future.

The words “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “intend”, “believe”, “plan” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by RIM in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that RIM believes are appropriate in the circumstances, including but not limited to, general economic conditions, product pricing levels and competitive intensity, supply constraints, the timing and success of new product introductions, RIM’s expectations regarding its business, strategy, opportunities and prospects, including its ability to implement meaningful changes to address its business challenges, and RIM’s expectations regarding the cash flow generation of its business. Many factors could cause RIM’s actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, most of which are discussed in greater detail in the “Risk Factors” section of RIM’s Annual Information Form for the fiscal year ended March 3, 2012, which is included in RIM’s Annual Report on Form 40-F for the fiscal year ended March 3, 2012:

Risks Related to the Company’s Business and its Industry

 

 

RIM’s ability to enhance current products and services, or develop new products and services in a timely manner at competitive prices;

 

 

intense competition within RIM’s industry, including the possibility that strategic transactions by RIM’s competitors or carrier partners could weaken RIM’s competitive position or require RIM to further reduce its prices to compete effectively;

 

 

RIM’s ability to establish new, and to build on existing relationships with its network carrier partners and distributors, and its reliance on its network carrier partners to help promote the BlackBerry 10 platform and BlackBerry 10 smartphones;

 

 

the efficient and uninterrupted operation of RIM’s network operations center and the networks of its carrier partners, and the risk of other business interruptions, including costs, potential liabilities, lost revenues and reputational damage associated with service interruptions;

 

 

risks related to RIM’s ability to maintain and grow its service revenue, including pressure to reduce RIM’s infrastructure access fees;

 

 

risks related to RIM’s ability to maintain its cash balance;

 

 

risks related to RIM’s ability to implement and to realize the anticipated benefits of its CORE program;

 

 

RIM’s ability to manage inventory and asset risk;

 

 

the occurrence or perception of a breach of RIM’s security measures, or an inappropriate disclosure of confidential or personal information;

 

 

potential liabilities or costs related to the collection, storage, transmission, use and disclosure of user and personal information;

 

 

dependence on key personnel and RIM’s ability to attract and retain key personnel;

 

2


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

RIM’s ability to continue to adapt to recent management changes and headcount reductions;

 

 

RIM’s ability to successfully maintain and enhance its brand;

 

 

RIM’s reliance on its suppliers for functional components, including the suppliers RIM has selected for its BlackBerry 10 smartphones, and the risk that suppliers will not supply components on a timely basis or in sufficient quantities;

 

 

the continued quality and reliability of RIM’s products and services and the potential effect of defects in products and services;

 

 

risks associated with RIM’s expanding foreign operations;

 

 

risks as a result of actions of activist shareholders;

 

 

reliance on strategic alliances and relationships with third-party network infrastructure developers, software platform vendors and service platform vendors, including RIM’s ability to promote and advance the development of an ecosystem of applications and services for the BlackBerry 10 smartphones and the BlackBerry PlayBook tablets;

 

 

RIM’s ability to expand and enhance BlackBerry® App World™;

 

 

RIM’s reliance on third-party manufacturers for certain products and its ability to manage its production and repair process;

 

 

restrictions on import and use of RIM’s products and services in certain countries due to encryption of the products and services;

 

 

general commercial litigation, class action and other litigation claims, including purported class action claims relating to RIM’s operations;

 

 

risks associated with litigation claims against the Company arising from the Company’s practice of providing forward-looking guidance to its shareholders with respect to certain financial metrics, including the Company’s practice of updating previous guidance where circumstances warrant;

 

 

effective management of the Company’s past growth and its ongoing development of service and support operations;

 

 

potential charges relating to the impairment of other long-lived assets recorded on RIM’s balance sheet;

 

 

government regulation of wireless spectrum and radio frequencies;

 

 

reduced spending by customers due to the uncertainty of economic and geopolitical conditions;

 

 

risks associated with acquisitions, investments and other business initiatives;

 

 

foreign exchange risks as the Company transacts globally in currencies other than the U.S. dollar;

 

 

regulation, certification and health risks, and risks relating to the misuse of RIM’s products;

 

 

tax liabilities, resulting from changes in tax laws or otherwise, associated with RIM’s worldwide operations;

 

 

changes in interest rates affecting RIM’s investment portfolio and its revolving credit facility and the creditworthiness of its investment portfolio;

 

 

the potential impact of recently adopted regulations in the United States that apply to RIM relating to conflict minerals; and

 

 

risks related to the failure of the Company’s suppliers, subcontractors, third-party distributors and representatives to use acceptable ethical business practices or comply with applicable laws.

 

3


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Risks Related to Intellectual Property

 

 

third-party claims for infringement of intellectual property rights by RIM and the outcome of any litigation with respect thereto;

 

 

RIM’s ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products;

 

 

RIM’s ability to obtain rights to use software or components supplied by third parties; and

 

 

the potential impact of copyright levies in numerous countries.

Prior to fiscal 2013, the Company followed the practice of providing specific quantitative forward-looking guidance to its shareholders with respect to certain financial metrics for the subsequent fiscal quarter in its quarterly earnings press releases. On March 29, 2012, the Company announced that it will no longer provide specific quantitative guidance. However, the Company is committed to providing a high level of disclosure and transparency and will continue to provide commentary that highlights the trends and uncertainties that RIM anticipates. Such statements relating to, among other metrics, RIM’s revenue, gross margin, operating results, cash flows and liquidity expectations, are forward-looking statements that are intended to enable RIM’s shareholders to view the anticipated financial performance, financial condition and prospects of the Company from management’s perspective at the time such statements are made, and they are subject to the risks that are inherent in all forward-looking statements, as described above. They are made by RIM in light of its experience, its perception of historical and anticipated business trends, current conditions in its business and anticipated future developments, including competition and new product initiatives and timing, as well as RIM’s current assessments of the various risk factors identified above. These forward-looking statements are subject to the inherent risk of difficulties in forecasting RIM’s financial results for future periods, particularly over longer periods, given the rapid technological changes, evolving industry standards, intense competition and short product life cycles that characterize the wireless communications industry.

These factors should be considered carefully, and readers should not place undue reliance on RIM’s forward-looking statements. RIM has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

RIM, a global leader in wireless innovation, revolutionized the mobile industry with the introduction of the BlackBerry® solution in 1999. BlackBerry products and services are currently used by approximately 80 million customers around the world. Founded in 1984 and based in Waterloo, Ontario, RIM operates offices in North America, Europe, Asia Pacific and Latin America. RIM’s common shares are listed on the NASDAQ Global Select Market (NASDAQ: RIMM) and the Toronto Stock Exchange (TSX: RIM).

With the BlackBerry platform, RIM believes it offers a market-leading wireless communications experience with push-based connectivity, industry-leading security and enterprise manageability, excellent radio performance and differentiated social applications, such as BlackBerry Messenger (“BBM”), that provide immediacy, productivity and collaboration. The wireless communications market has evolved in recent years and there is significant overlap between consumer and enterprise segments. The enterprise market is currently characterized by a combination of enterprise-deployed devices and devices that are purchased by consumers but also used in the corporate environment, commonly referred to as “Bring Your Own Device” (“BYOD”).

 

4


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RIM has encountered challenges adapting to the BYOD movement as some information technology (“IT”) departments that previously required employees to use the BlackBerry wireless solution because of its emphasis on security and reliability are permitting employees to choose devices offered by the Company’s competitors, and this is impacting the Company’s enterprise subscriber account base. To address this evolution of the market, RIM has introduced products to provide manageability and scalability solutions including BlackBerry Enterprise Server Express, BlackBerry Mobile Fusion and BlackBerry Balance, which give IT departments the ability to securely manage BlackBerry devices and other operating system platforms through a single unified interface and to securely protect corporate data on an employee’s personal smartphone or tablet. RIM continues to expect that the anticipated launch of BlackBerry 10 smartphones in the first quarter of calendar 2013 will strengthen its position in the BYOD enterprise segment and the Company will also continue to seek partnerships that will further enable RIM to have a complete BYOD offering.

BlackBerry is the leading smartphone in several markets around the world. The primary regions contributing to the Company’s recent growth are Asia Pacific and Latin America. The Company has experienced a decline in revenue and market share, particularly in the United States. Intense competition, the lack of a Long Term Evolution (“LTE”) product and a high end consumer offering in the United States is negatively impacting the Company’s results in that market. The decline can also be attributed to consumer preferences for devices with access to the broadest number of applications, such as those available in the iOS and Android environments. Market share has also been impacted by the significant number of new Android-based competitors that have entered the market. In addition, the increased desire by carriers to sell devices that operate on the new, faster LTE networks being built has also impacted the Company’s market share, as these networks feature faster download speeds and allow carriers to offer higher-value data plans. RIM’s first LTE smartphones, based on the BlackBerry 10 platform, are currently expected to be launched in the first quarter of calendar 2013. Some of RIM’s main competitors include Apple Inc., Google Inc., HTC Corporation, Huawei Technologies Co., Ltd, Microsoft Corporation, Nokia Corporation, Samsung Electronics Co., Ltd, and ZTE Corporation.

BlackBerry App World, RIM’s comprehensive electronic applications catalogue, is available to customers in over 100 markets globally, with other markets to follow. The continued expansion of the applications catalogue is an important element of the Company’s successful transition to its next-generation BlackBerry 10 smartphones and the success of the BlackBerry PlayBook tablet, and requires a substantial investment of internal resources for development of the infrastructure, improvement of developer and consumer interfaces and advertising costs.

RIM currently has a strong balance sheet with negligible debt and approximately $2.3 billion in cash, cash equivalents and investments as of September 1, 2012. In the second quarter of fiscal 2013, RIM had sales of $2.9 billion and the Company incurred a net loss of $235 million, or $0.45 per share diluted.

RIM made a number of strategic acquisitions in recent years including Certicom, Torch Mobile, The Astonishing Tribe, QNX, Gist and Tungle that are intended to accelerate RIM’s ability to innovate and deliver compelling products to market which RIM is continuing to explore. In June 2011, RIM also participated in a successful bid for the Nortel Networks Corporation (“Nortel”) patent portfolio as a part of a consortium of companies. The Nortel patents obtained eliminated the Company’s exposure to those patents and are expected to strengthen the Company’s patent portfolio and its position in respect of patent litigation and licensing.

 

5


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Operational and Strategic Review

The Company is in the ongoing process of completing the largest platform and organizational transition in its history, with a view to better position the Company to achieve growth and to continue to be a leading company in the wireless communications industry. The Company’s second quarter results reflect the product and platform transition underway, ongoing market challenges and the competitive dynamics across many markets. The Company continues to expect the remainder of fiscal 2013 to be very challenging for its business as it completes this transition. As part of its ongoing efforts, the Company has continued its operational and strategic review, which includes re-evaluating its product portfolio, operations, manufacturing and research and development strategy. In the second quarter of fiscal 2013, the Company has continued to implement various initiatives as part of its operational and strategic review, including approximately half of the headcount reduction of 5,000 employees previously announced in an effort to align the Company’s cost structure to enable it to move through this transition and deliver on long-term stakeholder value. The Company continues to engage J.P. Morgan Securities LLC and RBC Capital Markets in reviewing RIM’s business and financial performance. These advisors have been tasked to help the Company with its operational and strategic review and to evaluate the relative merits and feasibility of various financial strategies, including opportunities to leverage the BlackBerry platform through partnerships, licensing opportunities and strategic business model alternatives. The Company plans to exit this transition as a lean and nimble organization that can act quickly and is aligned with RIM’s growth opportunities.

Sources of Revenue

RIM’s primary revenue stream is generated by the BlackBerry wireless solution, which includes sales of BlackBerry® handheld devices and BlackBerry PlayBook tablets, services and software. The BlackBerry wireless solution provides users with a wireless extension of their work and personal email accounts, including Microsoft® Outlook®, IBM® Lotus Notes®, Novell® GroupWise® and many ISP email services.

RIM generates hardware revenues from sales, primarily to carriers and distributors, of BlackBerry handheld devices, which provide users with the ability to send and receive wireless messages and data. RIM’s BlackBerry handheld devices also incorporate a mobile phone, web-browsing capability and enables the use of data functions such as calendar, address book, task and memo lists and other functions associated with personal organizers. Most BlackBerry handheld devices also include multimedia capabilities. During the second quarter of fiscal 2013, the Company continued to launch new BlackBerry handheld devices that incorporate the BlackBerry 7 OS in markets such as South Africa, Saudi Arabia, the United Kingdom and Indonesia as well as launching major BlackBerry 7 upgrade programs in Canada, the United States and the United Kingdom. As part of RIM’s operational and strategic review, the Company plans to streamline the BlackBerry smartphone product portfolio to offer a fewer number of devices in market at any given time. The successful launch of the Company’s next-generation BlackBerry 10 platform and the delivery of high quality, full-featured BlackBerry 10 smartphones remain the Company’s number one priority. RIM’s software development teams have continued to make major progress in the development of key features for the BlackBerry 10 platform. The Company currently expects to launch the first BlackBerry 10 smartphones in market in the first quarter of calendar 2013.

The BlackBerry PlayBook tablet represents the Company’s first tablet product and features the BlackBerry Tablet Operating System based on technology resulting from the Company’s acquisition of QNX Software Systems. This operating system is also the core of RIM’s next generation of BlackBerry 10 smartphones expected to be launched in the first quarter of calendar 2013. In the second quarter of fiscal 2013, the

 

6


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Company launched the 3G plus BlackBerry PlayBook tablet and 4G LTE BlackBerry PlayBook tablet, the Company’s first LTE product, in Canada and Germany, with other countries to follow in the coming months. Features of the 4G LTE BlackBerry PlayBook tablet include a seven-inch high definition display, a dual core 1.5 GHZ processor, dual high definition cameras and other high performance multimedia capabilities, true multitasking, advanced security features and an uncompromised web browsing experience that supports Adobe Flash. In fiscal 2011, the BlackBerry PlayBook tablet received Federal Information Processing Standard 140-2 certification, making the BlackBerry PlayBook tablet the first tablet certified for deployment within U.S. federal government agencies. This certification demonstrates RIM’s continuing commitment and ability to meet the needs of security conscious organizations. The Company has undertaken a high level of promotional activity in retail-channels to drive sell-through of the BlackBerry PlayBook tablet to end customers as a result of intense competition in the tablet market. The Company sold out of the 16G BlackBerry PlayBook tablets in the second quarter of fiscal 2013 and is continuing to sell its 32G and 64G units.

RIM generates service revenues from billings to its BlackBerry subscriber account base primarily from a monthly infrastructure access fee charged to a carrier or reseller, which the carrier or reseller in turn bills the BlackBerry subscriber. The BlackBerry subscriber account base is the total of all subscriber accounts that have an active status at the end of a reporting period. Each carrier instructs RIM to create subscriber accounts and determines whether each subscriber account should have an active status. Each carrier is charged a service fee for each subscriber account each month, with substantially all of such service fees having no regard to the amount of data traffic that the subscriber account passes over the BlackBerry architecture.

If a carrier instructs RIM to deactivate a subscriber account, then RIM no longer includes that subscriber account in its BlackBerry subscriber account base and ceases billing the carrier with respect to such account from the date of notification of its deactivation. It is each carrier’s responsibility to report changes to its subscriber account status on a timely basis to RIM. The number of subscriber accounts is a non-financial metric and is intended to highlight the change in RIM’s subscriber base and should not be relied upon as an indicator of RIM’s financial performance.

Given that many of the Company’s competitors recover their infrastructure and services expense in alternate manners, the Company continues to face pressure to reduce its infrastructure access fees. In addition, the infrastructure access fees charged by the Company are expected to fall under increasing pressure as the Company implements certain pricing reduction programs to grow its subscriber base and because certain of the new products it launches, including BlackBerry 10 smartphones, are not expected to utilize the network infrastructure in the same way or to the same extent as the Company’s existing products. The Company is focused on developing an integrated services offering that leverages RIM’s strengths such as BBM, security and manageability and that will continue to generate service revenues. However, if the Company is unable to resist these competitive pressures or is unable to develop a compelling integrated services offering that will continue to generate service revenues and enable the Company to recover the costs associated with its network infrastructure, this could have a material adverse effect on the Company’s results of operations and financial condition.

An important part of RIM’s BlackBerry wireless solution is the software that is installed at the corporate or small- and medium-size enterprise server level, and in some cases, on personal computers. Software revenues include fees from (i) licensing RIM’s BlackBerry® Enterprise Server™ (“BES”) software; (ii) BlackBerry® Client Access Licenses (“CALs”), which are charged for each subscriber using the BlackBerry service via a BES; (iii) maintenance and upgrades to software; and (iv) technical support.

 

7


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Revenues are also generated from non-warranty repairs and sales of accessories.

Cost Optimization and Resource Efficiency

As part of the Company’s ongoing effort to streamline its operations and increase efficiency, the Company commenced the CORE program in March 2012. The CORE program is a Company-wide initiative with the objective of improving the Company’s operations. The program includes, among other things, the streamlining of the BlackBerry smartphone product portfolio to offer a fewer number of devices in market at any given time, the optimization of the Company’s global manufacturing footprint to reduce complexity and improve delivery performance, the outsourcing of global repair services, the alignment of the Company’s sales and marketing teams to prioritize marketing efforts to effectively leverage its marketing windows and a reduction in the number of layers of management to drive accelerated execution and decision making, improve performance and increase the transparency of accountability. The Company is currently targeting the CORE program to drive at least $1.0 billion in savings by the end of fiscal 2013 based on RIM’s fourth quarter of fiscal 2012 run rate. To date, the Company has launched CORE-related actions that it expects will result in savings of approximately $800 million of this target, of which approximately $350 million has already been realized in the first six months of this fiscal year. The savings have been realized through improved marketing processes, simplification of organizational structures, reduction in discretionary spending, certain supply chain initiatives including direct sourcing, freight, manufacturing and repair services as well as corporate IT and customer service optimization. As the CORE management team has been reviewing all aspects of the business, the Company continues to identify more opportunities to streamline cost and drive efficiencies. As a result of the BlackBerry 10 launch timeline in the first quarter of calendar 2013, the increasingly competitive environment as well as the identification of additional cost saving and efficiency opportunities, the Company may increase the scope and magnitude of the CORE program. In connection with the CORE program, the Company intends to avoid reductions that would negatively impact key programs such as BlackBerry 10, customer support or BlackBerry service levels.

To date, the Company has started implementing a number of these CORE initiatives including:

 

   

a global workforce reduction of approximately 5,000 employees. The Company has achieved approximately half of this target as of September 28, 2012 and the majority of the remaining reductions are expected to occur by the end of fiscal 2013;

 

   

a reduction in the number of layers of management to drive better clarity, efficiency and accountability across the organization;

 

   

the continued streamlining of RIM's supply chain, which include plans to move from ten sites to three sites;

 

   

outsourcing the Company's global repair services and re-engineering the Company’s spare parts processes;

 

   

a focus on reducing the Company’s product costs from suppliers;

 

   

targeted use of resources in RIM's sales and marketing initiatives to more effectively leverage marketing windows and prioritize marketing efforts and spend in regions that offer the highest opportunity and return; and

 

   

further outsourcing of non-core functions as determined during the implementation of the CORE program.

 

8


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company expects to continue to drive cost reductions over the coming fiscal quarters. The Company expects to incur restructuring related charges of approximately $350 million by the end of fiscal 2013, including the $136 million in pre-tax restructuring costs incurred in the second quarter of fiscal 2013, primarily associated with the global workforce reduction. Other charges may occur as programs are implemented or changes are completed.

Non-GAAP Financial Measures

As noted above, the Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, and information contained in this MD&A is presented on that basis. On September 27, 2012, the Company announced financial results for the second quarter of fiscal 2013, which included certain non-GAAP financial measures, including adjusted net loss and adjusted diluted loss per share that exclude the impact of the pre-tax restructuring charges of $136 million the Company recorded in the second quarter of fiscal 2013. The term “non-GAAP financial measure” is used to refer to a numerical measure of a company’s historical or future financial performance, financial position or cash flows that: (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with U.S. GAAP in a company’s statement of income, balance sheet or statement of cash flows; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. The Company believes that presenting non-GAAP financial measures that exclude the impact of those items enables it and its shareholders to better assess the Company’s operating performance relative to its consolidated financial results in prior and future periods and improves the comparability of the information presented. Readers are cautioned that adjusted net loss and adjusted diluted loss per share do not have any standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similarly titled measures reported by other companies. These non-GAAP financial measures should be considered in the context of the U.S. GAAP results, which are described in this MD&A. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures was included in the Company’s press release, dated September 27, 2012.

Critical Accounting Policies and Estimates

General

The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based upon management’s historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates.

The Company’s critical accounting policies and estimates have been reviewed and discussed with the Company’s Audit & Risk Management Committee. There have not been any changes to the Company’s critical accounting policies and estimates from those disclosed in the Company’s annual MD&A for the fiscal year ended March 3, 2012.

 

9


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Summary Results of Operations

Second quarter of Fiscal 2013 compared to the second quarter of Fiscal 2012

The following table sets forth certain unaudited consolidated statement of operations data, which is expressed in millions of dollars, for the periods indicated, except for share and per share amounts, as well as certain unaudited consolidated balance sheet data, as at September 1, 2012 and August 27, 2011, which is expressed in millions of dollars:

 

     As at and for the Three Months Ended  
                              Change  
                              Fiscal  
     September 1, 2012     August 27, 2011     2013/2012  
     (in millions, except for share and per share amounts)  

Revenue

   $ 2,873        100.0   $ 4,168         100.0   $ (1,295

Cost of sales

     2,126        74.0     2,556         61.3     (430
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     747        26.0     1,612         38.7     (865
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses

           

Research and development

     367        12.8     381         9.1     (14

Selling, marketing and administration

     559        19.5     683         16.4     (124

Amortization

     184        6.4     141         3.4     43   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     1,110        38.7     1,205         28.9     (95
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (363     (12.7 %)      407         9.8     (770

Investment income, net

     —          0.0     7         0.2     (7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (363     (12.7 %)      414         10.0     (777

Provision for (recovery of) income taxes

     (128     (4.5 %)      85         2.0     (213
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (235     (8.2 %)    $ 329         8.0   $ (564
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share

           

Basic

   $ (0.45     $ 0.63         $ (1.08
  

 

 

     

 

 

      

 

 

 

Diluted

   $ (0.45     $ 0.63         $ (1.08
  

 

 

     

 

 

      

 

 

 

Weighted-average number of common shares outstanding (000's)

           

Basic

     524,160          524,116        

Diluted

     524,160          524,166        

Total assets

   $ 12,463        $ 13,976         $ (1,513

Total current liabilities

   $ 2,863        $ 4,059         $ (1,196

Total long-term liabilities

   $ 228        $ 281         $ (53

Shareholders' equity

   $ 9,372        $ 9,917         $ (545

 

10


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

Revenue for the second quarter of fiscal 2013 was $2.9 billion, a decrease of approximately $1.3 billion, or 31.1%, from $4.2 billion in the second quarter of fiscal 2012. Hardware revenue decreased by $1.3 billion, or 43.4%, to $1.7 billion, primarily due to lower shipment volumes, a less favourable product mix with a greater proportion of entry level products with lower average selling prices and the continuation of pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices. The number of BlackBerry handheld devices shipped decreased by approximately 3.2 million, or 30.2%, to approximately 7.4 million in the second quarter of fiscal 2013, compared to approximately 10.6 million in the second quarter of fiscal 2012. The number of BlackBerry PlayBook tablets shipped during the second quarter of fiscal 2013 was approximately 0.1 million, representing a decrease of 0.1 million compared to 0.2 million in the second quarter of fiscal 2012. Service revenue increased by $2 million to $1.0 billion in the second quarter of fiscal 2013, reflecting the increase in net new BlackBerry subscriber accounts since the second quarter of fiscal 2012, offset by a decrease in average revenue per unit (“ARPU”). Software revenue decreased by $13 million in the second quarter of fiscal 2013 to $65 million as a result of a decrease in BES and CALs revenue. Other revenue increased by $31 million to $91 million in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012, which was primarily attributable to gains realized from revenue hedging instruments.

The Company’s net loss for the second quarter of fiscal 2013 was $235 million, a decrease of $564 million compared to net income of $329 million in the second quarter of fiscal 2012. The decrease, which takes into account the impact of one-time charges related to the CORE program incurred in the second quarter of fiscal 2013 of $136 million and one-time restructuring charges related to the Company’s previous cost optimization program incurred in the second quarter of fiscal 2012 of $118 million, primarily reflects a decrease in the Company’s gross margin, partially offset by lower operating expenses and the recovery of income taxes. The Company’s consolidated gross margin in the second quarter of fiscal 2013 was negatively impacted by the continuation of pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices, the mix of BlackBerry handheld devices sold during the quarter, which were weighted towards entry-level products with lower average selling prices and gross margins and the impact of allocating certain fixed costs, including licensing costs, to lower shipment volumes, compared to the second quarter of fiscal 2012.

Basic loss per share and diluted loss per share were both $0.45 in the second quarter of fiscal 2013 compared to basic earnings per share (“EPS”) and diluted EPS of $0.63 in the second quarter of fiscal 2012, which reflects the impact of one-time charges related to the CORE program incurred in the second quarter of fiscal 2013 of $136 million and one-time restructuring charges related to the Company’s previous cost optimization program incurred in the second quarter of fiscal 2012 of $118 million. The Company expects to report an operating loss in the third quarter of fiscal 2013 as it continues to invest in targeted marketing and sales programs to drive sales of BlackBerry 7 handheld devices and continues to work through the transition to Blackberry 10. The Company continues to expect that there will be pressure on operating results for the remainder of the fiscal year based on the factors described below and the timing of the BlackBerry 10 launch.

A more comprehensive analysis of these factors is contained in “Results of Operations”.

 

11


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

Three months ended September 1, 2012 compared to the three months ended August 27, 2011

Revenue

Revenue for the second quarter of fiscal 2013 was $2.9 billion, a decrease of approximately $1.3 billion, or 31.1%, from $4.2 billion in the second quarter of fiscal 2012.

A comparative breakdown of the significant revenue streams is set forth in the following table:

 

     For the Three Months Ended  
     September 1, 2012     August 27, 2011     Change Fiscal
2013/2012
 

Millions of BlackBerry handheld devices shipped

     7.4           10.6           (3.2     (30.2 %) 
  

 

 

      

 

 

      

 

 

   

 

 

 

Millions of BlackBerry PlayBook tablets shipped

     0.1           0.2           (0.1     (50.0 %) 
  

 

 

      

 

 

      

 

 

   

 

 

 

Revenue (in millions)

              

Hardware

   $ 1,712         59.6   $ 3,027         72.6   $ (1,315     (43.4 %) 

Service

     1,005         35.0     1,003         24.1     2        0.2

Software

     65         2.3     78         1.9     (13     (16.7 %) 

Other

     91         3.1     60         1.4     31        51.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 2,873         100.0   $ 4,168         100.0   $ (1,295     (31.1 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Hardware revenue was $1.7 billion, or 59.6% of consolidated revenue, in the second quarter of fiscal 2013, compared to $3.0 billion, or 72.6% of consolidated revenue, in the second quarter of fiscal 2012, representing a decrease of 43.4%. This decrease in hardware revenue over the comparable prior fiscal year period was a result of decreased BlackBerry handheld device shipments, a less favourable product mix with a greater proportion of entry level products with lower average selling prices and the continuation of pricing initiatives to drive sell-through and sell-in of BlackBerry 7 handheld devices. The Company anticipates aggressive pricing to continue to play a major role in the smartphone market for the foreseeable future and therefore plans to continue to aggressively incentivize sales of BlackBerry 7 handheld devices, which is expected to put downward pressure on revenue, average selling prices and related gross margins for handheld devices for the remainder of the fiscal year as the Company continues to work through the transition to BlackBerry 10. In the second quarter of fiscal 2013, 7.4 million Blackberry handheld devices were shipped, which decreased from 10.6 million in the same period in the prior fiscal year due to a number of factors, primarily reflecting the ongoing market challenges, the intense competition RIM is facing across many of its markets, particularly in the United States, as well as the platform and product transition the Company is undertaking. Delays in the introduction of the BlackBerry 10 smartphones have resulted in the current BlackBerry 7 product line being in

 

12


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

the market for over one year, which has contributed to declining unit shipments and a loss of market share as some customers await the launch of the new BlackBerry 10 smartphones. The anticipated launch of the BlackBerry 10 smartphones in the first calendar quarter of 2013 may continue to affect the Company's financial results as the Company expects lower sales of its BlackBerry 7 smartphones in the third quarter of fiscal 2013 compared to the second quarter of fiscal 2013 as customers await the new BlackBerry 10 smartphones. The Company has continued to launch new BlackBerry 7 handhelds in Asia Pacific and Europe, Middle East and Africa (“EMEA”) as well as launch major BlackBerry 7 upgrade programs in Canada, the United States and the United Kingdom and will continue to drive these devices into global carrier and distribution channels in the third quarter of fiscal 2013. The Company’s inventory in channels has decreased in the second quarter of fiscal 2013, compared to the first quarter of fiscal 2013. The Company expects that carrier partners will continue to carry less inventory at a given time as they are not replenishing their inventory at the same pace as they have historically.

Outside of North America, overall performance was negatively impacted by pricing pressure due to competitive market dynamics and the aging of the Company’s in-market product portfolio, making growth in international markets increasingly more challenging. The Company has been refreshing the product portfolio by releasing new BlackBerry 7 handheld devices in Asia Pacific and EMEA, as noted above. Results from these launches have been positive and the Company expects these new devices to continue to help re-invigorate sales in these regions.

The number of BlackBerry PlayBook tablets shipped during the second quarter of fiscal 2013 was approximately 0.1 million, representing a decrease of 0.1 million units compared to the same period in the prior fiscal year. Overall, BlackBerry PlayBook tablet shipments have experienced lower than anticipated sell-through to end users due mainly to intense competition in the tablet market, especially in the United States. During the second quarter of fiscal 2013, the Company continued its ongoing promotional activities to encourage sell-through of the BlackBerry PlayBook tablets. The Company sold out of the 16G BlackBerry PlayBook tablets in the second quarter of fiscal 2013 and is continuing to sell its 32G and 64G units as it transitions to the 3G BlackBerry PlayBook tablet and 4G LTE BlackBerry PlayBook tablet, which launched in Canada and Germany in the second quarter of fiscal 2013 with other countries to follow in the coming months. The Company believes that this strategy will help to manage its inventory and enhance adoption of its QNX-based platform by consumers and enterprises.

Service revenue increased marginally by $2 million, or 0.2%, to $1.0 billion, or 35.0% of consolidated revenue, in the second quarter of fiscal 2013, compared to $1.0 billion, or 24.1% of consolidated revenue, in the second quarter of fiscal 2012. The increase in service revenue reflects the Company’s increase in net new BlackBerry subscriber accounts since the second quarter of fiscal 2012, particularly in Latin America, Asia Pacific and EMEA, which was substantially offset by a decrease in subscriber accounts in North America and a decrease in ARPU. The decrease in ARPU resulted from recent pricing reduction programs implemented by the Company to grow the subscriber base as well as a shift in the mix of the Company’s subscriber base from higher tiered unlimited plans to prepaid and lower tiered plans. BlackBerry tiered service plans continued to drive growth in the Company’s subscriber base in the second quarter of fiscal 2013, specifically in the international markets. The overall BlackBerry subscriber base continued to grow in all regions in the second quarter of fiscal 2013 except for North America. The total BlackBerry subscriber base was approximately 80 million as at the end of the second quarter of fiscal 2013. The growth in international markets was offset by continued weak results in the second quarter of fiscal 2013 in the United States where a 12% decline in the subscriber base has caused service revenue to decline by 12%. The Company expects net subscriber accounts in the United States to remain under pressure and will continue to look to international markets to help maintain and grow the subscriber base as the Company continues to work through the transition to BlackBerry

 

13


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10. The Company also expects ARPU to continue to decline in the third quarter of fiscal 2013 due to the pricing reduction programs and the anticipated mix of the Company’s subscriber base discussed previously. The Company continues to be dissatisfied with the performance of the business in the United States. As described above, RIM generates service revenues from billings to its BlackBerry subscriber account base primarily from a monthly infrastructure access fee charged to a carrier or reseller, which the carrier or reseller in turn bills to the BlackBerry subscriber. Given that many of the Company’s competitors recover their infrastructure and services expense in alternate manners, the Company continues to face pressure to reduce its infrastructure access fees. In addition, the infrastructure access fees charged by the Company are expected to fall under increasing pressure as the Company implements pricing reduction programs to grow its subscriber base and because certain of the new products it launches, including BlackBerry 10 smartphones, are not expected to utilize the network infrastructure in the same way or to the same extent as the Company’s existing products. The Company is focused on developing an integrated services offering that leverages RIM’s strengths such as BBM, security and manageability and that will continue to generate service revenues. However, if the Company is unable to resist these competitive pressures or is unable to develop a compelling integrated services offering that will continue to generate service revenues and enable the Company to recover the costs associated with its network infrastructure, this could have a material adverse effect on the Company’s results of operations and financial condition.

Software revenue, which includes fees from licensed BES software, CALs, technical support, maintenance and upgrades decreased by $13 million, or 16.7%, to $65 million, or 2.3% of consolidated revenue, in the second quarter of fiscal 2013, compared to $78 million, or 1.9% of consolidated revenue, in the second quarter of fiscal 2012. This decrease was primarily attributable to a decrease in BES and CALs revenue.

Other revenue, which includes non-warranty repairs, accessories and gains and losses on revenue hedging instruments, increased by $31 million to $91 million in the second quarter of fiscal 2013 compared to $60 million in the second quarter of fiscal 2012. The majority of the increase was attributable to gains realized from revenue hedging instruments in the second quarter of fiscal 2013, compared to a net loss from hedging instruments that was realized in the same period in the prior fiscal year. The overall increase was partially offset by a decrease in non-warranty repair revenues. See “Market Risk of Financial Instruments – Foreign Exchange” for additional information on the Company’s hedging instruments.

Sales outside the United States, the United Kingdom and Canada comprised approximately 58% of the total consolidated revenue during the second quarter of fiscal 2013. Some of the larger markets comprising the other segment include Indonesia, South Africa and Venezuela. Sales in the United States represented approximately 22% of total consolidated revenue during the quarter, a decrease as a percentage of total consolidated revenue compared to the same period in the prior year resulting from shifts in the competitive dynamics within the United States, an aging in-market product portfolio, as well as growth in international markets compared to the second quarter of fiscal 2012. While the Company’s BlackBerry 7 upgrade program is being well received by many of its customers, revenues in the United States have continued to decline and subscriber attrition has remained high due to the intense competition faced by the Company in this market. Sales in the United Kingdom represented approximately 12% of total consolidated revenue and sales in Canada represented the remainder. During the second quarter of fiscal 2013, the Company experienced a significant decrease in its share of the smartphone market in the United States compared to the second quarter of fiscal 2012. Intense competition, the lack of an LTE smartphone product and a high end consumer offering in the United States as well as consumer preferences for devices with access to the broadest number of applications, such as those available in the iOS and Android environments continue to negatively impact the Company’s results in that market. The Company plans to have a broad spectrum of applications available on the

 

14


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

BlackBerry 10 platform when it is launched, including games, multimedia, productivity, enterprise and social media applications. Sales in the United States have also been impacted by the significant number of new Android-based competitors that have entered the market. In addition, the increased desire by carriers to sell devices that operate on the new, faster LTE networks being built has also impacted the Company’s market share, as these networks feature faster download speeds and enable carriers to offer higher-value data plans. RIM’s first LTE smartphones are scheduled to be launched with the Company’s first BlackBerry 10 smartphones, currently expected in the first quarter of calendar 2013. The Company expects net subscriber accounts in the United States to remain under pressure and ARPU to continue to decline in the third quarter of fiscal 2013, given the pricing reduction programs and the anticipated product mix reflecting growth in lower tiered plans, and will continue to look to international markets to grow the subscriber base as the Company continues to work through the transition to BlackBerry 10.

RIM has encountered challenges adapting to the BYOD movement as some IT departments that previously required employees to use the BlackBerry wireless solution because of its emphasis on security and reliability are permitting employees to choose devices offered by the Company’s competitors, and this has been reflected through a decrease in the Company’s enterprise subscriber growth rate. To address this evolution of the market, RIM has introduced products to provide manageability and scalability solutions including BlackBerry Enterprise Server Express, BlackBerry Mobile Fusion and BlackBerry Balance, which give IT departments the ability to securely manage BlackBerry devices and other operating system platforms through a single interface and to securely protect corporate data on an employee’s personal smartphone or tablet. RIM expects that the anticipated launch of BlackBerry 10 smartphones in the first quarter of calendar 2013 will strengthen its position in the BYOD enterprise segment and the Company will also continue to seek partnerships that will further enable RIM to have a complete BYOD offering.

Gross Margin

Consolidated gross margin decreased by $865 million, to $747 million, or 26.0% of consolidated revenue, in the second quarter of fiscal 2013, compared to $1.6 billion, or 38.7% of consolidated revenue, in the second quarter of fiscal 2012. Excluding the impact of one-time charges related to the CORE program incurred in the second quarter of fiscal 2013, of which $68 million was attributable to cost of sales, and one-time charges related to the Company’s previous cost optimization program incurred in the second quarter of fiscal 2012, of which $13 million was attributable to cost of sales, gross margin decreased by $810 million.

The $810 million decrease in consolidated gross margin was attributable to the continuation of pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices, the mix of BlackBerry handheld devices sold during the quarter, which were weighted towards entry-level products with lower average selling prices and gross margins and the impact of allocating certain fixed costs, including licensing costs, to lower shipment volumes.

 

15


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Operating Expenses

The table below presents a comparison of research and development, selling, marketing and administration, and amortization expense for the quarter ended September 1, 2012, compared to the quarter ended June 2, 2012 and the quarter ended August 27, 2011. The Company believes it is meaningful to provide a comparison between the second quarter of fiscal 2013 and the first quarter of fiscal 2013 given that RIM’s quarterly operating results vary substantially.

 

     For the Three Months Ended  
     (in millions)  
     September 1, 2012     June 2, 2012     August 27, 2011  
    

 

     % of
Revenue
   

 

     % of
Revenue
   

 

     % of
Revenue
 

Revenue

   $ 2,873         $ 2,814         $ 4,168      
  

 

 

      

 

 

      

 

 

    

Operating expenses

               

Research and development

   $ 367         12.8   $ 368         13.1   $ 381         9.1

Selling, marketing and administration

     559         19.5     552         19.6     683         16.4

Amortization

     184         6.4     176         6.3     141         3.4

Impairment of Goodwill(1)

     —           —          335         11.9     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,110         38.7   $ 1,431         50.9   $ 1,205         28.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

During the first quarter of fiscal 2013, the Company recorded a goodwill impairment charge of approximately $335 million pre-tax, or $326 million after-tax.

Operating expenses decreased by $321 million, or 22.4%, to $1.1 billion, or 38.7% of revenue, in the second quarter of fiscal 2013, compared to $1.4 billion, or 50.9% of revenue, in the first quarter of fiscal 2013, due to the goodwill impairment charge recorded in the first quarter of fiscal 2013 as well as the fully offsetting impacts of the one-time charges incurred in the second quarter of fiscal 2013 related to the CORE program, of which $68 million was attributable to operating expenses, and the operating expense savings realized in the quarter as a result of implementing the CORE program.

Operating expenses decreased by $95 million, or 7.9%, compared to $1.2 billion, or 28.9% of revenue, in the second quarter of fiscal 2012, reflecting the lower consolidated revenue in the second quarter of fiscal 2013. Excluding the impact of one-time charges incurred as part of the CORE program during the second quarter of fiscal 2013, of which $68 million were attributable to operating expenditures, and the one-time charges incurred as part of the Company’s previous cost optimization program during the second quarter of fiscal 2012, of which $105 million were attributed to operating expenditures, operating expenses decreased by $58 million. This decrease was due to reductions in marketing and promotional spending and travel costs as a result of the CORE program, less materials costs due to fewer new product introductions and a decrease in salaries and benefits as a result of a reduction in headcount. The overall decrease was partially offset by an increase in litigation costs due to an increased number of legal cases outstanding during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012.

Research and Development Expenses

Research and development expenses consist primarily of salaries and benefits for technical personnel, new product development costs, travel, office and building infrastructure costs and other employee costs.

 

16


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Research and development expenses decreased marginally by $1 million to $367 million in the second quarter of fiscal 2013, compared to $368 million in the first quarter of fiscal 2013. Excluding the impact of one-time charges related to the CORE program incurred during the second quarter of fiscal 2013, of which $20 million was attributable to research and development expenditures, research and development expenses decreased by $21 million, which was primarily attributable to decreases in salaries and benefits as a result of a reduction in headcount. Research and development related headcount decreased by approximately 850 individuals, or 11%, compared to the first quarter of fiscal 2013. Also contributing to the decrease was a reduction in material costs due to fewer new product introductions and less travel costs as a result of the CORE program.

Research and development expenses decreased by $14 million or 4% in the second quarter of fiscal 2013, compared to $381 million in the second quarter of fiscal 2012. This decrease was primarily attributable to decreases in materials costs due to fewer new product introductions and less travel costs as a result of the CORE program. The decrease was partially offset by an overall increase in salaries and benefits due to higher salary and bonus levels compared to the second quarter of fiscal 2012, offset by a reduction in headcount. Research and development related headcount decreased by approximately 1,050 individuals, or 13%, compared to the second quarter of fiscal 2012. The Company expects further headcount reductions in certain functional areas within research and development during the remainder of fiscal 2013.

Selling, Marketing and Administration Expenses

Selling, marketing and administration expenses consist primarily of marketing, advertising and promotion, salaries and benefits, external advisory fees, information technology costs, office and related staffing infrastructure costs and travel expenses.

Selling, marketing and administration expenses increased marginally by $7 million to $559 million in the second quarter of fiscal 2013 compared to $552 million for the first quarter of fiscal 2013. Excluding the impact of one-time charges related to the CORE program incurred during the second quarter of fiscal 2013, of which $48 million was attributable to selling, marketing and administration expenditures, selling, marketing and administration expenses decreased by $41 million. The $41 million decrease was primarily attributable to reductions in marketing and promotional spending as well as a decrease in salaries and benefits due to a reduction in headcount. Selling, marketing and administration related headcount decreased by approximately 1,200 individuals, or 16%, compared to the first quarter of fiscal 2013.

Selling, marketing and administration expenses decreased by $124 million in the second quarter of fiscal 2013 compared to $683 million in the second quarter of fiscal 2012. Excluding the impact of one-time charges incurred as part of the CORE program during the second quarter of fiscal 2013, of which $48 million was attributable to selling, marketing and administration expenditures, and the charges incurred as part of the Company’s previous cost optimization program during the second quarter of fiscal 2012, of which $86 million was attributable to selling marketing and administration expenditures, selling, marketing and administration expenses decreased by $86 million. This decrease was primarily due to a reduction in marketing and promotional spending as well as a reduction in headcount, which was partially offset by an increase in litigation costs due to an increased number of legal cases outstanding during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Headcount related to selling, marketing and administration functions decreased by approximately 1,500 individuals, or 19%, as compared to the second quarter of fiscal 2012. The Company expects further headcount reductions in these functional areas in the remainder of fiscal 2013.

 

17


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Amortization Expense

The table below presents a comparison of amortization expense relating to property, plant and equipment and intangible assets recorded as amortization or cost of sales for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Intangible assets are comprised of patents, licenses and acquired technology.

 

     For the Three Months Ended  
     (in millions)  
     Included in Amortization      Included in Cost of Sales  
     September 1,
2012
     August 27,
2011
     Change      September 1,
2012
     August 27,
2011
     Change  

Property, plant and equipment

   $ 101       $ 90       $ 11       $ 83       $ 74       $ 9   

Intangible assets

     83         51         32         254         139         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 184       $ 141       $ 43       $ 337       $ 213       $ 124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amortization

Amortization expense relating to certain property, plant and equipment and intangible assets increased by $43 million to $184 million for the second quarter of fiscal 2013, compared to $141 million for the comparable period in fiscal 2012, which primarily reflects the impact of certain property, plant and equipment and intangible asset additions made over the last four quarters.

Cost of sales

Amortization expense relating to certain property, plant and equipment and intangible assets employed in the Company’s manufacturing operations and BlackBerry service operations increased by $124 million to $337 million for the second quarter of fiscal 2013, compared to $213 million for the comparable period in fiscal 2012. This increase primarily reflects the impact of renewed or amended licensing agreements and certain property, plant and equipment asset additions made over the last four quarters.

Investment Income

Investment income decreased by $7 million to nil in the second quarter of fiscal 2013, from a gain of $7 million in the second quarter of fiscal 2012. The decrease in investment income is a result of decreases in the Company’s average yield on the investment portfolio, a decrease in the amount of one-time gains compared to the same period in fiscal 2012 and the recording of the Company’s portion of investment losses on its equity-based investments. See “Financial Condition—Liquidity and Capital Resources”.

Income Taxes

For the second quarter of fiscal 2013, the Company’s income tax recovery was $128 million, resulting in an effective tax rate of approximately 35.3%, compared to income tax expense of $85 million and an effective tax rate of approximately 20.5% for the same period in the prior fiscal year. The Company’s effective tax rate reflects the geographic mix of earnings in jurisdictions with different tax rates. The higher effective tax rate in the second quarter of fiscal 2013 primarily reflects the favourable impact of carrying operating losses back to prior periods with higher effective tax rates and the effect of tax incentives on earnings.

 

18


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company has not provided for Canadian income taxes or foreign withholding taxes that would apply on the distribution of the earnings of its non-Canadian subsidiaries, as these earnings are intended to be reinvested indefinitely by these subsidiaries.

Net Loss

The Company’s net loss for the second quarter of fiscal 2013 was $235 million, a decrease of $564 million compared to net income of $329 million in the second quarter of fiscal 2012. The decrease, which takes into account the impact of one-time charges related to the CORE program incurred in the second quarter of fiscal 2013 of $136 million and one-time restructuring charges related to the Company’s previous cost optimization program incurred in the second quarter of fiscal 2012 of $118 million, primarily reflects a decrease in the Company’s gross margin, partially offset by lower operating expenses and the recovery of income taxes. The Company’s consolidated gross margin in the second quarter of fiscal 2013 was negatively impacted by the continuation of pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices, the mix of BlackBerry handheld devices sold during the quarter, which were weighted towards entry-level products with lower average selling prices and gross margins and the impact of allocating certain fixed costs, including licensing costs, to lower shipment volumes, compared to the second quarter of fiscal 2012.

Basic and diluted loss per share were both $0.45 in the second quarter of fiscal 2013, compared to basic EPS and diluted EPS of $0.63 in the second quarter of fiscal 2012.

The weighted average number of shares outstanding was 524 million common shares for both basic and diluted loss per share for the second quarter of fiscal 2013 and both basic and diluted EPS for the second quarter of fiscal 2012, respectively.

The Company believes it is extremely important to focus on increasing sales of its BlackBerry 7 handheld devices ahead of its BlackBerry 10 launch and throughout the remainder of fiscal 2013. In order to drive increased demand for BlackBerry 7 products and services in the United States, the Company continued the targeted marketing and sales program that commenced in the first quarter of fiscal 2013 to aggressively incentivize sales of BlackBerry 7 handheld devices through the implementation of programs to drive upgrades from older BlackBerry products to BlackBerry 7 handheld devices and to attract first-time smartphone buyers to BlackBerry. This created downward pressure on financial results in the second quarter of fiscal 2013 and is expected to create further pressure on financial results in the coming fiscal quarters as the Company invests in an attempt to maintain and grow the BlackBerry brand and awareness of the BlackBerry 7 product family. The Company has also increased its spending on advertising and promotional activities in a number of key international markets. The Company anticipates that these investments will also lay the groundwork for the launch of its BlackBerry 10 smartphones, which is currently expected to occur in the first quarter of calendar year 2013. See “Cautionary Note Regarding Forward-Looking Statements”.

As noted above, the Company is in the process of completing the largest platform and organizational transition in its history, with a view to better position the Company to achieve growth and to continue to be a leading company in the wireless communications industry. As part of the ongoing efforts, the Company is

 

19


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

also re-evaluating its product portfolio, operations, manufacturing and research and development strategy. The Company has implemented various initiatives related to the CORE program, as discussed above, and expects to incur restructuring and related charges of approximately $350 million by the end of fiscal 2013, primarily associated with the global workforce reduction.

The Company expects the third quarter of fiscal 2013 to continue to be very challenging for its business based on the increasing competitive environment as well as the Company’s aggressive pricing initiatives on handheld devices and monthly infrastructure access fees. Also, the Company plans to invest in targeted marketing and sales programs to aggressively drive sales of BlackBerry 7 handheld devices as its portfolio of products with higher average selling prices begins to age before the anticipated launch of the BlackBerry 10 smartphones. As a result, the Company expects to report an operating loss in the third quarter of fiscal 2013 as RIM continues to work through the transition to BlackBerry 10. This outlook excludes the impact of charges related to the CORE program. The Company expects that there will be continued pressure on operating results for the remainder of the fiscal year based on the factors described above and the timing of the BlackBerry 10 launch. See “Cautionary Note Regarding Forward-Looking Statements”.

Common Shares Outstanding

On September 21, 2012, there were 524 million voting common shares, options to purchase 2.8 million voting common shares, 7.5 million restricted share units and 0.2 million deferred share units outstanding.

The Company has not paid any cash dividends during the last three fiscal years.

 

20


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Six months ended September 1, 2012 compared to the six months ended August 27, 2011

The following table sets forth certain unaudited consolidated statements of operations data, which is expressed in millions of dollars, for the periods indicated, except for share and per share amounts:

 

     For the Six Months Ended  
     September 1, 2012     August 27, 2011     Change
Fiscal
2013/2012
 
     (in millions, except for share and per share amounts)  

Revenue

   $ 5,687        100.0   $ 9,076         100.0   $ (3,389

Cost of sales (1)

     4,152        73.0     5,308         58.5     (1,156
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     1,535        27.0     3,768         41.5     (2,233
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses

           

Research and development (1)

     735        13.0     804         8.8     (69

Selling, marketing and administration (1)

     1,111        19.5     1,387         15.3     (276

Amortization

     360        6.3     273         3.0     87   

Impairment of goodwill

     335        5.9     —           —          335   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     2,541        44.7     2,464         27.1     77   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (1,006     (17.7 %)      1,304         14.4     (2,310

Investment income, net

     3        0.1     14         0.2     (11
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (1,003     (17.6 %)      1,318         14.6     (2,321

Provision for (recovery of) income taxes

     (250     (4.4 %)      294         3.2     (544
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (753     (13.2 %)    $ 1,024         11.3   $ (1,777
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share

           

Basic

   $ (1.44     $ 1.95         $ (3.39
  

 

 

     

 

 

      

 

 

 

Diluted

   $ (1.44     $ 1.95         $ (3.39
  

 

 

     

 

 

      

 

 

 

Weighted-average number of common shares outstanding (000’s)

           

Basic

     524,160          524,049        

Diluted

     524,160          524,365        

 

(1) 

Cost of sales, research and development and selling, marketing and administration expenses included approximately $136 million in total pre-tax charges related to the CORE program to streamline operations across the Company during the first six months of fiscal 2013. Included in cost of sales, research and development, and selling, marketing and administration expenses for the first six months of fiscal 2013 was approximately $68 million, $20 million and $48 million, respectively, of charges incurred as a result of the CORE program, related primarily to employee termination benefits and manufacturing costs.

 

21


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Revenue

Revenue for the first six months of fiscal 2013 was $5.7 billion, a decrease of $3.4 billion, or 37.3%, from $9.1 billion in the first six months of fiscal 2012.

A comparative breakdown of the significant revenue streams is set forth in the following table:

 

     For the Six Months Ended  
     September 1, 2012     August 27, 2011     Change Fiscal
2013/2012
 

Millions of BlackBerry handheld devices sold

     15.2           23.8           (8.6     (36.1 %) 
  

 

 

      

 

 

      

 

 

   

 

 

 

Millions of BlackBerry PlayBook tablets sold

     0.4           0.7           (0.3     (43 %) 
  

 

 

      

 

 

      

 

 

   

 

 

 

Revenue (in millions)

              

Hardware

   $ 3,380         59.4   $ 6,848         75.5   $ (3,468     (50.6 %) 

Service

     2,008         35.3     1,976         21.8     32        1.6

Software

     134         2.4     159         1.8     (25     (15.7 %) 

Other

     165         2.9     93         0.9     72        77.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,687         100.0   $ 9,076         100.0   $ (3,389     (37.3 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Hardware revenue decreased by $3.5 billion, or 50.6%, to $3.4 billion, or 59.4% of consolidated revenue, in the first six months of fiscal 2013 compared to $6.8 billion, or 75.5% of consolidated revenue, in the first six months of fiscal 2012. This decrease in hardware revenue over the prior fiscal year was primarily attributable to a decrease in the volume of BlackBerry handheld devices shipped by approximately 8.6 million, to approximately 15.2 million BlackBerry handheld devices in the first six months of fiscal 2013, compared to approximately 23.8 million BlackBerry handheld devices shipped in the first six months of fiscal 2012. The decrease is also attributable to a shift in the mix of BlackBerry handheld devices shipped during the first six months of fiscal 2013, which were more heavily weighted towards existing, lower-end devices that have lower average selling prices. As discussed previously, BlackBerry handheld device shipments were impacted by the highly competitive environment in North America during the first six months of fiscal 2013 compared to the first six months of fiscal 2012. BlackBerry handheld device shipments were positively impacted during the first six months of fiscal 2013 by continued growth in international markets when compared to the first six months of fiscal 2012 primarily due to the continued focus and development of prepaid markets and tiered pricing plan offerings. In addition, the number of BlackBerry PlayBook tablets shipped was 0.4 million units in the first six months of fiscal 2013, compared to 0.7 million units in the first six months of fiscal 2012.

Service revenue increased $32 million, or 1.6%, to $2.01 billion and comprised 35.3% of consolidated revenue in the first six months of fiscal 2013 compared to $1.98 billion, or 21.8% of consolidated revenue, in the first six months of fiscal 2012, reflecting the Company’s increase in net new BlackBerry subscriber accounts since the second quarter of fiscal 2012, partially offset by a decrease in ARPU.

Software revenue decreased $25 million, or 15.7%, to $134 million in the first six months of fiscal 2013 from $159 million in the first six months of fiscal 2012. The decrease was attributable to a decline in revenue generated by the Company’s acquired subsidiaries and a decrease in CALs and BES revenue.

 

22


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Other revenue increased by $72 million to $165 million in the first six months of fiscal 2013 compared to $93 million in the first six months of fiscal 2012. The majority of the increase was attributable to gains realized from revenue hedging instruments in contrast to a net loss realized in the same period in the prior fiscal year, which was partially offset by a decrease in non-warranty repair revenue. See “Market Risk of Financial Instruments – Foreign Exchange” for additional information on the Company’s hedging instruments.

Sales outside the United States, United Kingdom and Canada comprised approximately 60% of the total consolidated revenue during the first six months of fiscal 2013. Sales in the United States represented approximately 24% of total consolidated revenue during the first six months of fiscal 2013, a decrease as a percentage of total consolidated revenue resulting from the factors described above and continuous growth in international markets when compared to the first six months of fiscal 2012. Sales in the United Kingdom represented approximately 11% of total consolidated revenue and sales in Canada represented the remainder.

Gross Margin

Consolidated gross margin decreased by $2.2 billion, or 59.3%, to $1.5 billion, or 27.0% of consolidated revenue, in the first six months of fiscal 2013, compared to $3.8 billion, or 41.5% of consolidated revenue, in the same period of the previous fiscal year. Excluding the impact of one-time charges related to the CORE program that the Company incurred during the second quarter of fiscal 2013, of which $68 million was attributable to cost of sales, and the one-time charges related to the Company’s previous cost optimization program that the Company incurred during the second quarter of fiscal 2012, of which $13 million was attributable to cost of sales, consolidated gross margin decreased by $2.1 billion. The year-over-year decline in consolidated gross margin was primarily attributable to the continuation of pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices, the mix of BlackBerry handheld devices shipped during the first six months of fiscal 2013, which were more heavily weighted towards entry-level products with lower average selling prices and gross margins and the impact of allocating certain higher fixed costs, including licensing costs, over lower shipment volumes. Gross margin percentage for BlackBerry handheld devices and BlackBerry PlayBook tablets are generally lower than the Company’s consolidated gross margin percentage.

 

23


Research In Motion Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Operating Expenses

The table below presents a comparison of research and development, selling, marketing and administration, and amortization expenses for the six months ended September 1, 2012, compared to the six months ended August 27, 2011.

 

     For the Six Months Ended  
     (in millions)  
     September 1, 2012     August 27, 2011     Change Fiscal
2013/2012
 
    

 

     % of
Revenue
   

 

     % of
Revenue
   

 

    % of
Change
 

Revenue

   $ 5,687         $ 9,076         $ (3,389     (37.3 %) 
  

 

 

      

 

 

      

 

 

   

 

 

 

Operating expenses

              

Research and development (1)

   $ 735         13.0   $ 804         8.8   $ (69     (8.6 %) 

Selling, marketing and administration (1)

     1,111<