02348120-00000001-00011917-i@#SEDAR#SierraWireless#2015#2015_Q1_FS-PDF 002002001130Sierra Wireless, Inc. 2015050820150508173630101
02348120-00000001-00011917-i@#SEDAR#SierraWireless#2015#2015_Q1_FS-PDF
02348120
00000001
002
Other Issuers
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Continuous Disclosure
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Interim financial statements/report - English
20150508
20150508
BC
AB
SK
MB
ON
QC
NB
NS
PE
NF
00011917
Sierra Wireless, Inc.
Sierra Wireless, Inc.
Dave McLennan
604
231-1100
604
231-1109
Canada
826516
099199000000000000000090000099999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999
001
19930531
1231
019
00111111111100000999
10000000000009999999
KPMG
KPMG
Computershare Investor Services Inc.
Services aux investisseurs Computershare inc.
004
20060421
16:18:21
1
SW
20150331
002
13811 Wireless Way
Richmond
British Columbia
Canada
V6V 3A4
604
231-1100
604
231-1109
13811 Wireless Way
Richmond
British Columbia
Canada
V6V 3A4
604
231-1100
604
231-1109
1
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
March 31, 2015December 31, 2014
Assets
Current assets
Cash and cash equivalents$ 99,555$ 207,062
Accounts receivable, net of allowance for doubtful accounts of $2,404
(December 31, 2014 - $2,275)
128,469106,799
Inventories (note 4)19,10417,445
Deferred income taxes4,7784,779
Prepaids and other (note 5)6,7077,826
258,613343,911
Property and equipment20,31920,717
Intangible assets79,59737,893
Goodwill141,222103,966
Deferred income taxes3,5603,898
Other assets4,4554,979
$ 507,766$ 515,364
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 6)$ 122,164$ 128,196
Deferred revenue and credits3,8133,245
125,977131,441
Long-term obligations (note 7)27,86426,608
Deferred income taxes6,661453
160,502158,502
Equity
Shareholders’ equity
Common stock: no par value; unlimited shares authorized; issued and
outstanding 32,132,653 shares (December 31, 2014 -
31,868,541 shares)343,649339,640
Preferred stock: no par value; unlimited shares authorized;
issued and outstanding: nil shares
——
Treasury stock: at cost 4,190 shares (December 31, 2014 – 342,645 shares)(80)(6,236)
Additional paid-in capital20,31726,909
Retained earnings (deficit)(7,139)2,514
Accumulated other comprehensive loss (note 8)(9,483)(5,965)
347,264356,862
$ 507,766$ 515,364
Commitments and contingencies (note 12)
Subsequent event (note 15)
The accompanying notes are an integral part of the consolidated financial statements.
2
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
Three months ended March 31,
20152014
Revenue
$ 150,406$ 121,163
Cost of goods sold101,57082,566
Gross margin 48,83638,597
Expenses
Sales and marketing13,14512,366
Research and development19,09220,017
Administration10,4209,333
Acquisition and Integration1,103970
Amortization2,6022,583
46,36245,269
Earnings (loss) from operations 2,474(6,672)
Foreign exchange gain (loss)(11,893)392
Other income10526
Loss before income taxes
(9,314)(6,254)
Income tax expense (recovery)339(2,249)
Net loss
$ (9,653)$ (4,005)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes of $nil(3,518)20
Comprehensive loss
$ (13,171)$ (3,985)
Basic and diluted net loss per share (in dollars) (note 11)$ (0.30)$ (0.13)
Weighted average number of shares outstanding (in thousands) (note 11)
Basic and diluted31,98331,235
The accompanying notes are an integral part of the consolidated financial statements.
3
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands of U.S. dollars)
(unaudited)
Common Stock Treasury Shares
# of shares
$
# of shares
$
Additional
paid-in
capital
Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss) Total
Balance as at December 31, 2013 31,097,844 $ 329,628 507,147 $ (5,137) $ 25,996 $ 19,367 $ (6,858) $ 362,996
Stock option exercises 686,384 9,236 — — (2,832 ) — — 6,404
Stock-based compensation — — — — 9,404 — — 9,404
Purchase of treasury shares for RSU
distribution — — 311,333 (5,955) — — — (5,955)
Distribution of vested RSUs 84,313 776 (475,835) 4,856 (7,035 ) — — (1,403)
Excess tax benefits from equity awards — — — — 1,376 — — 1,376
Net loss — — — — — (16,853) — (16,853)
Foreign currency translation adjustments,
net of tax
— — — — — — 893 893
Balance as at December 31, 2014 31,868,541 $ 339,640 342,645 $ (6,236) $ 26,909 $ 2,514 $ (5,965) $ 356,862
Stock option exercises (note 9) 186,285 3,041 — — (896) — — 2,145
Stock-based compensation (note 9) — — — — 2,297 — — 2,297
Purchase of treasury shares for RSU
distribution
— — 17,599 (797) — — — (797)
Distribution of vested RSUs 77,827 968 (356,054) 6,953 (9,663) — — (1,742)
Excess tax benefits from equity awards — — — — 1,670 — — 1,670
Net loss — — — — — (9,653) — (9,653)
Foreign currency translation
adjustments, net of tax
— — — — — — (3,518) (3,518)
Balance as at March 31, 2015 32,132,653 $ 343,649 4,190 $ (80) $ 20,317 $ (7,139) $ (9,483) $ 347,264
The accompanying notes are an integral part of the consolidated financial statements.
4
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
Three months ended March 31,
20152014
Cash flows provided by (used in):
Operating activities
Net loss$ (9,653)$ (4,005)
Items not requiring (providing) cash
Amortization5,1316,483
Stock-based compensation (note 9)2,2972,251
Deferred income taxes—2,966
Loss (gain) on disposal of property and equipment1(14)
Unrealized foreign exchange loss6,21914
Other(30)—
Changes in non-cash working capital
Accounts receivable(22,277)860
Inventories(2,594)139
Prepaid expenses and other1,6415,098
Accounts payable and accrued liabilities(3,143)(17,238)
Deferred revenue and credits45852
Cash flows used in operating activities(21,950)(3,394)
Investing activities
Additions to property and equipment(1,911)(1,430)
Proceeds from sale of property and equipment—37
Increase in intangible assets (233)(527)
Acquisition of Wireless Maingate, net of cash acquired (note 3)(88,449)—
Acquisition of In Motion Technology, net of cash acquired—(22,578)
Net change in short-term investments—2,470
Increase in other assets—(2,748)
Cash flows used in investing activities(90,593)(24,776)
Financing activities
Issuance of common shares2,1452,725
Purchase of treasury shares for RSU distribution(797)—
Taxes paid related to net settlement of equity awards(1,742)(501)
Excess tax benefits from equity awards1,670—
Decrease in other long-term obligations(74)(112)
Cash flows provided by (used in) financing activities1,2022,112
Effect of foreign exchange rate changes on cash and cash equivalents3,834(19)
Cash and cash equivalents, decrease in the period(107,507)(26,077)
Cash and cash equivalents, beginning of period207,062177,416
Cash and cash equivalents, end of period $ 99,555$ 151,339
The accompanying notes are an integral part of the consolidated financial statements.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
5
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (“U.S. GAAP”), on a basis consistent with those
followed in the December 31, 2014 audited annual consolidated financial statements. These unaudited
interim consolidated financial statements do not include all information and note disclosures required by
U.S. GAAP for annual financial statements, and therefore should be read in conjunction with the December
31, 2014 audited consolidated financial statements and the notes thereto. The accompanying interim
financial information reflects all adjustments, consisting of normal recurring adjustments, which, in the
opinion of management, are necessary for a fair presentation of results for the interim period.
Our consolidated financial statements include the accounts of Sierra Wireless, Inc. and its wholly-owned
subsidiaries from their respective dates of formation or acquisition. We have eliminated all significant
intercompany balances and transactions.
In these interim consolidated financial statements, unless otherwise indicated, all dollar amounts are
expressed in United States dollars (U.S. dollars). The term dollars and the symbol “$” refer to U.S. dollars.
2. SIGNIFICANT ACCOUNTING POLICIES
Changes in future accounting standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The update
is intended to clarify the principles of recognizing revenue, and to develop a common revenue standard for
U.S. GAAP and IFRS that would remove inconsistencies in revenue requirements, leading to improved
comparability of revenue recognition practices across entities and industries. ASC 606 contains a single
model that applies to contracts with customers and two approaches to recognizing revenue: at a point in
time or over time. The model features a contract-based five-step analysis of transactions to determine
whether, how much, and when revenue is recognized. New estimates and judgmental thresholds have
been introduced, which may affect the amount and/or timing of revenue recognized. The new standard is
effective for annual and interim financial statements for fiscal years beginning after December 15, 2016.
Early application is not permitted. We are in the process of evaluating the impact of this update and
cannot reasonably estimate the effect on our financial statements at this time. In April 2015, the FASB
proposed to defer the effective date of the new standard by one year.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to
Continue as a Going Concern. The update provides guidance about management's responsibility in
evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and
to provide related footnote disclosures. The new standard is effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Given our financial condition, we do not expect the update to have a significant impact on our disclosures.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing
Arrangement. The update provides accounting guidance for customers with cloud computing
arrangements. The standard is effective for interim and annual periods ending after December 15, 2015.
Early application is permitted. We are in the process of evaluating the potential impact of this update to
our consolidated financial statements.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
6
3. ACQUISITION OF WIRELESS MAINGATE AB
On January 16, 2015, we acquired all of the shares of Wireless Maingate AB ("Maingate") for cash
consideration of $91.6 million ($88.4 million, net of cash acquired). Maingate is a Sweden-based provider
of M2M connectivity and data management services.
We accounted for the transaction using the acquisition method and accordingly, the consideration has
been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of our
preliminary estimates of their respective fair values as at January 16, 2015. The excess of the purchase
price over the preliminary value assigned to the net assets acquired is recorded as goodwill.
The following table summarizes the amounts of the assets acquired and liabilities assumed at the
acquisition date:
$
Assets acquired
Cash3,139
Accounts receivable2,795
Prepaid and other assets270
Inventory75
Property and equipment275
Identifiable intangible assets50,231
Goodwill46,395
103,180
Liabilities assumed
Accounts payable and accrued liabilities4,437
Deferred revenue172
Deferred income tax6,983
Fair value of net assets acquired 91,588
The preliminary goodwill of $46.4 million resulting from the acquisition consists largely of the expectation
that the acquisition will further strengthen our Enterprise Solutions segment and offer us significantly
enhanced market position in Europe. Goodwill has been assigned to the Enterprise Solutions segment and
is not deductible for tax purposes.
The initial accounting for the business acquisition is preliminary as of the date of this report. The
aggregate fair value of the assets acquired and liabilities assumed are our best estimates based upon
certain valuations and analyses that have yet to be finalized and are subject to adjustments.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
7
The following table provides the components of the identifiable intangible assets acquired that are subject
to amortization:
Estimated
useful life $
Brand20 years 4,820
Customer relationships12 years 34,571
Existing technology4 years 3,411
In-process research and development8 years 7,429
50,231
The amount of revenue of Maingate included in our consolidated statements of operations from the
acquisition date, through the period ended March 31, 2015, was $3.4 million. The amount of earnings of
Maingate included in our consolidated statements of operations for the aforementioned period was $nil.
The following table presents the unaudited pro forma results for the three months ended March 31, 2015
and 2014. The unaudited pro forma financial information combines the results of operations of Sierra
Wireless, Inc. and Maingate as though the businesses had been combined as of the beginning of fiscal
2014. The pro forma financial information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the acquisition had taken place at
the beginning of fiscal 2014. The unaudited pro forma financial information presented includes
amortization charges for acquired tangible and intangible assets, and related tax effects.
Three months ended March 31,
20152014
Pro forma information
Revenue$ 151,124$ 126,089
Earnings (loss) from operations2,116(6,448)
Net loss(10,096)(3,819)
Basic and diluted loss per share (in dollars)$ (0.32)$ (0.12)
4. INVENTORIES
The components of inventories were as follows:
March 31, 2015December 31, 2014
Electronic components$ 10,445$ 5,608
Finished goods8,65911,837
$ 19,104$ 17,445
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
8
5. PREPAIDS AND OTHER
The components of prepaids and other were as follows:
March 31, 2015December 31, 2014
Inventory advances$ 323$ 639
Insurance and licenses1,3473,009
Other5,0374,178
$ 6,707$ 7,826
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
March 31, 2015December 31, 2014
Trade payables$ 70,098$ 75,452
Inventory commitment reserve1,6481,777
Accrued royalties19,18818,895
Accrued payroll and related liabilities11,57511,300
Taxes payable (including sales taxes)2,2674,742
Product warranties (note 12 (a)(ii))6,3645,951
Other11,02410,079
$ 122,164$ 128,196
7. LONG-TERM OBLIGATIONS
The components of long-term obligations were as follows:
March 31, 2015December 31, 2014
Accrued royalties$ 23,189$ 22,101
Other4,6754,507
$ 27,864$ 26,608
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
9
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss, net of taxes, were as follows:
March 31, 2015December 31, 2014
Release of foreign currency translation relating to acquisition
of non-controlling interest
$ 178$ 178
Translation adjustment related to change in functional
currency
(728)(728)
Foreign currency translation adjustments(8,933)(5,415)
$ (9,483)$ (5,965)
9. STOCK-BASED PAYMENTS
Stock-based compensation expense:
Three months ended March 31,
20152014
Cost of goods sold$ 231$ 124
Sales and marketing490448
Research and development358414
Administration1,2181,265
$ 2,297$ 2,251
Stock option plan$ 527$ 563
Restricted stock plan1,7701,688
$ 2,297$ 2,251
As at March 31, 2015, the unrecognized compensation expense related to non-vested stock options and
RSUs was $4,812 and $11,561 (2014 – $4,836 and $11,945), respectively, which is expected to be
recognized over weighted average periods of 2.9 and 1.6 years (2014 – 2.8 and 1.8 years), respectively.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
10
Stock option plan
The following table presents stock option activity for the period:
Three months ended March 31,
Number of Options
20152014
Outstanding, beginning of period1,144,0571,537,586
Granted200,975271,776
Exercised(186,285)(292,754)
Forfeited / expired(13,839)(2,313)
Outstanding, end of period1,144,9081,514,295
Exercisable, beginning of period337,469470,638
Exercisable, end of period315,140417,234
Under the terms of our Stock Option Plan (the “Plan”), our Board of Directors may grant options to
employees, officers and directors. The maximum number of shares available for issue under the Plan is
the lesser of 10% of the number of issued and outstanding common shares from time to time or 7,000,000
common shares. Based on the number of shares outstanding as at March 31, 2015, stock options
exercisable into 2,068,357 common shares are available for future allocation under the Plan.
The Plan provides that the exercise price of an option will be determined on the date of grant and will not
be less than the closing market price of our stock at that date. Options generally vest over four years, with
the first 25% vesting at the first anniversary date of the grant and the balance vesting in equal amounts at
the end of each month thereafter. We determine the expiry date of each option at the time it is granted,
which cannot be more than five years after the date of the grant.
The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of
the stock at the balance sheet date, or date of exercise, less the exercise price of the option. The
aggregate intrinsic value of stock options exercised in the three months ended March 31, 2015 was $4,637
(three months ended March 31, 2014 - $3,022).
The fair value of share options was estimated on the date of grant using the Black-Scholes op
model with the following assumptions:
Three months ended March 31,
20152014
Risk-free interest rate0.94%1.23%
Annual dividends per shareNil Nil
Expected stock price volatility44%46%
Expected option life (in years)4.04.0
Estimated forfeiture rate3.5%3.5%
Average fair value of options granted (in dollars)$11.34$7.03
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
11
There is no dividend yield because we do not pay, and do not plan to pay, cash dividends on our common
shares. The expected stock price volatility is based on the historical volatility of our average monthly stock
closing prices over a period equal to the expected life of each option grant. The risk-free interest rate is
based on yields from risk-free instruments with a term equal to the expected term of the options being
valued. The expected life of options represents the period of time that the options are expected to be
outstanding based on historical data of option holder exercise and termination behavior. We estimate
forfeitures at the time of grant and, if necessary, revise that estimate if actual forfeitures differ and adjust
stock-based compensation expense accordingly.
Restricted share plans
The following table summarizes the RSU activity for the period:
Three months ended March 31,
Number of RSUs
20152014
Outstanding, beginning of period1,161,7651,442,115
Granted213,781317,059
Vested / settled(483,788)(492,620)
Forfeited(5,267)—
Outstanding, end of period886,4911,266,554
Outstanding – vested and not settled103,60567,624
Outstanding – unvested782,8861,198,930
Outstanding, end of period886,4911,266,554
We have two market based restricted share unit plans: one for U.S. employees and one for all non-U.S.
employees, and a treasury based restricted share unit plan (collectively, the “RSPs”). The RSPs support our
growth and profitability objectives by providing long-term incentives to certain executives and other key
employees and also encourage our objective of employee share ownership through the granting of
restricted share units (“RSUs”). There is no exercise price or monetary payment required from the
employees upon the grant of an RSU or upon the subsequent delivery of our common shares (or, in certain
jurisdictions, cash in lieu at the option of the Company) to settle vested RSUs. The form and timing of
settlement is subject to local laws. With respect to the treasury based RSP, the maximum number of
common shares which the Company may issue from treasury is 1,000,000 common shares. With respect
to the two market based RSPs, independent trustees purchase Sierra Wireless common shares over the
facilities of the TSX and NASDAQ, which are used to settle vested RSUs. The existing trust funds are
variable interest entities and are included in these consolidated financial statements as treasury shares
held for RSU distribution.
Generally, RSUs vest over three years, in equal one-third amounts on each anniversary date of the date of
the grant. RSU grants to employees who are resident in France for French tax purposes will not vest before
the second anniversary from the date of grant, and any shares issued are subject to an additional two year
tax hold period.
The aggregate intrinsic value of RSUs that vested and settled in the three months ended March 31, 2015
was $16,714 (three months ended March 31, 2014 – $9,560).
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
12
RSUs are valued at the market price of the underlying securities on the grant date and the compensation
expense, based on the estimated number of awards expected to vest, is recognized on a straight-line basis
over the three-year vesting period. Grants to French employees are expensed over a two-year vesting
period.
10. FINANCIAL INSTRUMENTS
(a) Fair value presentation
An established fair value hierarchy requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the lowest level of input that is available and
significant to the fair value measurement. There are three levels of inputs that may be used to measure
fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and
liabilities, such as quoted prices for identical or similar assets or liabilities in markets that
are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 - Inputs that are generally unobservable and are supported by little or no market activity
and that are significant to the fair value determination of the assets or liabilities.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities and current portions of long-term liabilities, approximate their fair value due to the immediate or
short-term maturity of these financial instruments. Based on borrowing rates currently available to us for
loans with similar terms, the carrying values of our long-term liabilities approximate their fair values.
(b) Credit Facilities
We have a $10 million revolving term credit facility ("Revolving Facility") with Toronto Dominion Bank and
the Canadian Imperial Bank of Commerce expiring on October 31, 2015. The Revolving Facility is for
working capital requirements, is secured by a pledge against all of our assets, and is subject to borrowing
base limitations. As at March 31, 2015, there were no borrowings under the Revolving Facility.
(c) Letters of credit
We have access to a revolving standby letter of credit facility of $10 million from Toronto Dominion Bank.
The credit facility is used for the issuance of letters of credit for project related performance guarantees
and is guaranteed by Export Development Canada. As at March 31, 2015, there were no letters of credit
issued against the revolving standby letter of credit facility.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
13
11. EARNINGS (LOSS) PER SHARE
The following table provides the reconciliation between basic and diluted earnings (loss) per share:
Three months ended March 31,
20152014
Net loss$ (9,653)$ (4,005)
Weighted average shares used in computation of:
Basic31,98331,235
Assumed conversion——
Diluted31,98331,235
Basic and dilutive loss per share (in dollars):$ (0.30)$ (0.13)
As we incurred a loss, all unexercised equity awards were anti-dilutive and are excluded from the diluted
weighted average shares.
12. COMMITMENTS AND CONTINGENCIES
(a) Contingent liability on sale of products
(i) Under license agreements, we are committed to make royalty payments based on the sales of
products using certain technologies. We recognize royalty obligations as determinable in accordance
with agreement terms. Where agreements are not finalized, we have recognized our current best
estimate of the obligation. When the agreements are finalized, the estimate will be revised
accordingly.
(ii) We accrue product warranty costs to provide for the repair or replacement of defective products when
we sell the related products. Our accrual is based on an assessment of historical experience and on
management’s estimates. An analysis of changes in the liability for product warranties were as
follows:
Three months ended
March 31, 2015
Balance, beginning of period$ 5,951
Provisions1,189
Expenditures(776)
Balance, end of period$ 6,364
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
14
(b) Other commitments
We have entered into purchase commitments totaling approximately $91,586, net of related electronic
components inventory of $9,905 (December 31, 2014 – $85,192, net of electronic components inventory
of $5,079), with certain contract manufacturers under which we have committed to buy a minimum
amount of designated products between April 2015 and June 2015. In certain of these agreements, we
may be required to acquire and pay for such products up to the prescribed minimum or forecasted
purchases.
(c) Legal proceedings
We are from time to time involved in litigation, certain other claims and arbitration matters arising in the
ordinary course of our business. We accrue for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both
the determination of probability and the determination as to whether a loss is reasonably estimable.
These accruals are reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and technical experts and other information and events
pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of ASC
450, Contingencies) that the losses could exceed the amounts already accrued for those cases for which an
estimate can be made, management believes that the amount of any such additional loss would not be
material to our results of operations or financial condition.
In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature
and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the
company. There are many reasons why we cannot make these assessments, including, among others, one
or more of the following: in the early stage of a proceeding, the claimant is not required to specifically
identify the patent that has allegedly been infringed; damages sought that are unspecified, unsupportable,
unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the
facts that are in dispute (e.g., once a patent is identified, the analysis of the patent and a comparison to
the activities of the company is a labor-intensive and highly technical process); the difficulty of assessing
novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that
other parties may share in any ultimate liability; and the often slow pace of patent litigation.
We are required to apply judgment with respect to any potential loss or range of loss in connection with
litigation. While we believe we have meritorious defenses to the claims asserted against us in our
currently outstanding litigations, and intend to defend ourselves vigorously in all cases, in light of the
inherent uncertainties in litigation there can be no assurance that the ultimate resolution of these matters
will not significantly exceed the reserves currently accrued by us for those cases for which an estimate can
be made. Losses in connection with any litigation for which we are not presently able to reasonable
estimate any potential loss or range of loss could be material to our results of operations and financial
condition.
In February 2015, a patent holding company, Wetro Lan, filed a patent infringement lawsuit in the United
States District Court for the Eastern District of Texas, asserting patent infringement by us of one patent
that expired in 2012. The lawsuit makes certain allegations concerning our AirLink router products which
were sold prior to the patent’s expiry. The lawsuit is in the initial pleadings stage.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
15
In November 2013, we filed a complaint against Nokia Corporation ("Nokia") with the EU Commission for
breach of Article 102 of the European Union Treaty. The complaint alleged that Nokia abuses a dominant
position, discriminates, applies unfair royalties and wrongfully refuses to grant a license to Sierra Wireless
in the context of Nokia's essential patents licensing program. In March 2015, we withdrew our EU
Commission complaint, reserving our right to introduce a similar complaint in the future. We also believe
that Nokia violates Section 5 of the FTC Act (United States) and have sent a notice to the Federal Trade
Commission ("FTC") setting out these violations. On January 6, 2014, we received notice from the
International Chamber of Commerce ("ICC") of arbitration proceedings launched by Nokia against us, for
alleged unpaid royalties of approximately €32 million. Both parties in the arbitration have filed their
responses and the ICC has appointed an arbitrator. We believe Nokia's arbitration claims are without legal
merit, and we will defend the claims vigorously. Nonetheless, an unfavorable outcome could have a
material adverse effect on our operating results, liquidity or financial position.
In January 2012, a patent holding company, M2M Solutions LLC ("M2M"), filed a patent infringement
lawsuit in the United States District Court for the District of Delaware asserting patent infringement by us
and our competitors. The lawsuit makes certain allegations concerning the AirPrime embedded wireless
module products, related AirLink products and related services sold by us for use in M2M communication
applications. The lawsuit is in the discovery stage. The claim construction order has determined one of
the two patents-in-suit to be indefinite and therefore invalid. We anticipate that M2M will not proceed
with its infringement case against us, but will eventually appeal the claim construction order. M2M wishes
to proceed against other defendants in related cases involving the same patents with regard to its
infringement claims. We expect these trials to occur in early 2016. Any appeals from the claim
construction order may follow the disposition of these trials. In August 2014, M2M filed a second patent
infringement lawsuit against us in the same court with respect to a recently issued patent held by M2M,
which patent is a continuation of one of the patents-in-suit in the original lawsuit filed against us by M2M.
The lawsuit is in the scheduling stage and trial is anticipated to occur in late 2016.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect
on our operating results, liquidity or financial position, we believe the claims made in the foregoing legal
proceedings are without merit and intend to defend ourselves and our products vigorously in all cases.
IP Indemnification Claims
We have been notified by one or more of our customers in each of the following matters that we may have
an obligation to indemnify them in respect of the products we supply to them:
In May 2013, a patent holding company, Adaptix, Inc., filed a patent infringement lawsuit in the United
States District Court for the Eastern District of Texas against one of our customers asserting patent
infringement in relation to our customer’s products, which may include certain LTE products which utilize
modules sold to them by us. In March 2014, the lawsuit was transferred to the United States District Court
for the Northern District of California. The claim construction hearing is set for May 2015 and trial is set
for August 2016.
In February 2012, a patent holding company, Intellectual Ventures (comprised of Intellectual Ventures I LLC
and Intellectual Ventures II LLC), filed a patent infringement lawsuit in the United States District Court for
the District of Delaware against two of our customers asserting patent infringement in relation to several
of our customer's products and services, including the mobile hotspots sold to them by us prior to the
transfer of the AirCard business to Netgear. The lawsuit was split into several separate lawsuits and
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
16
amended complaints were filed in October 2013. We have intervened in two of the cases in defense of our
products with respect to four patents-in-suit alleged to relate to Wi-Fi standards. The lawsuits are in the
discovery stage. A claim construction order was issued in March 2015.
A patent holding company, Eon Corp. IP Holdings, LLC ("Eon"), filed a patent infringement lawsuit against
one of our customers in October 2010 in the United States District Court for the Eastern District of Texas,
which was subsequently transferred to the United States District Court for the Northern District of
California. The lawsuit involves assertions of patent infringement in relation to wireless modems sold to
our customer by us prior to the transfer of the AirCard business to Netgear. A claim construction order
was issued in July 2013, and the defendant's motion for summary judgment of non-infringement was
granted by the Court in March 2014. In March 2015, this judgment was affirmed by the United States
Court of Appeals for the Federal Circuit. Eon filed a patent litigation lawsuit against another of our former
AirCard customers in January 2012 in the United States District Court for the District of Puerto Rico
involving the same patent-in-suit in the California lawsuit plus three additional patents. This lawsuit was
transferred in part to the District of Delaware with respect to claims related to one of the four patents-in-
suit, which claims related to interactive television. The Delaware case has since been closed. The claim
construction order in the Puerto Rico case was issued in April 2014. The case was closed in September
2014 following the filing of a joint notice of stipulation of dismissal without prejudice.
Although there can be no assurance that an unfavorable outcome would not have a material adverse effect
on our operating results, liquidity or financial position, we believe the claims made in the foregoing legal
proceedings are without merit and intend to defend ourselves and our products vigorously in all cases.
We are engaged in certain other claims, legal actions and arbitration matters, all in the ordinary course of
business, and believe that the ultimate outcome of these claims, legal actions and arbitration matters will
not have a material adverse effect on our operating results, liquidity or financial position.
13. COMPARATIVE FIGURES
Certain comparative figures presented in the interim consolidated financial statements have been
reclassified to conform to the current period presentation.
SIERRA WIRELESS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where otherwise stated)
(unaudited)
17
14. SEGMENTED INFORMATION
OEM
Solutions
Enterprise
Solutions Total
Three months ended March 31, 2015
Revenue$ 133,040 $ 17,366 $ 150,406
Cost of goods sold93,079 8,491 101,570
Gross margin$ 39,961 $ 8,875 $ 48,836
Gross margin %30.0% 51.1% 32.5%
Expenses46,362
Earnings from operations$ 2,474
Three months ended March 31, 2014
Revenue $ 106,162 $ 15,001 $ 121,163
Cost of goods sold 75,634 6,932 82,566
Gross margin $ 30,528 $ 8,069 $ 38,597
Gross margin % 28.8% 53.8% 31.9%
Expenses 45,269
Loss from operations $ (6,672)
We sell certain products through resellers, original equipment manufacturers, and wireless service
providers who sell these products to end-users. We did not have any customers during the three months
ended March 31, 2015 that accounted for more than 10% of our revenue.
15. SUBSEQUENT EVENT
On May 7, 2015 we announced that we have entered into a definitive agreement to purchase substantially
all of the assets of Accel Networks LLC for $9.3 million in cash with contingent consideration for an
additional $1.5 million under a performance-based earnout formula. The transaction is expected to close in
June 2015.
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