Blackberry 2014 Annual Report Download - page 174

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Plaintiff filed a Notice of Appeal. The appeal was argued on November 7, 2013 with judgment reserved. Proceedings are
ongoing.
Between October and December 2013, several purported class action lawsuits and one individual lawsuit were filed against the
Company and certain of its former officers in various jurisdictions alleging that during the period from September 27, 2012
through September 20, 2013, the Company and certain of its officers made materially false and misleading statements
regarding the Company’s financial condition and business prospects and that certain of the Company’s financial statements
contain material misstatements. The individual lawsuit was voluntarily dismissed. The purported class action claims seek
unspecified damages. Motions for the appointment of Lead Plaintiff and counsel have been filed in the U.S. proceedings.
Proceedings are ongoing in all cases.
Market Risk of Financial Instruments
The Company is engaged in operating and financing activities that generate risk in three primary areas:
Foreign Exchange
The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency, the
U.S. dollar. The majority of the Company’s revenues in fiscal 2014 are transacted in U.S. dollars. 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 mainly of salaries, certain operating costs and manufacturing overhead are incurred primarily in
Canadian dollars. At March 1, 2014, approximately 35% of cash and cash equivalents, 26% of accounts receivables and 12% of
accounts payable are denominated in foreign currencies (March 2, 2013 – 19%, 29% and 5%, respectively). These foreign
currencies primarily include the Canadian dollar, Euro and British Pound. As part of its risk management strategy, the Company
maintains net monetary asset and/or liability balances in foreign currencies and engages in foreign currency hedging activities
using derivative financial instruments, including currency forward contracts and currency options. The Company does not use
derivative instruments for speculative purposes. The principal currencies hedged include the Canadian dollar, Euro and British
Pound.
The Company enters into forward and option contracts to hedge exposures relating to anticipated foreign currency 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 when the hedged exposure
affects income. Any ineffective portion of the derivative’s gain or loss is recognized in current period income. For the fiscal
year ended March 1, 2014, there was $4 million in realized losses on forward contracts which were ineffective upon maturity
(March 2, 2013 – $8 million in realized gains). As at March 1, 2014 and March 2, 2013, the outstanding derivatives designated
as cash flow hedges were considered to be fully effective. As at March 1, 2014, the net unrealized loss on these forward and
option contracts was approximately $8 million (March 2, 2013 – net unrealized losses of $8 million) and were recorded in other
current assets and accumulated other comprehensive income. Unrealized losses were recorded in accrued liabilities and
accumulated other comprehensive income.
The Company enters into forward and option 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; as a result, gains or losses are recognized in income each period, generally offsetting the
change in the U.S. dollar value of the hedged asset or liability. As at March 1, 2014, net unrealized losses (net of premium paid)
of $10 million were recorded (March 2, 2013 – net unrealized gains of $29 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.
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 has also issued the Debentures with a fixed interest rate. Consequently, the Company is exposed to interest rate
risk as a result of the long term of the Debentures. The fair value of the Debentures will fluctuate with changes in prevailing
interest rates. The Company does not currently utilize interest rate derivative instruments to hedge its investment portfolio.