(All amounts in U.S. dollars.
Per share information based on diluted
shares outstanding unless otherwise noted.)
TORONTO, July 24, 2014 /CNW/ - Celestica Inc. (NYSE, TSX:
CLS), a global leader in the delivery of end-to-end product
lifecycle solutions, today announced financial results for the
second quarter ended June 30,
2014.
Second Quarter 2014 Highlights
- Revenue: $1.472 billion, at the
high end of the range of our guidance of $1.375 to $1.475 billion (announced April 23, 2014), increased 12% sequentially
and decreased 2% compared to the second quarter of 2013
- IFRS EPS: $0.22 per share,
compared to $0.15 per share for the
second quarter of 2013
- Adjusted EPS (non-IFRS): $0.25
per share, within the range of our guidance of $0.20 to $0.26 per share (announced April 23, 2014), compared to $0.21 per share for the second quarter of
2013
- Operating margin (non-IFRS): 3.5%, compared to 2.9% for the
second quarter of 2013
- Repurchased and cancelled 2.6 million subordinate voting shares
for $27.1 million pursuant to a
previously disclosed program share repurchase (PSR) under our
Normal Course Issuer Bid (NCIB), which we pre-funded in
February 2014. Funded another
$17.0 million PSR in May 2014, pursuant to which 1.4 million
subordinate voting shares were repurchased for cancellation on
July 22, 2014
- Free cash flow (non-IFRS): $40.9
million, compared to $50.5
million for the second quarter of 2013
- Revenue dollars from our diversified end market grew 11% from
the second quarter of 2013 to represent 28% of total revenue, up
from 25% of total revenue for the second quarter of 2013
"Celestica delivered a solid second quarter with
revenue and adjusted earnings per share at the higher end
of our guidance driven primarily by demand strength from our
communications end market. As a result of our revenue growth,
strong operational performance and focus on continuous improvement,
we achieved sequential improvements in operating margin,
inventory turnover and free cash flow generation," said
Craig Muhlhauser, Celestica's
President and Chief Executive Officer. "As we look to the future,
we remain confident in our strategy and ability to further
accelerate our progress by leveraging our strong foundation of
innovation and operational excellence through continued investments
in people, capabilities, and technologies that will enable our
customers' success."
"In addition, we are pleased to announce our
intent to launch a normal course issuer bid this quarter based on
our confidence to consistently generate free cash flow for the
necessary investments to support our growth, while returning excess
capital to shareholders through share repurchases."
Second Quarter and Year-to-Date
Summary
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
Revenue (in
millions).............................................. |
$ |
1,495.1 |
|
|
$ |
1,471.5 |
|
|
$ |
2,867.5 |
|
|
$ |
2,783.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS net earnings (in
millions)(i).............................. |
$ |
28.0 |
|
|
$ |
40.9 |
|
|
$ |
38.5 |
|
|
$ |
78.2 |
|
IFRS
EPS(i)............................................................. |
$ |
0.15 |
|
|
$ |
0.22 |
|
|
$ |
0.21 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings (non-IFRS) (in
millions)(ii).... |
$ |
38.6 |
|
|
$ |
44.9 |
|
|
$ |
68.6 |
|
|
$ |
92.0 |
|
Adjusted EPS
(non-IFRS)(ii).................................... |
$ |
0.21 |
|
|
$ |
0.25 |
|
|
$ |
0.37 |
|
|
$ |
0.50 |
|
Non-IFRS return on invested capital
(ROIC)(ii)........ |
18.3 |
% |
|
19.0 |
% |
|
16.4 |
% |
|
17.7 |
% |
Non-IFRS operating
margin(ii).................................. |
2.9 |
% |
|
3.5 |
% |
|
2.7 |
% |
|
3.3 |
% |
i. |
International Financial Reporting
Standards (IFRS) net earnings for the second quarter of 2014
included
an aggregate charge of $0.04 (pre-tax) per share for employee
stock-based compensation expense and
amortization of intangible assets (excluding computer software).
This is within the range we provided on
April 23, 2014 of an aggregate charge of between $0.03 and
$0.07 per share for these items (see the
tables in Schedule 1 attached hereto for per-item charges). |
ii. |
Non-IFRS measures do not have any
standardized meaning prescribed by IFRS and therefore may not
be
comparable to similar measures presented by other public companies
that use IFRS or other generally
accepted accounting principles (GAAP). See "Non-IFRS Supplementary
Information" below for information
on our rationale for the use of non-IFRS measures, and Schedule 1
for, among other items, non-IFRS
measures included in this press release, as well as their
definitions, uses, and a reconciliation of non-IFRS
to IFRS measures (where a comparable IFRS measure exists). |
End Markets by Quarter as a Percentage of
Total Revenue
|
2013 |
|
2014 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
FY |
|
Q1 |
|
Q2 |
Communications................. |
40% |
|
42% |
|
45% |
|
41% |
|
42% |
|
40% |
|
40% |
Consumer........................... |
7% |
|
7% |
|
6% |
|
6% |
|
6% |
|
6% |
|
5% |
Diversified(i)........................ |
24% |
|
25% |
|
26% |
|
27% |
|
25% |
|
28% |
|
28% |
Servers............................... |
16% |
|
14% |
|
9% |
|
11% |
|
13% |
|
10% |
|
10% |
Storage............................... |
13% |
|
12% |
|
14% |
|
15% |
|
14% |
|
16% |
|
17% |
Revenue (in billions)........... |
$1.37 |
|
$1.50 |
|
$1.49 |
|
$1.44 |
|
$5.80 |
|
$1.31 |
|
$1.47 |
i. |
Our diversified end market is comprised of industrial,
aerospace and defense,
healthcare, solar, green technology, semiconductor equipment and
other. |
Expected Launch of a New NCIB
We expect to file with the Toronto Stock
Exchange (TSX) a notice of intention to commence a new NCIB during
the third quarter of 2014. If this notice is accepted by the TSX,
we expect to repurchase for cancellation, at our discretion during
the following 12 months, up to 10% of the public float (calculated
in accordance with the rules of the TSX) of our subordinate voting
shares in the open market or as otherwise permitted, subject to the
terms and limitations to be applicable to such NCIB.
Third Quarter 2014 Outlook
For the third quarter ending September 30, 2014, we anticipate revenue to
be in the range of $1.40 to $1.50
billion, and non-IFRS adjusted net earnings per share to be
in the range of $0.21 to $0.27. We
expect a negative $0.03 to $0.07 per
share (pre-tax) aggregate impact on net earnings on an IFRS basis
for employee stock-based compensation expense and amortization of
intangible assets (excluding computer software).
Second Quarter 2014 Webcast
Management will host its second quarter results
conference call today at 4:30 p.m. Eastern
Daylight Time. The webcast can be accessed at
www.celestica.com.
Non-IFRS Supplementary Information
In addition to disclosing detailed results in
accordance with IFRS, Celestica provides supplementary non-IFRS
measures to consider in evaluating the company's operating
performance. Management uses adjusted net earnings and other
non-IFRS measures to assess operating performance and the effective
use and allocation of resources; to provide more meaningful
period-to-period comparisons of operating results; to enhance
investors' understanding of the core operating results of
Celestica's business; and to set management incentive targets. We
believe investors use both IFRS and non-IFRS measures to assess
past, current and future decisions associated with our priorities
and our allocation of capital, as well as to analyze how businesses
operate in, or respond to, swings in economic cycles or to other
events that impact our core operations. See Schedule 1 -
Supplementary Non-IFRS Measures for, among other items, non-IFRS
measures provided herein, non-IFRS definitions, and a
reconciliation of non-IFRS to IFRS measures (where a comparable
IFRS measure exists).
About Celestica
Celestica is dedicated to delivering end-to-end
product lifecycle solutions to drive our customers' success.
Through our simplified global operations network and information
technology platform, we are solid partners who deliver informed,
flexible solutions that enable our customers to succeed in the
markets they serve. Committed to providing a truly differentiated
customer experience, our agile and adaptive employees share a proud
history of demonstrated expertise and creativity that provides our
customers with the ability to overcome complex challenges. For
further information about Celestica, visit our website at
www.celestica.com. Our securities filings can also be accessed at
www.sedar.com and www.sec.gov.
Safe Harbor and Fair Disclosure Statement
This news release contains forward-looking
statements related to our future growth; trends in the electronics
manufacturing services (EMS) industry; our financial or operational
results including our quarterly revenue and earnings guidance; the
impact of acquisitions and program wins or losses on our financial
results and working capital requirements; anticipated expenses,
charges, capital expenditures and/or benefits; our expected tax and
litigation outcomes; our cash flows, financial targets and
priorities; changes in our mix of revenue by end market; our
ability to diversify and grow our customer base and develop new
capabilities; the effect of the global economic environment on
customer demand; our expected filing of a notice of intention to
commence a new NCIB; and the number of subordinate voting shares
and price thereof we may repurchase under our current or any new
NCIB. Such forward-looking statements may, without limitation, be
preceded by, followed by, or include words such as "believes",
"expects", "anticipates", "estimates", "intends", "plans",
"continues", "project", "potential", "possible", "contemplate",
"seek", or similar expressions, or may employ such future or
conditional verbs as "may", "might", "will", "could", "should" or
"would", or may otherwise be indicated as forward-looking
statements by grammatical construction, phrasing or context.
For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the U.S. Private
Securities Litigation Reform Act of 1995 and applicable Canadian
securities laws.
Forward-looking statements are provided for
the purpose of assisting readers in understanding management's
current expectations and plans relating to the future. Readers are
cautioned that such information may not be appropriate for other
purposes. Forward-looking statements are not guarantees of future
performance and are subject to risks that could cause actual
results to differ materially from conclusions, forecasts or
projections expressed in such statements, including, among others,
risks related to: our customers' ability to compete and succeed in
the marketplace with the products we manufacture; price and other
competitive factors generally affecting the EMS industry; managing
our operations and our working capital performance during uncertain
economic conditions; responding to rapid changes in demand and
changes in our customers' outsourcing strategies, including the
insourcing of programs; customer concentration and the challenges
of diversifying our customer base and replacing revenue from lost
programs or customer disengagements; changing commodity, material
and component costs, as well as labor costs and conditions;
disruptions to our operations, or those of our customers, component
suppliers or logistics partners, including as a result of global or
local events outside our control; retaining or expanding our
business due to execution problems relating to the ramping of new
programs; delays in the delivery and availability of components,
services and materials; non-performance by counterparties; our
financial exposure to foreign currency volatility; our dependence
on industries affected by rapid technological change; managing our
global operations and supply chain; increasing income taxes,
increased levels and scrutiny of tax audits globally, and defending
our tax positions or meeting the conditions of tax incentives and
credits; completing any restructuring actions and integrating
any acquisitions; computer viruses, malware, hacking attempts or
outages that may disrupt our operations; any U.S. government
shutdown or delay in the increase of the U.S. government debt
ceiling; compliance with applicable laws, regulations and social
responsibility initiatives; and the TSX not accepting our notice of
intention to commence a new NCIB. These and other material risks
and uncertainties are discussed in our public filings at
www.sedar.com and www.sec.gov, including in our MD&A, our
Annual Report on Form 20-F and subsequent reports on Form 6-K filed
with the U.S. Securities and Exchange Commission, and our Annual
Information Form filed with the Canadian Securities
Administrators.
Our revenue, earnings and other financial
guidance, as contained in this press release, are based on various
assumptions many of which involve factors that are beyond our
control. The material assumptions include those related to the
following: production schedules from our customers, which generally
range from 30 to 90 days and can fluctuate significantly in terms
of volume and mix of products or services; the timing and execution
of, and investments associated with, ramping new business; the
success in the marketplace of our customers' products; the
stability of general economic and market conditions, currency
exchange rates, and interest rates; our pricing, the competitive
environment and contract terms and conditions; supplier
performance, pricing and terms; compliance by third parties with
their contractual obligations, the accuracy of their
representations and warranties, and the performance of their
covenants; components, materials, services, plant and capital
equipment, labor, energy and transportation costs and availability;
operational and financial matters including the extent, timing and
costs of replacing revenue from lost programs or customer
disengagements; technological developments; overall demand
improvement in the semiconductor industry, and revenue growth and
improved profitability in our semiconductor business; the timing
and execution of any restructuring actions; and our ability to
diversify our customer base and develop new capabilities. While
management believes these assumptions to be reasonable under the
current circumstances, they may prove to be inaccurate. Except as
required by applicable law, we disclaim any intention or obligation
to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
All forward-looking statements attributable
to us are expressly qualified by these cautionary
statements.
Schedule 1
Supplementary Non-IFRS Measures
Our non-IFRS measures herein include adjusted
gross profit, adjusted gross margin (adjusted gross profit as a
percentage of revenue), adjusted selling, general and
administrative expenses (SG&A), adjusted SG&A as a
percentage of revenue, operating earnings (adjusted EBIAT),
operating margin (adjusted EBIAT as a percentage of revenue),
adjusted net earnings, adjusted net earnings per share, net
invested capital, return on invested capital (ROIC), and free cash
flow. Adjusted EBIAT, net invested capital, ROIC and free cash flow
are further described in the tables below. In calculating these
non-IFRS financial measures, management excludes the following
items, as applicable: employee stock-based compensation expense,
amortization of intangible assets (excluding computer software),
restructuring and other charges, net of recoveries (most
significantly restructuring charges), the write-down of goodwill,
intangible assets and property, plant and equipment, and gains or
losses related to the repurchase of shares or debt, net of tax
adjustments and significant deferred tax write-offs or recoveries
associated with restructuring actions or restructured sites.
We believe the non-IFRS measures we present
herein are useful, as they enable investors to evaluate and compare
our results from operations and cash resources generated from our
business in a more consistent manner (by excluding specific items
that we do not consider to be reflective of our ongoing operating
results) and provide an analysis of operating results using the
same measures our chief operating decision makers use to measure
performance. The non-IFRS financial measures that can be reconciled
to IFRS measures result largely from management's determination
that the facts and circumstances surrounding the excluded charges
or recoveries are not indicative of the ordinary course of our
ongoing operation of our business.
Non-IFRS measures do not have any standardized
meaning prescribed by IFRS and may not be comparable to similar
measures presented by other public companies that use IFRS, or who
report under U.S. GAAP and use non-U.S. GAAP measures to describe
similar operating metrics. Non-IFRS measures are not measures of
performance under IFRS and should not be considered in isolation or
as a substitute for any standardized measure under IFRS. The most
significant limitation to management's use of non-IFRS financial
measures is that the charges or credits excluded from the non-IFRS
measures are nonetheless charges or credits that are recognized
under IFRS and that have an economic impact on the company.
Management compensates for these limitations primarily by issuing
IFRS results to show a complete picture of the company's
performance, and reconciling non-IFRS results back to IFRS where a
comparable IFRS measure exists.
The economic substance of these exclusions and
management's rationale for excluding these from non-IFRS financial
measures is provided below:
Employee stock-based compensation expense, which
represents the estimated fair value of stock options, restricted
share units and performance share units granted to employees, is
excluded because grant activities vary significantly from
quarter-to-quarter in both quantity and fair value. In addition,
excluding this expense allows us to better compare core operating
results with those of our competitors who also generally exclude
employee stock-based compensation expense from their core operating
results, who may have different granting patterns and types of
equity awards, and who may use different valuation assumptions than
we do, including those competitors who use U.S. GAAP and non-U.S.
GAAP measures to present similar metrics.
Amortization charges (excluding computer
software) consist of non-cash charges against intangible assets
that are impacted by the timing and magnitude of acquired
businesses. Amortization of intangible assets varies among our
competitors, and we believe that excluding these charges permits a
better comparison of core operating results with those of our
competitors who also generally exclude amortization charges.
Restructuring and other charges, net of
recoveries, include costs relating to employee severance, lease
terminations, facility closings and consolidations, write-downs of
owned property and equipment which are no longer used and are
available for sale, reductions in infrastructure and
acquisition-related transaction costs. We exclude restructuring and
other charges, net of recoveries, because we believe that they are
not directly related to ongoing operating results and do not
reflect expected future operating expenses after completion of
these activities. We believe these exclusions permit a better
comparison of our core operating results with those of our
competitors who also generally exclude these charges, net of
recoveries, in assessing operating performance.
Impairment charges, which consist of non-cash
charges against goodwill, intangible assets and property, plant and
equipment, result primarily when the carrying value of these assets
exceeds their recoverable amount. Our competitors may record
impairment charges at different times. We believe that excluding
these charges permits a better comparison of our core operating
results with those of our competitors who also generally exclude
these charges in assessing operating performance.
Gains or losses related to the repurchase of
shares or debt are excluded as these gains or losses do not impact
core operating performance and vary significantly among those of
our competitors who also generally exclude these charges or
recoveries in assessing operating performance.
Significant deferred tax write-offs or
recoveries associated with restructuring actions or restructured
sites are excluded as these write-offs or recoveries do not impact
core operating performance and vary significantly among those of
our competitors who also generally exclude these charges or
recoveries in assessing operating performance.
The following table sets forth, for the periods
indicated, the various non-IFRS measures discussed above, and a
reconciliation of IFRS to non-IFRS measures, where a comparable
IFRS measure exists (in millions, except percentages and per
share amounts):
|
Three
months ended June 30 |
|
Six
months ended June 30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
|
|
% of
revenue |
|
|
|
% of
revenue |
|
|
|
% of
revenue |
|
|
|
% of
revenue |
IFRS
Revenue.................................................................................... |
$ |
1,495.1 |
|
|
|
$ |
1,471.5 |
|
|
|
$ |
2,867.5 |
|
|
|
$ |
2,783.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS gross
profit............................................................................... |
$ |
95.8 |
|
6.4% |
|
$ |
104.9 |
|
7.1% |
|
$ |
182.6 |
|
6.4% |
|
$ |
195.3 |
|
7.0% |
|
Employee stock-based compensation
expense................................. |
3.2 |
|
|
|
3.1 |
|
|
|
6.3 |
|
|
|
7.3 |
|
|
Non-IFRS adjusted gross
profit...................................................... |
$ |
99.0 |
|
6.6% |
|
$ |
108.0 |
|
7.3% |
|
$ |
188.9 |
|
6.6% |
|
$ |
202.6 |
|
7.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS
SG&A.......................................................................................... |
$ |
52.6 |
|
3.5% |
|
$ |
53.6 |
|
3.6% |
|
$ |
109.3 |
|
3.8% |
|
$ |
108.6 |
|
3.9% |
|
Employee stock-based compensation
expense................................. |
(3.4) |
|
|
|
(3.3) |
|
|
|
(9.8) |
|
|
|
(10.0) |
|
|
Non-IFRS adjusted
SG&A................................................................. |
$ |
49.2 |
|
3.3% |
|
$ |
50.3 |
|
3.4% |
|
$ |
99.5 |
|
3.5% |
|
$ |
98.6 |
|
3.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS earnings before income
taxes............................................... |
$ |
31.3 |
|
|
|
$ |
46.0 |
|
|
|
$ |
46.7 |
|
|
|
$ |
76.7 |
|
|
|
Finance
costs.................................................................................... |
0.7 |
|
|
|
0.9 |
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
Employee stock-based compensation
expense.................................. |
6.6 |
|
|
|
6.4 |
|
|
|
16.1 |
|
|
|
17.3 |
|
|
|
Amortization of intangible assets (excluding
computer software)........ |
1.6 |
|
|
|
1.6 |
|
|
|
3.3 |
|
|
|
3.2 |
|
|
|
Restructuring and other charges
(recoveries)................................... |
3.4 |
|
|
|
(3.9) |
|
|
|
10.7 |
|
|
|
(6.4) |
|
|
Non-IFRS operating earnings
(adjusted EBIAT) (1)....................... |
$ |
43.6 |
|
2.9% |
|
$ |
51.0 |
|
3.5% |
|
$ |
78.3 |
|
2.7% |
|
$ |
92.2 |
|
3.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS net
earnings............................................................................. |
$ |
28.0 |
|
1.9% |
|
$ |
40.9 |
|
2.8% |
|
$ |
38.5 |
|
1.3% |
|
$ |
78.2 |
|
2.8% |
|
Employee stock-based compensation
expense.................................. |
6.6 |
|
|
|
6.4 |
|
|
|
16.1 |
|
|
|
17.3 |
|
|
|
Amortization of intangible assets (excluding
computer software)......... |
1.6 |
|
|
|
1.6 |
|
|
|
3.3 |
|
|
|
3.2 |
|
|
|
Restructuring and other charges
(recoveries)..................................... |
3.4 |
|
|
|
(3.9) |
|
|
|
10.7 |
|
|
|
(6.4) |
|
|
|
Adjustments for taxes
(2)..................................................................... |
(1.0) |
|
|
|
(0.1) |
|
|
|
— |
|
|
|
(0.3) |
|
|
Non-IFRS adjusted net
earnings...................................................... |
$ |
38.6 |
|
|
|
$ |
44.9 |
|
|
|
$ |
68.6 |
|
|
|
$ |
92.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS.......................................................................................... |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average # of shares (in
millions).......................................... |
185.9 |
|
|
|
182.0 |
|
|
|
185.3 |
|
|
|
182.2 |
|
|
|
IFRS earnings per
share...................................................................... |
$ |
0.15 |
|
|
|
$ |
0.22 |
|
|
|
$ |
0.21 |
|
|
|
$ |
0.43 |
|
|
|
Non-IFRS adjusted net earnings per
share.......................................... |
$ |
0.21 |
|
|
|
$ |
0.25 |
|
|
|
$ |
0.37 |
|
|
|
$ |
0.50 |
|
|
|
# of shares outstanding at period end (in
millions).............................. |
184.3 |
|
|
|
178.8 |
|
|
|
184.3 |
|
|
|
178.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS cash provided by
operations................................................... |
$ |
64.6 |
|
|
|
$ |
62.2 |
|
|
|
$ |
87.9 |
|
|
|
$ |
60.4 |
|
|
|
Purchase of property, plant and equipment, net of
sales proceeds..... |
(13.4) |
|
|
|
(20.7) |
|
|
|
(22.4) |
|
|
|
(34.5) |
|
|
|
Finance costs
paid............................................................................... |
(0.7) |
|
|
|
(0.6) |
|
|
|
(1.5) |
|
|
|
(1.2) |
|
|
Non-IFRS free cash flow
(3)............................................................... |
$ |
50.5 |
|
|
|
$ |
40.9 |
|
|
|
$ |
64.0 |
|
|
|
$ |
24.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-IFRS ROIC %
(4)........................................................................... |
18.3 |
% |
|
|
19.0 |
% |
|
|
16.4 |
% |
|
|
17.7 |
% |
|
(1) |
Management uses non-IFRS adjusted EBIAT as a measure to assess
our operational performance related to our core operations.
Non-IFRS adjusted EBIAT is defined as
earnings before finance costs (consisting of interest and fees
related to our credit facilities and accounts receivable sales
program), amortization of intangible assets
(excluding computer software) and income taxes. Non-IFRS
adjusted EBIAT also excludes, in periods where such charges have
been recorded, employee stock-based
compensation expense, restructuring and other charges (net of
recoveries), gains or losses related to the repurchase of shares or
debt, and impairment charges. |
(2) |
The adjustments for taxes, as applicable, represent the tax
effects on the non-IFRS adjustments and significant deferred tax
write-offs or recoveries associated with
restructuring actions or restructured sites that we believe do not
impact our core operating performance. |
(3) |
Management uses non-IFRS free cash flow as a measure, in
addition to IFRS cash flow from operations, to assess our
operational cash flow performance. We believe
non-IFRS free cash flow provides another level of transparency to
our liquidity. Non-IFRS free cash flow is defined as cash generated
from or used in operating activities
after the purchase of property, plant and equipment (net of
proceeds from sale of certain surplus equipment and property) and
finance costs paid. |
(4) |
Management uses non-IFRS ROIC as a measure to assess the
effectiveness of the invested capital we use to build products or
provide services to our customers. Our
non-IFRS ROIC measure includes non-IFRS operating margin, working
capital management and asset utilization. Non-IFRS ROIC is
calculated by dividing non-IFRS
adjusted EBIAT by average non-IFRS net invested capital. Net
invested capital (calculated in the table below) is a non-IFRS
measure and consists of the following IFRS
measures: total assets less cash, accounts payable, accrued and
other current liabilities and provisions, and income taxes payable.
We use a two-point average to
calculate average net invested capital for the quarter and a
three-point average to calculate average net invested capital for
the six-month period. There is no
comparable measure under IFRS. |
The following table sets forth, for the periods
indicated, our calculation of non-IFRS ROIC % (in millions,
except ROIC %):
|
Three months ended June 30 |
|
Six
months ended June 30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Non-IFRS operating earnings (adjusted
EBIAT)............................................ |
$ |
43.6 |
|
|
$ |
51.0 |
|
|
$ |
78.3 |
|
|
$ |
92.2 |
|
Multiplier........................................................................................................ |
4 |
|
|
4 |
|
|
2 |
|
|
2 |
|
Annualized non-IFRS adjusted
EBIAT........................................................... |
$ |
174.4 |
|
|
$ |
204.0 |
|
|
$ |
156.6 |
|
|
$ |
184.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-IFRS net invested capital
for the period................................... |
$ |
951.8 |
|
|
$ |
1,071.4 |
|
|
$ |
956.0 |
|
|
$ |
1,042.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-IFRS ROIC %
(1).................................................................................... |
18.3 |
% |
|
19.0 |
% |
|
16.4 |
% |
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2013 |
|
March
31
2014 |
|
June
30
2014 |
Non-IFRS net invested capital consists
of: |
|
|
|
|
|
|
|
|
|
|
|
Total
assets................................................................................................... |
|
|
|
$ |
2,638.9 |
|
|
$ |
2,590.7 |
|
|
$ |
2,673.3 |
|
Less:
cash..................................................................................................... |
|
|
|
544.3 |
|
|
489.2 |
|
|
519.1 |
|
Less: accounts
payable, accrued and other current liabilities, provisions and |
|
|
|
|
|
|
|
|
|
|
|
|
income taxes
payable................................................................................. |
|
|
|
1,109.2 |
|
|
1,035.7 |
|
|
1,077.2 |
|
Non-IFRS net invested capital at
period end
(1)............................................ |
|
|
|
$ |
985.4 |
|
|
$ |
1,065.8 |
|
|
$ |
1,077.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2012 |
|
March
31
2013 |
|
June
30
2013 |
Non-IFRS net invested capital consists
of: |
|
|
|
|
|
|
|
|
|
|
|
Total
assets................................................................................................... |
|
|
|
$ |
2,658.8 |
|
|
$ |
2,643.4 |
|
|
$ |
2,705.5 |
|
Less:
cash..................................................................................................... |
|
|
|
550.5 |
|
|
531.3 |
|
|
553.5 |
|
Less: accounts
payable, accrued and other current liabilities, provisions and |
|
|
|
|
|
|
|
|
|
|
|
|
income taxes
payable................................................................................. |
|
|
|
1,143.9 |
|
|
1,145.7 |
|
|
1,214.8 |
|
Non-IFRS net invested capital at
period end
(1)............................................ |
|
|
|
$ |
964.4 |
|
|
$ |
966.4 |
|
|
$ |
937.2 |
|
(1) |
Management uses non-IFRS ROIC as a measure to assess the
effectiveness of the invested capital we use to build products or
provide
services to our customers. Our non-IFRS ROIC measure includes
non-IFRS operating margin, working capital management and asset
utilization. Non-IFRS ROIC is calculated by dividing non-IFRS
adjusted EBIAT by average non-IFRS net invested capital. Net
invested
capital is a non-IFRS measure and consists of the following IFRS
measures: total assets less cash, accounts payable, accrued and
other current liabilities and provisions, and income taxes payable.
We use a two-point average to calculate average net invested
capital for the quarter and a three-point average to calculate
average net invested capital for the six-month period. There is
no
comparable measure under IFRS. |
GUIDANCE SUMMARY
|
Q2
2014 Guidance |
|
Q2
2014 Actual |
|
Q3
2014 Guidance (1) |
IFRS revenue
(in billions)........................ |
$1.375 to $1.475 |
|
$1.472 |
|
$1.40 to $1.50 |
Non-IFRS adjusted EPS
(diluted)............ |
$0.20 to $0.26 |
|
$0.25 |
|
$0.21 to $0.27 |
(1) |
We expect a negative $0.03 to $0.07 per share (pre-tax)
aggregate impact on net earnings on an IFRS
basis for employee stock-based compensation expense and
amortization of intangible assets (excluding
computer software). |
CELESTICA INC. |
|
CONDENSED CONSOLIDATED BALANCE
SHEET
(in millions of U.S. dollars)
(unaudited) |
|
|
December 31
2013 |
|
June
30
2014 |
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents (note
10).......................................... |
$ |
544.3 |
|
|
$ |
519.1 |
|
|
Accounts receivable (note
4)....................................................... |
654.1 |
|
|
740.8 |
|
|
Inventories
(note 5)...................................................................... |
817.2 |
|
|
781.9 |
|
|
Income taxes
receivable............................................................... |
13.6 |
|
|
12.5 |
|
|
Assets classified as
held-for-sale................................................. |
30.2 |
|
|
29.9 |
|
|
Other current
assets.................................................................... |
61.1 |
|
|
63.0 |
|
Total current
assets......................................................................... |
2,120.5 |
|
|
2,147.2 |
|
|
|
|
|
|
|
Property, plant and
equipment........................................................ |
313.6 |
|
|
318.1 |
|
Goodwill........................................................................................... |
60.3 |
|
|
60.3 |
|
Intangible
assets............................................................................. |
44.2 |
|
|
39.9 |
|
Deferred income
taxes.................................................................... |
45.3 |
|
|
44.1 |
|
Other non-current
assets................................................................ |
55.0 |
|
|
63.7 |
|
Total
assets..................................................................................... |
$ |
2,638.9 |
|
|
$ |
2,673.3 |
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts
payable...................................................................... |
$ |
770.7 |
|
|
$ |
806.2 |
|
|
Accrued and other current
liabilities........................................... |
274.5 |
|
|
232.4 |
|
|
Income taxes
payable................................................................. |
30.6 |
|
|
12.4 |
|
|
Current portion of
provisions....................................................... |
33.4 |
|
|
26.2 |
|
Total current
liabilities........................................................................ |
1,109.2 |
|
|
1,077.2 |
|
|
|
|
|
|
|
Pension and non-pension
post-employment benefit obligations........ |
93.5 |
|
|
93.8 |
|
Provisions and other non-current
liabilities........................................ |
16.3 |
|
|
15.8 |
|
Deferred income
taxes....................................................................... |
17.9 |
|
|
17.9 |
|
Total
liabilities.................................................................................... |
1,236.9 |
|
|
1,204.7 |
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Capital stock
(note 7).................................................................. |
2,712.0 |
|
|
2,681.1 |
|
|
Treasury stock
(note 7)............................................................... |
(12.0) |
|
|
(1.3) |
|
|
Contributed
surplus..................................................................... |
681.7 |
|
|
679.9 |
|
|
Deficit.......................................................................................... |
(1,965.4) |
|
|
(1,887.2) |
|
|
Accumulated other comprehensive
loss....................................... |
(14.3) |
|
|
(3.9) |
|
Total
equity........................................................................................ |
1,402.0 |
|
|
1,468.6 |
|
Total liabilities and
equity................................................................... |
$ |
2,638.9 |
|
|
$ |
2,673.3 |
|
|
|
|
|
|
|
|
|
|
Contingencies (note 11)
Subsequent events (note 7) |
|
The accompanying
notes are an integral part of these unaudited interim condensed
consolidated financial statements. |
CELESTICA INC. |
|
CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
(in millions of U.S. dollars, except per share
amounts)
(unaudited) |
|
|
Three months ended |
|
Six months ended |
|
June
30 |
|
June
30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Revenue........................................................................... |
$ |
1,495.1 |
|
|
$ |
1,471.5 |
|
|
$ |
2,867.5 |
|
|
$ |
2,783.9 |
|
Cost of sales (note
5)....................................................... |
1,399.3 |
|
|
1,366.6 |
|
|
2,684.9 |
|
|
2,588.6 |
|
Gross
profit....................................................................... |
95.8 |
|
|
104.9 |
|
|
182.6 |
|
|
195.3 |
|
Selling, general and administrative
expenses (SG&A)....... |
52.6 |
|
|
53.6 |
|
|
109.3 |
|
|
108.6 |
|
Research and
development.............................................. |
4.5 |
|
|
5.6 |
|
|
7.7 |
|
|
9.5 |
|
Amortization of intangible
assets....................................... |
3.3 |
|
|
2.7 |
|
|
6.7 |
|
|
5.5 |
|
Other charges (recoveries)
(note 8)................................. |
3.4 |
|
|
(3.9) |
|
|
10.7 |
|
|
(6.4) |
|
Earnings from
operations................................................. |
32.0 |
|
|
46.9 |
|
|
48.2 |
|
|
78.1 |
|
Finance
costs................................................................... |
0.7 |
|
|
0.9 |
|
|
1.5 |
|
|
1.4 |
|
Earnings before income
taxes........................................... |
31.3 |
|
|
46.0 |
|
|
46.7 |
|
|
76.7 |
|
Income tax expense (recovery) (note
9): |
|
|
|
|
|
|
|
|
|
|
|
|
Current.......................................................................... |
4.1 |
|
|
7.7 |
|
|
10.2 |
|
|
(2.2) |
|
|
Deferred........................................................................ |
(0.8) |
|
|
(2.6) |
|
|
(2.0) |
|
|
0.7 |
|
|
3.3 |
|
|
5.1 |
|
|
8.2 |
|
|
(1.5) |
|
Net earnings for the
period............................................... |
$ |
28.0 |
|
|
$ |
40.9 |
|
|
$ |
38.5 |
|
|
$ |
78.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share.................................................. |
$ |
0.15 |
|
|
$ |
0.23 |
|
|
$ |
0.21 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share................................................ |
$ |
0.15 |
|
|
$ |
0.22 |
|
|
$ |
0.21 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing per share amounts (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic.............................................................................. |
184.2 |
|
|
179.6 |
|
|
183.8 |
|
|
180.2 |
|
|
Diluted............................................................................ |
185.9 |
|
|
182.0 |
|
|
185.3 |
|
|
182.2 |
|
|
|
The accompanying
notes are an integral part of these unaudited interim condensed
consolidated financial statements. |
CELESTICA INC. |
|
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
(in millions of U.S. dollars)
(unaudited) |
|
|
Three months ended |
|
Six months ended |
|
June
30 |
|
June
30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Net earnings for the
period................................................................. |
$ |
28.0 |
|
|
$ |
40.9 |
|
|
$ |
38.5 |
|
|
$ |
78.2 |
|
Other comprehensive income (loss), net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Items that may be reclassified to net
earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation differences for foreign
operations.................. |
(0.7) |
|
|
(0.3) |
|
|
(3.9) |
|
|
(0.4) |
|
|
|
Changes from derivatives designated as
hedges........................... |
(10.6) |
|
|
7.2 |
|
|
(8.6) |
|
|
10.8 |
|
Total comprehensive income for the
period........................................ |
$ |
16.7 |
|
|
$ |
47.8 |
|
|
$ |
26.0 |
|
|
$ |
88.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these unaudited interim condensed
consolidated financial statements. |
CELESTICA INC. |
|
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
(in millions of U.S. dollars)
(unaudited) |
|
|
Capital stock
(note 7) |
|
Treasury
stock (note 7) |
|
Contributed
surplus |
|
Deficit |
|
Accumulated
other
comprehensive
income (loss)
(a) |
|
Total equity |
Balance -- January 1,
2013.............................................................. |
$ |
2,774.7 |
|
|
$ |
(18.3) |
|
|
$ |
653.2 |
|
|
$ |
(2,091.0) |
|
|
$ |
4.1 |
|
|
$ |
1,322.7 |
|
Capital transactions (note
7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital
stock................................................................. |
13.0 |
|
|
— |
|
|
(8.6) |
|
|
— |
|
|
— |
|
|
4.4 |
|
|
Purchase of treasury
stock............................................................. |
— |
|
|
(10.4) |
|
|
— |
|
|
— |
|
|
— |
|
|
(10.4) |
|
|
Stock-based compensation and
other............................................. |
— |
|
|
16.7 |
|
|
0.5 |
|
|
— |
|
|
— |
|
|
17.2 |
|
Total comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the
period.............................................................. |
— |
|
|
— |
|
|
— |
|
|
38.5 |
|
|
— |
|
|
38.5 |
|
|
Other comprehensive income (loss), net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation differences for foreign
operations.................. |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3.9) |
|
|
(3.9) |
|
|
|
Changes from derivatives designated as
hedges........................... |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8.6) |
|
|
(8.6) |
|
Balance -- June 30,
2013................................................................... |
$ |
2,787.7 |
|
|
$ |
(12.0) |
|
|
$ |
645.1 |
|
|
$ |
(2,052.5) |
|
|
$ |
(8.4) |
|
|
$ |
1,359.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -- January 1,
2014................................................................ |
$ |
2,712.0 |
|
|
$ |
(12.0) |
|
|
$ |
681.7 |
|
|
$ |
(1,965.4 |
) |
|
$ |
(14.3) |
|
|
$ |
1,402.0 |
|
Capital transactions (note
7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital
stock................................................................... |
15.6 |
|
|
— |
|
|
(9.3) |
|
|
— |
|
|
— |
|
|
6.3 |
|
|
Repurchase of capital stock for
cancellation (b)............................... |
(46.5) |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
(46.4) |
|
|
Stock-based compensation and
other.............................................. |
— |
|
|
10.7 |
|
|
7.4 |
|
|
— |
|
|
— |
|
|
18.1 |
|
Total comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the
period.............................................................. |
— |
|
|
— |
|
|
— |
|
|
78.2 |
|
|
— |
|
|
78.2 |
|
|
Other comprehensive income (loss), net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation differences for foreign
operations................. |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.4) |
|
|
(0.4) |
|
|
|
Changes from derivatives designated as
hedges........................... |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10.8 |
|
|
10.8 |
|
Balance -- June 30,
2014................................................................... |
$ |
2,681.1 |
|
|
$ |
(1.3) |
|
|
$ |
679.9 |
|
|
$ |
(1,887.2) |
|
|
$ |
(3.9) |
|
|
$ |
1,468.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Accumulated other comprehensive income
(loss) is net of tax. |
|
(b) Includes $17.0 prepayment related to program
share repurchases. See note 7.
|
The accompanying notes are an
integral part of these unaudited interim condensed consolidated
financial statements. |
CELESTICA INC. |
|
CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(in millions of U.S. dollars)
(unaudited) |
|
|
Three months ended |
|
Six months ended |
|
June
30 |
|
June
30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Cash provided by (used
in): |
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the
period....................................................................................... |
$ |
28.0 |
|
|
$ |
40.9 |
|
|
$ |
38.5 |
|
|
$ |
78.2 |
|
Adjustments to net earnings for items
not affecting cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization................................................................................ |
18.7 |
|
|
16.8 |
|
|
37.6 |
|
|
33.6 |
|
|
Equity-settled stock-based
compensation............................................................... |
6.6 |
|
|
6.4 |
|
|
16.1 |
|
|
17.3 |
|
|
Other charges (recoveries) (note
8)....................................................................... |
0.6 |
|
|
— |
|
|
0.9 |
|
|
(0.1) |
|
|
Finance
costs.......................................................................................................... |
0.7 |
|
|
0.9 |
|
|
1.5 |
|
|
1.4 |
|
|
Income tax expense
(recovery)................................................................................ |
3.3 |
|
|
5.1 |
|
|
8.2 |
|
|
(1.5) |
|
Other......................................................................................................................... |
(0.8) |
|
|
(9.1) |
|
|
(1.4) |
|
|
(14.7) |
|
Changes in non-cash working capital
items: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable................................................................................................. |
7.2 |
|
|
(91.0) |
|
|
22.0 |
|
|
(86.7) |
|
|
Inventories................................................................................................................ |
(52.3) |
|
|
43.8 |
|
|
(95.4) |
|
|
35.3 |
|
|
Other current
assets................................................................................................. |
(7.3) |
|
|
1.7 |
|
|
5.6 |
|
|
3.4 |
|
|
Accounts payable, accrued and other current
liabilities and provisions.................... |
65.4 |
|
|
55.1 |
|
|
66.7 |
|
|
8.9 |
|
Non-cash working capital
changes............................................................................. |
13.0 |
|
|
9.6 |
|
|
(1.1) |
|
|
(39.1) |
|
Net income taxes
paid................................................................................................ |
(5.5) |
|
|
(8.4) |
|
|
(12.4) |
|
|
(14.7) |
|
Net cash provided by operating
activities.................................................................. |
64.6 |
|
|
62.2 |
|
|
87.9 |
|
|
60.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchase of computer software and
property, plant and equipment........................... |
(14.5) |
|
|
(20.9) |
|
|
(25.1) |
|
|
(35.0) |
|
Proceeds from sale of
assets..................................................................................... |
1.1 |
|
|
0.2 |
|
|
2.7 |
|
|
0.5 |
|
Net cash used in investing
activities........................................................................... |
(13.4) |
|
|
(20.7) |
|
|
(22.4) |
|
|
(34.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Repayments under credit facilities
(note
6)................................................................ |
(20.0) |
|
|
— |
|
|
(55.0) |
|
|
— |
|
Issuance of capital stock (note
7)............................................................................... |
1.7 |
|
|
6.0 |
|
|
4.4 |
|
|
6.3 |
|
Repurchase of capital stock for
cancellation (note
7)................................................ |
— |
|
|
(17.0) |
|
|
— |
|
|
(56.2) |
|
Purchase of treasury stock (note
7)........................................................................... |
(10.0) |
|
|
— |
|
|
(10.4) |
|
|
— |
|
Finance costs
paid..................................................................................................... |
(0.7) |
|
|
(0.6) |
|
|
(1.5) |
|
|
(1.2) |
|
Net cash used in financing
activities........................................................................... |
(29.0) |
|
|
(11.6) |
|
|
(62.5) |
|
|
(51.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash
equivalents.............................................. |
22.2 |
|
|
29.9 |
|
|
3.0 |
|
|
(25.2) |
|
Cash and cash equivalents, beginning
of
period........................................................ |
531.3 |
|
|
489.2 |
|
|
550.5 |
|
|
544.3 |
|
Cash and cash equivalents, end of
period................................................................. |
$ |
553.5 |
|
|
$ |
519.1 |
|
|
$ |
553.5 |
|
|
$ |
519.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these unaudited interim condensed consolidated
financial statements. |
CELESTICA INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share
amounts)
(unaudited)
1. REPORTING ENTITY
Celestica Inc. (Celestica) is incorporated in
Canada with its corporate
headquarters located at 844 Don Mills Road, Toronto, Ontario, M3C 1V7. Celestica's
subordinate voting shares are listed on the Toronto Stock Exchange
(TSX) and the New York Stock Exchange (NYSE).
Celestica delivers innovative supply chain
solutions globally to customers in the Communications (comprised of
enterprise communications and telecommunications), Consumer,
Diversified (comprised of industrial, aerospace and defense,
healthcare, solar, green technology, semiconductor equipment and
other), and Enterprise Computing (comprised of servers and storage)
end markets. Our product lifecycle offerings include a range of
services to our customers including design, engineering services,
supply chain management, new product introduction, component
sourcing, electronics manufacturing, assembly and test, complex
mechanical assembly, systems integration, precision machining,
order fulfillment, logistics and after-market repair and return
services.
2. BASIS OF PREPARATION AND SIGNIFICANT
ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated
financial statements have been prepared in accordance with
International Accounting Standard (IAS) 34, Interim Financial
Reporting, as issued by the International Accounting Standards
Board (IASB) and the accounting policies we have adopted in
accordance with International Financial Reporting Standards (IFRS).
These unaudited interim condensed consolidated financial statements
reflect all adjustments that are, in the opinion of management,
necessary to present fairly our financial position as at
June 30, 2014 and our financial
performance, comprehensive income and cash flows for the three and
six months ended June 30,
2014.
The unaudited interim condensed consolidated
financial statements were authorized for issuance by our board of
directors on July 24,
2014.
Functional and presentation
currency:
These unaudited interim condensed consolidated
financial statements are presented in U.S. dollars, which is also
our functional currency. Unless otherwise noted, all financial
information is presented in millions of U.S. dollars (except
percentages and per share amounts).
Use of estimates and
judgments:
The preparation of financial statements in
conformity with IFRS requires management to make judgments,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities,
revenue and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ materially from
these estimates and assumptions. We review our estimates and
underlying assumptions on an ongoing basis and make revisions as
determined necessary by management. Revisions are recognized in the
period in which the estimates are revised and may impact future
periods as well.
Key sources of estimation uncertainty and
judgment: We have applied significant estimates and assumptions
in the following areas which we believe could have a significant
impact on our reported results and financial position: our
valuations of inventory, assets held for sale and income taxes; the
amount of our restructuring charges or recoveries; the measurement
of the recoverable amount of our cash generating units (CGUs),
which we define as a group of assets that cannot be tested
individually and that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of
assets; our valuations of financial assets and liabilities, pension
and non-pension post-employment benefit costs, stock-based
compensation expense, provisions and contingencies; and the
allocation of the purchase price and other valuations in connection
with our business acquisitions. The near-term economic environment
could also impact certain estimates necessary to prepare our
consolidated financial statements, in particular, the recoverable
amount used in our impairment testing of our non-financial assets,
and the discount rates applied to our net pension and non-pension
post-employment benefit assets or liabilities.
We have also applied significant judgment in the
following areas: the determination of our CGUs and whether events
or changes in circumstances during the period are indicators that a
review for impairment should be conducted; and the timing of the
recognition of charges or recoveries associated with our
restructuring actions.
These unaudited interim condensed consolidated
financial statements are based upon accounting policies and
estimates consistent with those used and described in note 2 of our
2013 annual consolidated financial statements, except for the
recently adopted accounting pronouncements discussed below. There
have been no material changes to our significant accounting
estimates and assumptions or the judgments affecting the
application of such estimates and assumptions during the second
quarter of 2014 from those described in the notes to our 2013
annual consolidated financial statements.
Recently adopted accounting
pronouncements:
Effective January 1,
2014, we adopted IAS 32, Financial Instruments —
Presentation (revised) as issued by the IASB, which clarifies
the requirements for offsetting financial assets and liabilities.
The adoption of this standard did not have a material impact on our
unaudited interim condensed consolidated financial statements.
Effective January 1,
2014, we adopted IFRIC Interpretation 21, Levies as
issued by the IASB, which clarifies when the liability for certain
levies should be recognized and requires retroactive adoption. The
adoption of this standard did not have a material impact on our
unaudited interim condensed consolidated financial statements.
Recently issued accounting
pronouncements:
In May 2014, the
IASB issued IFRS 15, Revenue from Contracts with Customers,
which provides a single, principles-based five-step model for
revenue recognition to be applied to all customer contracts, and
requires enhanced disclosures. This standard is effective
January 1, 2017 and allows early
adoption. We do not intend to adopt this standard early and
are currently evaluating the impact of adopting this standard on
our consolidated financial statements.
3. SEGMENT AND CUSTOMER
REPORTING
End markets:
The following table indicates revenue by end
market as a percentage of total revenue for the periods indicated.
Our revenue fluctuates from period-to-period depending on numerous
factors, including but not limited to: the seasonality of our
business, the mix and complexity of the products or services we
provide, the extent, timing and rate of new program wins, follow-on
business or program losses, the phasing in or out of customer
programs, the success in the marketplace of our customers'
products, and changes in customer demand. We expect that the
pace of technological change, the frequency of customers
transferring business among EMS competitors and the level of
outsourcing by customers (including decisions to insource), and the
dynamics of the global economy will also continue to impact our
business from period-to-period.
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Communications........................ |
42% |
|
40% |
|
41% |
|
41% |
Consumer.................................. |
7% |
|
5% |
|
7% |
|
5% |
Diversified.................................. |
25% |
|
28% |
|
24% |
|
28% |
Servers...................................... |
14% |
|
10% |
|
15% |
|
10% |
Storage...................................... |
12% |
|
17% |
|
13% |
|
16% |
Customers:
For the second quarter and first half of 2014,
we had three customers that individually represented more than 10%
of total revenue (second quarter and first half of 2013 — one
customer).
4. ACCOUNTS RECEIVABLE
In November 2012,
we entered into an agreement to sell up to $375.0 at any one time in accounts receivable on
an uncommitted basis (subject to pre-determined limits by customer)
to two third-party banks. In November
2013, we amended the agreement to reduce the overall
capacity to $250.0 based upon our
annual review of our requirements under this agreement. Both banks
had a Standard and Poor's long-term rating of A and short-term
rating of A-1 at June 30, 2014.
This agreement can be terminated at any time by the banks or us. At
June 30, 2014, we had sold
$60.0 of accounts receivable under
this facility (December 31,
2013 — $50.0). The
accounts receivable sold are removed from our consolidated balance
sheet and reflected as cash provided by operating activities in our
consolidated statement of cash flows. Upon sale, we assign the
rights to the accounts receivable to the banks. We continue to
collect cash from our customers and remit the cash to the banks
when collected. We pay interest and fees which we record in finance
costs in our condensed consolidated statement of operations.
5. INVENTORIES
We record our inventory provisions and valuation
recoveries in cost of sales. We record inventory provisions to
reflect write-downs in the value of our inventory to net realizable
value, and valuation recoveries primarily to reflect realized gains
on the disposition of inventory previously written down to net
realizable value. We recorded net inventory provisions of
$2.3 and $4.8 for the second quarter and first half of
2014, respectively (second quarter and first half of 2013 —
$3.7 and $7.0, respectively). We regularly review our
estimates and assumptions used to value our inventory through
analysis of historical performance.
6. CREDIT FACILITIES
We have a $400.0 revolving credit facility that matures in
January 2015. We are
required to comply with certain restrictive covenants including
those relating to debt incurrence, the sale of assets, a change of
control and certain financial covenants related to indebtedness,
interest coverage and liquidity. Certain of our assets are pledged
as security for borrowings under this facility. The facility
includes a $25.0 swing line that
provides for short-term borrowings up to a maximum of seven days.
The credit facility permits us and certain designated subsidiaries
to borrow funds for general corporate purposes (including
acquisitions).
Borrowings under this facility bear interest for
the period of the draw at LIBOR or Prime rate plus a margin. These
borrowings have historically been outstanding for fewer than 90
days. In December 2012, we completed
a substantial issuer bid to repurchase for cancellation
$175.0 of our subordinate voting
shares, $55.0 of which were funded
through this credit facility which we repaid in the first half of
2013. At June 30, 2014, there
were no amounts outstanding under this facility (December 31, 2013 — no amounts outstanding),
and we were in compliance with all applicable restrictive and
financial covenants required by this facility. Commitment fees
paid in the second quarter and first half of 2014 were $0.5 and $1.0,
respectively. At June 30, 2014,
we had $35.3 (December 31, 2013 — $29.7) outstanding in letters of credit under
this facility.
We also have a total of $70.0 of uncommitted bank overdraft facilities
available for intraday and overnight operating
requirements. There were no amounts outstanding under these
overdraft facilities at June 30,
2014 (December 31, 2013 —
no amounts outstanding).
The amounts we borrow and repay under these
facilities can vary significantly from month-to-month depending
upon our working capital and other cash requirements.
7. CAPITAL STOCK
On August 2, 2013,
we received approval from the TSX to launch a new Normal Course
Issuer Bid (NCIB) (a previous NCIB expired on February 8, 2013). The current NCIB allows us to
repurchase, at our discretion, until the earlier of August 6, 2014 or the completion of purchases
under such NCIB, up to approximately 9.8 million subordinate voting
shares (representing approximately 5.3% of our total
then-outstanding subordinate voting shares and multiple voting
shares) in the open market, or as otherwise permitted, subject to
the normal terms and limitations of such bids. The maximum number
of subordinate voting shares we are permitted to repurchase for
cancellation under the current NCIB is reduced by the number of
subordinate voting shares we purchase for stock-based compensation
plans (since the commencement of the current NCIB, an aggregate of
0.3 million subordinate voting shares were purchased for this
purpose as of June 30, 2014).
During the first quarter of 2014, prior to entering into the first
program share repurchase (PSR) described below, we paid
$12.1 (including transaction fees) to
repurchase and cancel under the current NCIB 1.2 million
subordinate voting shares at a weighted average price of
$10.11 per share, including 0.9
million subordinate voting shares repurchased under a prior
Automatic Share Purchase Plan that expired in February 2014. During the first half of 2013, we
did not repurchase any subordinate voting shares for cancellation
under our previous NCIB.
In February 2014,
we received approval from the TSX to amend our current NCIB in
order to permit the repurchase of our subordinate voting shares
under one or more PSRs during the term of the current NCIB. Under
each PSR, the price and the number of subordinate voting shares to
be repurchased by us is determined based on a discount to the
volume weighted-average market price of our subordinate voting
shares during the term of such PSR, subject to certain terms and
conditions. The subordinate voting shares repurchased under each
PSR will be cancelled upon completion of such PSR, as part of our
current NCIB. We paid $27.1 to a
broker in February 2014 for the right
to receive a variable number of our subordinate voting shares upon
such PSR's completion. Pursuant to this PSR, which we completed on
May 23, 2014, we repurchased and
cancelled 2.6 million subordinate voting shares at a weighted
average price of $10.43 per share. In
May 2014, after the completion of the
initial PSR, we entered into a new PSR and paid $17.0 to a broker for the right to receive an
additional variable number of subordinate voting shares for
cancellation upon such PSR's completion. We completed this PSR on
July 22, 2014 pursuant to which 1.4
million subordinate voting shares were repurchased for cancellation
at a weighted average price of $12.17
per share. We recorded the $17.0
prepayment as a reduction to contributed surplus on our condensed
consolidated balance sheet in the second quarter of 2014.
We expect to file with the TSX a notice of
intention to commence a new NCIB during the third quarter of 2014.
If this notice is accepted by the TSX, we expect to repurchase for
cancellation, at our discretion during the following 12 months, up
to 10% of the public float (calculated in accordance with the rules
of the TSX) of our subordinate voting shares in the open market or
as otherwise permitted, subject to the terms and limitations to be
applicable to such NCIB.
We grant share unit awards to employees under
our stock-based compensation plans. We have the option to satisfy
the delivery of shares upon vesting of the awards by purchasing
subordinate voting shares in the open market or by settling in
cash. Under one of these plans, we also have the option to satisfy
the delivery of shares by issuing new subordinate voting shares
from treasury, subject to certain limits. From time-to-time, we pay
cash for the purchase by a trustee of subordinate voting shares in
the open market to satisfy the delivery of shares upon vesting of
awards. For accounting purposes, we classify these shares as
treasury stock until they are delivered pursuant to the plans.
During the second quarter and first half of 2014, we did not
purchase any subordinate voting shares in the open market for our
stock-based compensation plans. During the second quarter of 2013,
we paid $10.0, including transaction
fees, for the trustee's purchase of 1.05 million subordinate voting
shares in the open market for our stock-based compensation plans.
We also paid $0.4 (including
transaction fees) in the first quarter of 2013 for the same
purpose. At June 30, 2014, the
trustee held 0.1 million subordinate voting shares with a value of
$1.3. At December 31, 2013, the trustee held 1.3 million
subordinate voting shares with a value of $12.0.
The following table outlines the activities for
stock-based awards granted to employees (activities for deferred
share units (DSUs) issued to directors are excluded) for the six
months ended June 30, 2014:
Number of awards (in
millions) |
|
Options |
|
RSUs |
|
PSUs
(i) |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2013................................................................................... |
|
5.3 |
|
|
3.5 |
|
|
5.4 |
|
Granted
(i)......................................................................................................................... |
|
— |
|
|
2.1 |
|
|
2.6 |
|
Exercised or settled
(ii)...................................................................................................... |
|
(1.0) |
|
|
(1.4) |
|
|
(0.5) |
|
Forfeited/expired............................................................................................................... |
|
(0.6) |
|
|
(0.1) |
|
|
(1.2) |
|
Outstanding at June 30,
2014........................................................................................... |
|
3.7 |
|
|
4.1 |
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of options
and share units granted..................... |
|
$ |
— |
|
|
$ |
9.31 |
|
|
$ |
9.30 |
|
(i) |
During the first quarter of 2014, we granted 2.6 million (first
quarter of 2013 — 2.1 million) performance share units (PSUs),
of which 60% vest based on the achievement of a market performance
condition tied to Total Shareholder Return (TSR),
and the balance vest based on a non-market performance condition.
See note 2(n) of our 2013 annual consolidated financial
statements for a description of TSR. We estimated the grant date
fair value of the TSR-based PSUs using a Monte Carlo
simulation model. The grant date fair value of the non-TSR-based
PSUs is determined by the market value of our subordinate
voting shares at the time of grant and may be adjusted in
subsequent periods to reflect a change in the estimated level
of
achievement related to the applicable performance condition. We
expect to settle these awards with subordinate voting
shares purchased in the open market by a trustee. The number of
PSUs that will actually vest will vary from 0 to the amount
set forth in the table above depending on the achievement of
pre-determined performance goals and financial targets. |
(ii) |
During the second quarter and first half of 2014, we received
cash proceeds of $6.0 and $6.3, respectively (second quarter
and first half of 2013 — $1.7 and $4.4, respectively) relating to
the exercise of stock options granted to employees. |
At June 30,
2014, 1.0 million DSUs were outstanding and
fully vested.
For the second quarter and first half of 2014,
we recorded employee stock-based compensation expense (excluding
DSUs) of $6.4 and $17.3, respectively (second quarter and first
half of 2013 — $6.6 and $16.1, respectively), and DSU expense of
$0.5 and $1.0, respectively (second quarter and first half
of 2013 — $0.4 and $0.8, respectively). The amount of our employee
stock-based compensation expense varies from period-to-period. The
portion of our expense that relates to performance-based
compensation generally varies depending on the level of achievement
of pre-determined performance goals and financial targets.
8. OTHER CHARGES (RECOVERIES)
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Restructuring
(a)................................... |
$ |
3.4 |
|
|
$ |
0.3 |
|
|
$ |
10.7 |
|
|
$ |
0.3 |
|
Other
(b)................................................ |
— |
|
|
(4.2) |
|
|
— |
|
|
(6.7) |
|
|
$ |
3.4 |
|
|
$ |
(3.9) |
|
|
$ |
10.7 |
|
|
$ |
(6.4) |
|
(a) Restructuring:
Our net restructuring charges are comprised of the
following:
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
Cash
charges.......................................... |
$ |
2.8 |
|
|
$ |
0.3 |
|
|
$ |
9.8 |
|
|
$ |
0.4 |
|
Non-cash charges
(recoveries)............... |
0.6 |
|
|
— |
|
|
0.9 |
|
|
(0.1) |
|
|
$ |
3.4 |
|
|
$ |
0.3 |
|
|
$ |
10.7 |
|
|
$ |
0.3 |
|
Due to our disengagement from BlackBerry Limited
in 2012 and in response to a challenging demand environment, we
implemented restructuring actions during 2013 throughout our global
network intended to streamline and simplify our business and to
reduce our overall cost structure and improve margin performance.
Although these restructuring actions were completed by the end of
2013, certain payments in connection therewith are expected to be
made throughout 2014. At June 30,
2014, our remaining restructuring provision was $8.7 (December 31,
2013 — $18.0) comprised
primarily of employee termination costs and contractual lease
obligations.
The recognition of our restructuring charges
required us to make certain judgments and estimates regarding the
nature, timing and amounts associated with the restructuring
actions. Our major assumptions included the timing and number of
employees to be terminated, the measurement of termination costs,
and the timing of disposition and estimated fair values of assets
available for sale. We developed a detailed plan and recorded
termination costs for employees informed of their termination. We
engaged independent brokers to determine the estimated fair values
less costs to sell for assets we no longer used and which were
available for sale. We recognized an impairment loss for assets
whose carrying amount exceeded their respective fair value less
costs to sell as determined by the third-party brokers. We also
recorded adjustments to reflect actual proceeds on disposition of
these assets. At the end of each reporting period, we evaluate the
appropriateness of our restructuring charges and balances. Further
adjustments may be required to reflect actual experience or changes
in estimates.
(b) Other:
Other is comprised primarily of the recoveries
of damages we received in the second quarter and first half of 2014
in connection with the settlement of class action lawsuits in which
we were a plaintiff, related to certain purchases we made in prior
periods.
9. INCOME TAXES
Our effective income tax rate can vary
significantly quarter-to-quarter for various reasons, including the
mix and volume of business in lower tax jurisdictions within
Europe and Asia, in jurisdictions with tax holidays and
tax incentives, and in jurisdictions for which no deferred income
tax assets have been recognized because management believed it was
not probable that future taxable profit would be available against
which tax losses and deductible temporary differences could be
utilized. Our effective income tax rate can also vary due to
the impact of restructuring charges, foreign exchange fluctuations,
operating losses, and changes in our provisions related to tax
uncertainties.
During the first quarter of 2014, Malaysian
investment authorities concluded their evaluation, and approved our
request to revise certain required conditions related to income tax
incentives for one of our Malaysian subsidiaries. The benefits of
these tax incentives were not previously recognized, as prior to
this revision we had not anticipated meeting the required
conditions. As a result of this approval, we recognized an income
tax benefit of $14.1 in the first
quarter of 2014 relating to years 2010 through 2013.
See note 11 regarding income tax
contingencies.
10. FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT
Our financial assets are comprised primarily of
cash and cash equivalents, accounts receivable and derivatives used
for hedging purposes. Our financial liabilities are comprised
primarily of accounts payable, certain accrued and other
liabilities and provisions, and derivatives. We record the
majority of our financial liabilities at amortized cost except for
derivative liabilities, which we measure at fair value. We
classify our term deposits as held-to-maturity. We record our
short-term investments in money market funds at fair value, with
changes recognized in our consolidated statement of operations.
We classify the financial assets and liabilities
that we measure at fair value based on the inputs used to determine
fair value at the measurement date. See note 20 of our 2013 annual
consolidated financial statements for details of the input levels
used and our fair value hierarchy at December 31, 2013. There have been no significant
changes to the source of our inputs since December 31, 2013.
Cash and cash equivalents are comprised of the
following:
|
December 31
2013 |
|
June
30
2014 |
Cash................................................... |
$ |
294.3 |
|
|
$ |
337.5 |
|
Cash
equivalents................................ |
250.0 |
|
|
181.6 |
|
|
$ |
544.3 |
|
|
$ |
519.1 |
|
Our current portfolio consists of bank deposits
and certain money market funds that primarily hold U.S. government
securities. The majority of our cash and cash equivalents is held
with financial institutions each of which had at June 30, 2014 a Standard and Poor's
short-term rating of A-1 or above.
Currency risk:
Due to the global nature of our operations, we
are exposed to exchange rate fluctuations on our financial
instruments denominated in various currencies. The majority of our
currency risk is driven by the operational costs incurred in local
currencies by our subsidiaries. We manage our currency risk through
our hedging program using forecasts of future cash flows and
balance sheet exposures denominated in foreign
currencies.
Our major currency exposures at June 30, 2014 are summarized in U.S. dollar
equivalents in the following table. We have included in this table
only those items that we classify as financial assets or
liabilities and which were denominated in non-functional
currencies. In accordance with the IFRS financial instruments
standard, we have excluded items such as pension and non-pension
post-employment benefits and income taxes. The local currency
amounts have been converted to U.S. dollar equivalents using the
spot rates at June 30, 2014.
|
Canadian
dollar |
|
Euro |
|
Malaysian
ringgit |
|
Thai
baht |
Cash and cash
equivalents....................................................................................................... |
$ |
25.2 |
|
|
$ |
4.1 |
|
|
$ |
1.2 |
|
|
$ |
0.7 |
|
Account receivable and other
financial
assets.......................................................................... |
9.5 |
|
|
14.6 |
|
|
0.6 |
|
|
0.2 |
|
Accounts payable and certain accrued
and other liabilities and
provisions............................... |
(45.8) |
|
|
(8.4) |
|
|
(15.6) |
|
|
(14.1) |
|
Net financial assets
(liabilities)................................................................................................... |
$ |
(11.1) |
|
|
$ |
10.3 |
|
|
$ |
(13.8) |
|
|
$ |
(13.2) |
|
Foreign currency risk sensitivity
analysis:
The financial impact of a one-percentage point
strengthening or weakening of the following currencies against the
U.S. dollar for our financial instruments denominated in
non-functional currencies is summarized in the following table as
at June 30, 2014. The financial
instruments impacted by a change in exchange rates include our
exposures to the above financial assets or liabilities denominated
in non-functional currencies and our foreign exchange forward
contracts.
|
Canadian
dollar |
|
Euro |
|
Malaysian
ringgit |
|
Thai
baht |
|
Increase (decrease) |
1% Strengthening |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings.................................................... |
$ |
1.2 |
|
|
$ |
— |
|
|
$ |
(0.1 |
) |
|
$ |
— |
|
|
|
Other comprehensive
income......................... |
1.0 |
|
|
— |
|
|
0.8 |
|
|
1.2 |
|
1% Weakening |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings................................................... |
(1.2) |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
|
Other comprehensive
income......................... |
(1.0) |
|
|
— |
|
|
(0.8) |
|
|
(1.2) |
|
At June 30,
2014, we had forward exchange contracts to trade
U.S. dollars in exchange for the following currencies:
Currency |
Amount of
U.S. dollars |
|
Weighted
average
exchange rate in
U.S. dollars |
|
Maximum
period in
months |
|
Fair value
gain (loss) |
Canadian
dollar................................................... |
$ |
245.1 |
|
|
$ |
0.92 |
|
|
15 |
|
$ |
3.5 |
|
Thai
baht............................................................. |
141.5 |
|
|
0.03 |
|
|
15 |
|
(1.5) |
|
Malaysian
ringgit.................................................. |
116.1 |
|
|
0.31 |
|
|
15 |
|
0.3 |
|
Mexican
peso....................................................... |
24.8 |
|
|
0.08 |
|
|
12 |
|
0.4 |
|
British
pound........................................................ |
91.5 |
|
|
1.68 |
|
|
4 |
|
(1.0) |
|
Chinese
renminbi................................................. |
87.9 |
|
|
0.16 |
|
|
12 |
|
(0.9) |
|
Euro..................................................................... |
22.1 |
|
|
1.37 |
|
|
4 |
|
— |
|
Romanian
leu...................................................... |
14.6 |
|
|
0.30 |
|
|
12 |
|
0.4 |
|
Singapore
dollar.................................................. |
13.4 |
|
|
0.79 |
|
|
12 |
|
0.1 |
|
Other................................................................... |
9.6 |
|
|
|
|
|
4 |
|
— |
|
Total.................................................................... |
$ |
766.6 |
|
|
|
|
|
|
|
$ |
1.3 |
|
At June 30,
2014, the fair value of the outstanding contracts was a net
unrealized gain of $1.3 (December 31, 2013 — net unrealized loss of
$17.3). Changes in the fair
value of hedging derivatives to which we apply cash flow hedge
accounting, to the extent effective, are deferred in other
comprehensive income until the expenses or items being hedged are
recognized in our consolidated statement of operations. Any hedge
ineffectiveness, which at June 30,
2014 was not significant, is recognized immediately in our
consolidated statement of operations. At June 30, 2014, we recorded $7.0 of derivative assets in other current and
non-current assets, and $5.7 of
derivative liabilities in accrued and other current and non-current
liabilities (December 31, 2013 —
$1.5 of derivative assets in other
current assets and $18.8 of
derivative liabilities in accrued and other current liabilities and
other non-current liabilities). The unrealized gains or losses are
a result of fluctuations in foreign exchange rates between the date
the currency forward contracts were entered into and the valuation
date at period end.
11. CONTINGENCIES
Litigation
In the normal course of our operations, we may
be subject to lawsuits, investigations and other claims, including
environmental, labor, product, customer disputes and other
matters. Management believes that adequate provisions have
been recorded in the accounts where required. Although it is not
always possible to estimate the extent of potential costs, if any,
management believes that the ultimate resolution of all such
pending matters will not have a material adverse impact on our
financial performance, financial position
or liquidity.
In 2007, securities class action lawsuits were
commenced against us and our former Chief Executive and Chief
Financial Officers, in the United States District Court of the
Southern District of New York
by certain individuals, on behalf of themselves and other unnamed
purchasers of our stock, claiming that they were purchasers of our
stock during the period January 27,
2005 through January 30, 2007.
The plaintiffs allege violations of United States federal securities laws and
seek unspecified damages. They allege that during the purported
period we made statements concerning our actual and anticipated
future financial results that failed to disclose certain
purportedly material adverse information with respect to demand and
inventory in our Mexico operations
and our information technology and communications divisions. In an
amended complaint, the plaintiffs added one of our directors and
Onex Corporation as defendants. On October 14, 2010, the District Court granted
the defendants' motions to dismiss the consolidated amended
complaint in its entirety. The plaintiffs appealed to the United States Court of Appeals for the
Second Circuit the dismissal of their claims against us, and our
former Chief Executive and Chief Financial Officers, but not as to
the other defendants. In a summary order dated December 29, 2011, the Court of Appeals reversed
the District Court's dismissal of the consolidated amended
complaint and remanded the case to the District Court for further
proceedings. The discovery phase of the case has been completed.
Defendants have moved for summary judgment dismissing the case in
its entirety, and plaintiffs have moved for class certification and
for partial summary judgment on certain elements of their claims.
Those motions have been fully briefed and argued. In an order dated
February 21, 2014, the District
Court denied plaintiffs' motion for class certification because
they sought to include in their proposed class persons who
purchased Celestica stock in Canada. Plaintiffs renewed their motion for
class certification on April 23,
2014, removing Canadian stock purchasers from their proposed
class in accordance with the District Court's February 21 order. Defendants opposed plaintiffs'
renewed motion on May 5, 2014 on the
grounds that the plaintiffs are not adequate class representatives,
and the renewed motion is currently pending before the Court. The
District Court has reserved decision on the summary judgment and
partial summary judgment motions. Parallel class proceedings remain
against us and our former Chief Executive and Chief Financial
Officers in the Ontario Superior
Court of Justice. On October 15,
2012, the Ontario Superior Court of Justice granted limited
aspects of the defendants' motion to strike, but dismissed the
defendants' limitation period argument. The defendants' appeal of
the limitation period issue was dismissed on February 3, 2014 when the Court of Appeal
for Ontario overturned its own
prior decision on the limitation period issue. The defendants have
applied for leave to appeal this decision to the Supreme Court of
Canada. In a decision dated
February 19, 2014, the court
granted the plaintiffs leave to proceed with a statutory claim
under the Ontario Securities Act
and certified the action as a class proceeding on the claim that
the defendants made misrepresentations regarding the 2005
restructuring. The Court denied the plaintiffs leave and
certification on the claims that the defendants did not properly
report Celestica's inventory and revenue and that Celestica's
financial statements did not comply with GAAP. The Court also
denied certification of the plaintiffs' common law claims. The
action is at the discovery stage. We believe the allegations in the
claims are without merit and we intend to continue to defend
against them vigorously. However, there can be no assurance that
the outcome of the litigation will be favorable to us or that it
will not have a material adverse impact on our financial position
or liquidity. In addition, we may incur substantial litigation
expenses in defending the claims. As the matter is ongoing, we
cannot predict its duration or resources required. We have
liability insurance coverage that may cover some of our litigation
expenses, and potential judgments or settlement costs.
Income taxes
We are subject to increased scrutiny in tax
audits and reviews globally by various tax authorities of
historical information which could result in additional tax expense
in future periods relating to prior results. Reviews by tax
authorities generally focus on, but are not limited to, the
validity of our inter-company transactions, including financing and
transfer pricing policies which generally involve subjective areas
of taxation and a significant degree of judgment. If any of these
tax authorities are successful with their challenges, our income
tax expense may be adversely affected and we could also be subject
to interest and penalty charges.
Tax authorities in Canada have taken the position that income
reported by one of our Canadian subsidiaries should have been
materially higher in 2001 and 2002 and materially lower in 2003 and
2004 as a result of certain inter-company transactions, and have
imposed limitations on benefits associated with favorable
adjustments arising from inter-company transactions and other
adjustments. We have appealed this decision with the Canadian
tax authorities and have sought assistance from the relevant
Competent Authorities in resolving the transfer pricing matter
under relevant treaty principles. We could be required to provide
security up to an estimated maximum range of $20 million to $25 million Canadian dollars
(approximately $19 to $23 at
period-end exchange rates) in the form of letters of credit to the
tax authorities in connection with the transfer pricing appeal,
however, we do not believe that such security will be required. If
the tax authorities are successful with their challenge, we
estimate that the maximum net impact for additional income taxes
and interest charges associated with the proposed limitations of
the favorable adjustments could be approximately $41 million Canadian dollars (approximately
$38 at period-end exchange
rates).
Canadian tax authorities have taken the position
that certain interest amounts deducted by one of our Canadian
entities in 2002 through 2004 on historical debt instruments should
be re-characterized as capital losses. If the tax authorities are
successful with their challenge, we estimate that the maximum net
impact for additional income taxes and interest charges could be
approximately $32 million Canadian
dollars (approximately $30 at
period-end exchange rates). We have appealed this decision with the
Canadian tax authorities and have provided the requisite security
to the tax authorities, including a letter of credit in
January 2014 of $5 million Canadian dollars (approximately
$5 at period-end exchange rates), in
addition to amounts previously on account, in order to proceed with
the appeal. We believe that our asserted position is appropriate
and would be sustained upon full examination by the tax authorities
and, if necessary, upon consideration by the judicial courts. Our
position is supported by our Canadian legal tax advisors.
We have and expect to continue to recognize the
future benefit of certain Brazilian tax losses on the basis that
these tax losses can and will be fully utilized in the fiscal
period ending on the date of dissolution of our Brazilian
subsidiary. While our ability to do so is not certain, we believe
that our interpretation of applicable Brazilian law will be
sustained upon full examination by the Brazilian tax authorities
and, if necessary, upon consideration by the Brazilian judicial
courts. Our position is supported by our Brazilian legal tax
advisors. An adverse change to the benefit realizable on
these Brazilian losses could increase our net deferred tax
liabilities by approximately 43 million Brazilian reais
(approximately $19 at period-end
exchange rates).
The successful pursuit of the assertions made by
any taxing authority related to the above noted tax audits or
others could result in our owing significant amounts of tax,
interest and possibly penalties. We believe we have substantial
defenses to the asserted positions and have adequately accrued for
any probable potential adverse tax impact. However, there can be no
assurance as to the final resolution of these claims and any
resulting proceedings. If these claims and any ensuing proceedings
are determined adversely to us, the amounts we may be required to
pay could be material, and could be in excess of amounts
currently accrued.
12. COMPARATIVE INFORMATION
We have reclassified certain prior period information to conform
to the current period's presentation.
SOURCE Celestica Inc.