Celestica Announces First Quarter 2022 Financial Results
(All amounts in
shares outstanding unless otherwise noted.)
Q1 2022 Revenue and non-IFRS Adjusted EPS* exceed guidance range
Full Year Revenue Outlook raised
"Our strong performance in the first quarter was a great start to the year. Although the macro environment presented a number of challenges, we continue to execute well on our key objectives while advancing our long term strategy," said
"Based on our performance to-date and the assumption that the supply chain environment does not materially worsen, we are pleased to raise our full year 2022 revenue outlook to at least
Q1 2022 Highlights
- Key measures:
- Revenue:
$1.57 billion , increased 27% compared to$1.23 billion for the first quarter of 2021 (Q1 2021). - Operating margin (non-IFRS)*: 4.4%, compared to 3.5% for Q1 2021.
- ATS segment revenue: increased 31% compared to Q1 2021; ATS segment margin was 5.0%, compared to 4.0% for Q1 2021.
- CCS segment revenue: increased 24% compared to Q1 2021; CCS segment margin was 3.9%, compared to 3.1% for Q1 2021.
- Adjusted earnings per share (EPS) (non-IFRS)*:
$0.39 , compared to$0.22 for Q1 2021. - Adjusted return on invested capital (non-IFRS)*: 13.9%, compared to 10.8% for Q1 2021.
- Free cash flow (non-IFRS)*:
$0 .5 million, compared to$20.9 million for Q1 2021.
- Revenue:
- IFRS financial measures (directly comparable to non-IFRS measures above):
- Earnings before income taxes as a percentage of revenue: 2.0%, compared to 1.3% for Q1 2021.
- EPS:
$0.17 , compared to$0.08 per share for Q1 2021. - Return on invested capital: 6.2%, compared to 3.9% for Q1 2021.
- Cash provided by operations:
$35.3 million , compared to$48.8 million for Q1 2021.
- Repurchased and cancelled 0.7 million shares for
$7.8 million under our normal course issuer bid.
†
* Non-International Financial Reporting Standards (IFRS) financial measures (including ratios based on non-IFRS financial measures) do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar financial measures presented by other public companies that report under IFRS or
Second Quarter of 2022 (Q2 2022) Guidance
| Q2 2022 Guidance | |
| Revenue (in billions) | |
| Operating margin (non-IFRS)* | 4.6% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges |
| Adjusted SG&A (non-IFRS)* (in millions) | |
| Adjusted EPS (non-IFRS)* |
For Q2 2022, we expect a negative
2022 Outlook
Based on our strong execution in Q1 2022, our current and expected levels of demand, and assuming that supply chain constraints do not materially worsen, our outlook for 2022 includes:
- raising our revenue outlook to at least
$6.5 billion ; - tightening our non-IFRS adjusted EPS* target to be between
$1.60 and$1.75 ; and - continuing to anticipate non-IFRS operating margin* of between 4% and 5%.
We continue to expect supply chain constraints to persist throughout the remainder of 2022. While we have incorporated these dynamics into our financial guidance and outlook to the best of our ability, their adverse impact (in terms of duration and severity) cannot be estimated with certainty, and may be materially in excess of our expectations.
* See Schedule 1 for the definitions of these non-IFRS financial measures. We do not provide reconciliations for forward-looking non-IFRS financial measures, as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various events that have not yet occurred, are out of our control and/or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking IFRS financial measure. For these same reasons, we are unable to address the probable significance of the unavailable information. Forward-looking non-IFRS financial measures may vary materially from the corresponding IFRS financial measures.
Summary of Selected Q1 2022 Results
| Q1 2022 Actual | Q1 2022 Guidance (2) | ||||
| Key measures: | |||||
| Revenue (in billions) | $ | 1.57 | |||
| Operating margin (non-IFRS)* | 4.4% | 4.2% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges |
|||
| Adjusted SG&A (non-IFRS)* (in millions) | $ | 56.7 | |||
| Adjusted EPS (non-IFRS)* | $ | 0.39 | |||
| Directly comparable IFRS financial measures: | |||||
| Earnings before income taxes as a % of revenue | 2.0% | N/A | |||
| SG&A (in millions) | $ | 65.7 | N/A | ||
| EPS (1) | $ | 0.17 | N/A | ||
* See Schedule 1 for, among other things, the definitions of, and exclusions used to determine, these non-IFRS financial measures, and a reconciliation of such financial measures to the most directly comparable IFRS financial measures for Q1 2022.
(1) IFRS EPS of
IFRS EPS for Q1 2022 included a
IFRS EPS for Q1 2021 of
For information on the estimated impact of supply chain constraints (including from COVID-19) on our revenue and costs in Q1 2022 and Q1 2021, see "Segment Updates — Operational Impacts" of our Q1 2022 Management's Discussion and Analysis of Financial Condition and Results of Operations, to be filed today at www.sedar.com and furnished on Form 6-K at www.sec.gov.
(2) For Q1 2022, our revenue and non-IFRS adjusted EPS exceeded the high end of our guidance ranges, and our non-IFRS operating margin exceeded the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, driven by strong performance in both of our segments. Non-IFRS adjusted SG&A for Q1 2022 was at the low end of our guidance range. Our non-IFRS adjusted effective tax rate for Q1 2022 was 19%, higher than our anticipated estimate of approximately 18%, mainly due to jurisdictional profit mix.
Q1 2022 Webcast and Annual Shareholders Meeting Webcast
Management will host its Q1 2022 results conference call on
Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS,
About
Cautionary Note Regarding Forward-looking Statements
This press release contains forward-looking statements, including, without limitation, those related to: our anticipated financial and/or operational results and outlook, including our anticipated Q2 2022 non-IFRS adjusted effective tax rate; our credit risk; our liquidity; anticipated charges and expenses, including restructuring charges; anticipated recoveries; the potential impact of tax and litigation outcomes; mandatory prepayments under our credit facility; interest rates; and the anticipated timing of the sale of a vacated property (land and building) in
Forward-looking statements are provided to assist 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 those expressed or implied in such forward-looking statements, including, among others, risks related to: customer and segment concentration; price, margin pressures, and other competitive factors and adverse market conditions affecting, and the highly competitive nature of, the electronics manufacturing services industry in general and our segments in particular (including the risk that anticipated market improvements do not materialize); delays in the delivery and availability of components, services and/or materials, as well as their costs and quality; challenges of replacing revenue from completed, lost or non-renewed programs or customer disengagements; our customers' ability to compete and succeed using our products and services; changes in our mix of customers and/or the types of products or services we provide, including negative impacts of higher concentrations of lower margin programs; managing changes in customer demand; rapidly evolving and changing technologies, and changes in our customers' business or outsourcing strategies; the cyclical and volatile nature of our semiconductor business; the expansion or consolidation of our operations; the inability to maintain adequate utilization of our workforce; defects or deficiencies in our products, services or designs; volatility in the commercial aerospace industry; integrating and achieving the anticipated benefits from acquisitions (including our acquisition of
The forward-looking statements contained in this press release are based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions include: continued growth (and recovery from adverse impacts due to COVID-19) in the broader economy and our end markets; growth in manufacturing outsourcing from customers in diversified end markets; no significant unforeseen negative impacts to Celestica’s operations; no unforeseen materials price increases, margin pressures, or other competitive factors affecting the
All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Schedule 1
Supplementary Non-IFRS Financial Measures
The non-IFRS financial measures (including ratios based on non-IFRS financial measures) included in this press release are: 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 (or adjusted EBIAT), operating margin (operating earnings or adjusted EBIAT as a percentage of revenue), adjusted net earnings, adjusted EPS, adjusted return on invested capital (adjusted ROIC), free cash flow, adjusted tax expense and adjusted effective tax rate. Adjusted EBIAT, adjusted ROIC, free cash flow, adjusted tax expense and adjusted effective tax rate are further described in the tables below. In calculating our non-IFRS financial measures, management excludes the following items (where indicated): employee stock-based compensation (SBC) expense, amortization of intangible assets (excluding computer software), Other Charges, net of recoveries (defined below), and Finance Costs (defined below), all net of the associated tax adjustments (quantified in the table below), and non-core tax impacts (tax adjustments related to acquisitions, and certain other tax costs or recoveries related to restructuring actions or restructured sites).
We believe the non-IFRS financial measures we present herein are useful to investors, as they enable investors to evaluate and compare our results from operations in a more consistent manner (by excluding specific items that we do not consider to be reflective of our core operations), to evaluate cash resources that we generate from our business each period, and to provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of a non-IFRS adjusted tax expense and a non-IFRS adjusted effective tax rate provide improved insight into the tax effects of our core operations, and are useful to management and investors for historical comparisons and forecasting. These non-IFRS financial measures result largely from management’s determination that the facts and circumstances surrounding the excluded charges or recoveries are not indicative of our core operations.
Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies that report under IFRS, or who report under
The most significant limitation to management’s use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS financial measures are nonetheless recognized under IFRS and have an economic impact on us. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of our performance, and reconciling non-IFRS financial measures back to the most directly comparable IFRS financial measures.
The economic substance of these exclusions described above (where applicable to the periods presented) and management’s rationale for excluding them from non-IFRS financial measures is provided below:
Employee SBC 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 SBC expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do.
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 in assessing operating performance.
Other Charges, net of recoveries, consist of, when applicable: Restructuring Charges, net of recoveries (defined below); Transition Costs (Recoveries) (defined below); net Impairment charges (defined below); consulting, transaction and integration costs related to potential and completed acquisitions, and charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with acquisitions, when applicable; legal settlements (recoveries); specified credit facility-related charges; and post-employment benefit plan losses. We exclude these 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 or incurrence of the relevant costs. Our competitors may record similar charges at different times, and we believe these exclusions permit a better comparison of our core operating results with those of our competitors who also generally exclude these types of charges, net of recoveries, in assessing operating performance.
Restructuring Charges, net of recoveries, consist of costs relating to: employee severance, lease terminations, site closings and consolidations; write-downs of owned property and equipment which are no longer used and are available for sale; and reductions in infrastructure.
Transition Costs consist of costs recorded in connection with: (i) the relocation of our
Impairment charges, which consist of non-cash charges against goodwill, intangible assets, property, plant and equipment, and right-of-use (ROU) assets, result primarily when the carrying value of these assets exceeds their recoverable amount.
Finance Costs consist of interest expense and fees related to our credit facility (including debt issuance and related amortization costs), our interest rate swap agreements, our accounts receivable sales program and customers' supplier financing programs, and interest expense on our lease obligations, net of interest income earned. We believe that excluding these costs provides useful insight for assessing the performance of our core operations.
Non-core tax impacts are excluded, as we believe that these costs or recoveries do not reflect core operating performance and vary significantly among those of our competitors who also generally exclude these costs or recoveries in assessing operating performance.
The following table (which is unaudited) sets forth, for the periods indicated, the various non-IFRS financial measures discussed above, and a reconciliation of non-IFRS financial measures to the most directly comparable IFRS financial measures (in millions, except percentages and per share amounts):
| Three months ended |
|||||||||||
| 2021 | 2022 | ||||||||||
| % of revenue |
% of revenue |
||||||||||
| IFRS revenue | $ | 1,234.9 | $ | 1,566.9 | |||||||
| IFRS gross profit | $ | 101.5 | 8.2% | $ | 132.5 | 8.5% | |||||
| Employee SBC expense | 4.9 | 5.6 | |||||||||
| Non-IFRS adjusted gross profit | $ | 106.4 | 8.6% | $ | 138.1 | 8.8% | |||||
| IFRS SG&A | $ | 58.8 | 4.8% | $ | 65.7 | 4.2% | |||||
| Employee SBC expense | (5.2) | (9.0) | |||||||||
| Non-IFRS adjusted SG&A | $ | 53.6 | 4.3% | $ | 56.7 | 3.6% | |||||
| IFRS earnings before income taxes | $ | 15.7 | 1.3% | $ | 30.8 | 2.0% | |||||
| Finance Costs | 8.0 | 9.8 | |||||||||
| Employee SBC expense | 10.1 | 14.6 | |||||||||
| Amortization of intangible assets (excluding computer software) | 4.9 | 9.3 | |||||||||
| Other Charges | 4.6 | 4.8 | |||||||||
| Non-IFRS operating earnings (adjusted EBIAT) (1) | $ | 43.3 | 3.5% | $ | 69.3 | 4.4% | |||||
| IFRS net earnings | $ | 10.5 | 0.9% | $ | 21.8 | 1.4% | |||||
| Employee SBC expense | 10.1 | 14.6 | |||||||||
| Amortization of intangible assets (excluding computer software) | 4.9 | 9.3 | |||||||||
| Other Charges | 4.6 | 4.8 | |||||||||
| Adjustments for taxes (2) | (2.3) | (2.3) | |||||||||
| Non-IFRS adjusted net earnings | $ | 27.8 | $ | 48.2 | |||||||
| Diluted EPS | |||||||||||
| Weighted average # of shares (in millions) | 129.0 | 124.7 | |||||||||
| IFRS earnings per share | $ | 0.08 | $ | 0.17 | |||||||
| Non-IFRS adjusted earnings per share | $ | 0.22 | $ | 0.39 | |||||||
| # of shares outstanding at period end (in millions) | 128.4 | 124.1 | |||||||||
| IFRS cash provided by operations | $ | 48.8 | $ | 35.3 | |||||||
| Purchase of property, plant and equipment, net of sales proceeds | (12.6) | (16.4) | |||||||||
| Lease payments | (9.6) | (11.2) | |||||||||
| Finance Costs paid (excluding debt issuance costs paid) | (5.7) | (7.2) | |||||||||
| Non-IFRS free cash flow (3) | $ | 20.9 | $ | 0.5 | |||||||
| IFRS ROIC % (4) | 3.9 | % | 6.2 | % | |||||||
| Non-IFRS adjusted ROIC % (4) | 10.8 | % | 13.9 | % | |||||||
(1) Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess performance related to our core operations. Non-IFRS adjusted EBIAT is defined as earnings (loss) before income taxes, Finance Costs (defined above), employee SBC expense, amortization of intangible assets (excluding computer software), and Other Charges (recoveries) (defined above). See note 10 to our Q1 2022 Interim Financial Statements for separate quantification and discussion of the components of Other Charges (recoveries).
(2) The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments and non-core tax impacts (see below).
The following table sets forth a reconciliation of our IFRS tax expense and IFRS effective tax rate to our non-IFRS adjusted tax expense and our non-IFRS adjusted effective tax rate for the periods indicated, in each case determined by excluding the tax benefits or costs associated with the listed items (in millions, except percentages) from our IFRS tax expense for such periods:
| Three months ended | |||||||||
| 2021 | Effective tax rate |
2022 | Effective tax rate |
||||||
| IFRS tax expense and IFRS effective tax rate | $ | 5.2 | 33% | $ | 9.0 | 29% | |||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||
| Employee SBC expense | 0.9 | 1.5 | |||||||
| Amortization of intangible assets (excluding computer software) | — | 0.8 | |||||||
| Other Charges | 0.3 | — | |||||||
| Non-core tax impact related to restructured sites* | 1.1 | — | |||||||
| Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 7.5 | 21% | $ | 11.3 | 19% | |||
- Consists of the reversals of tax uncertainties related to one of our Asian subsidiaries that completed its liquidation and dissolution during Q1 2021.
(3) Management uses non-IFRS free cash flow as a measure, in addition to IFRS cash provided by (used in) 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 provided by (used in) operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), lease payments and Finance Costs paid (excluding any debt issuance costs and when applicable, waiver fees related to our credit facility). We do not consider debt issuance costs (
(4) Management uses non-IFRS adjusted ROIC as a measure to assess the effectiveness of the invested capital we use to build products or provide services to our customers, by quantifying how well we generate earnings relative to the capital we have invested in our business. Non-IFRS adjusted ROIC is calculated by dividing non-IFRS adjusted EBIAT by average net invested capital. Net invested capital (calculated in the table below) is derived from IFRS measures, and is defined as total assets less: cash, ROU assets, accounts payable, accrued and other current liabilities, provisions, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter. For example, the average net invested capital for Q1 2022 is calculated using the average of the net invested capital as at
The following table sets forth, for the periods indicated, our calculation of IFRS ROIC % and non-IFRS adjusted ROIC % (in millions, except IFRS ROIC % and non-IFRS adjusted ROIC %).
| Three months ended | |||||||||
| 2021 | 2022 | ||||||||
| IFRS earnings before income taxes | $ | 15.7 | $ | 30.8 | |||||
| Multiplier to annualize earnings | 4 | 4 | |||||||
| Annualized IFRS earnings before income taxes | $ | 62.8 | $ | 123.2 | |||||
| Average net invested capital for the period | $ | 1,609.8 | $ | 2,000.7 | |||||
| IFRS ROIC % (1) | 3.9 | % | 6.2 | % | |||||
| Three months ended | |||||||||
| 2021 | 2022 | ||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 43.3 | $ | 69.3 | |||||
| Multiplier to annualize earnings | 4 | 4 | |||||||
| Annualized non-IFRS adjusted EBIAT | $ | 173.2 | $ | 277.2 | |||||
| Average net invested capital for the period | $ | 1,609.8 | $ | 2,000.7 | |||||
| Non-IFRS adjusted ROIC % (1) | 10.8 | % | 13.9 | % | |||||
2021 |
2022 |
||||||||
| Net invested capital consists of: | |||||||||
| Total assets | $ | 4,666.9 | $ | 4,848.0 | |||||
| Less: cash | 394.0 | 346.6 | |||||||
| Less: ROU assets | 113.8 | 109.8 | |||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 2,202.0 | 2,347.4 | |||||||
| Net invested capital at period end (1) | $ | 1,957.1 | $ | 2,044.2 | |||||
2020 |
2021 |
||||||||
| Net invested capital consists of: | |||||||||
| Total assets | $ | 3,664.1 | $ | 3,553.4 | |||||
| Less: cash | 463.8 | 449.4 | |||||||
| Less: ROU assets | 101.0 | 98.4 | |||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,478.4 | 1,407.0 | |||||||
| Net invested capital at period end (1) | $ | 1,620.9 | $ | 1,598.6 | |||||
(1) See footnote 4 on the previous page.
CELESTICA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars)
(unaudited)
| Note | 2021 |
2022 |
||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 394.0 | $ | 346.6 | ||||
| Accounts receivable | 5 | 1,260.3 | 1,243.4 | |||||
| Inventories | 6 | 1,697.0 | 1,934.8 | |||||
| Income taxes receivable | 8.6 | 8.6 | ||||||
| Assets classified as held for sale | 7 | — | 9.0 | |||||
| Other current assets | 75.4 | 88.0 | ||||||
| Total current assets | 3,435.3 | 3,630.4 | ||||||
| Property, plant and equipment | 338.7 | 326.2 | ||||||
| Right-of-use assets | 113.8 | 109.8 | ||||||
| 4 | 324.2 | 321.9 | ||||||
| Intangible assets | 382.0 | 375.3 | ||||||
| Deferred income taxes | 47.7 | 52.7 | ||||||
| Other non-current assets | 25.2 | 31.7 | ||||||
| Total assets | $ | 4,666.9 | $ | 4,848.0 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility and lease obligations | 8 | $ | 51.5 | $ | 59.6 | |||
| Accounts payable | 1,238.3 | 1,400.2 | ||||||
| Accrued and other current liabilities | 6 | 884.3 | 862.5 | |||||
| Income taxes payable | 62.3 | 67.0 | ||||||
| Current portion of provisions | 17.1 | 17.7 | ||||||
| Total current liabilities | 2,253.5 | 2,407.0 | ||||||
| Long-term portion of borrowings under credit facility and lease obligations | 8 | 742.9 | 726.1 | |||||
| Pension and non-pension post-employment benefit obligations | 107.5 | 109.0 | ||||||
| Provisions and other non-current liabilities | 39.8 | 35.4 | ||||||
| Deferred income taxes | 60.2 | 61.1 | ||||||
| Total liabilities | 3,203.9 | 3,338.6 | ||||||
| Equity: | ||||||||
| Capital stock | 9 | 1,764.5 | 1,753.9 | |||||
| 9 | (48.9 | ) | (19.0 | ) | ||||
| Contributed surplus | 1,029.8 | 1,024.4 | ||||||
| Deficit | (1,255.6 | ) | (1,233.8 | ) | ||||
| Accumulated other comprehensive loss | (26.8 | ) | (16.1 | ) | ||||
| Total equity | 1,463.0 | 1,509.4 | ||||||
| Total liabilities and equity | $ | 4,666.9 | $ | 4,848.0 | ||||
Commitments and Contingencies (note 14).
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 | ||||||||
| Note | 2021 | 2022 | ||||||
| Revenue | 3 | $ | 1,234.9 | $ | 1,566.9 | |||
| Cost of sales | 6 | 1,133.4 | 1,434.4 | |||||
| Gross profit | 101.5 | 132.5 | ||||||
| Selling, general and administrative expenses (SG&A) | 58.8 | 65.7 | ||||||
| Research and development | 8.8 | 11.4 | ||||||
| Amortization of intangible assets | 5.6 | 10.0 | ||||||
| Other charges | 10 | 4.6 | 4.8 | |||||
| Earnings from operations | 23.7 | 40.6 | ||||||
| Finance costs | 8 | 8.0 | 9.8 | |||||
| Earnings before income taxes | 15.7 | 30.8 | ||||||
| Income tax expense (recovery) | 11 | |||||||
| Current | 10.7 | 13.5 | ||||||
| Deferred | (5.5 | ) | (4.5 | ) | ||||
| 5.2 | 9.0 | |||||||
| Net earnings for the period | $ | 10.5 | $ | 21.8 | ||||
| Basic earnings per share | $ | 0.08 | $ | 0.17 | ||||
| Diluted earnings per share | $ | 0.08 | $ | 0.17 | ||||
| Shares used in computing per share amounts (in millions): | ||||||||
| Basic | 128.9 | 124.6 | ||||||
| Diluted | 129.0 | 124.7 | ||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions of U.S. dollars)
(unaudited)
| Three months ended | |||||||
| 2021 | 2022 | ||||||
| Net earnings for the period | $ | 10.5 | $ | 21.8 | |||
| Other comprehensive income (loss), net of tax: | |||||||
| Items that may be reclassified to net earnings: | |||||||
| Currency translation differences for foreign operations | (4.4 | ) | (2.8 | ) | |||
| Changes from currency forward derivative hedges | (9.9 | ) | 3.0 | ||||
| Changes from interest rate swap derivative hedges | 3.3 | 10.5 | |||||
| Total comprehensive income (loss) for the period | $ | (0.5 | ) | $ | 32.5 | ||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in millions of
(unaudited)
| Note | Capital stock (note 9) |
(note 9) |
Contributed surplus |
Deficit | Accumulated other comprehensive loss (a) |
Total equity |
||||||||||||||||||
| Balance -- |
$ | 1,834.2 | $ | (15.7 | ) | $ | 974.5 | $ | (1,368.8 | ) | $ | (15.2 | ) | $ | 1,409.0 | |||||||||
| Capital transactions: | 9 | |||||||||||||||||||||||
| Repurchase of capital stock for cancellation(b) | (10.1 | ) | — | 1.7 | — | — | (8.4 | ) | ||||||||||||||||
| Equity-settled stock-based compensation (SBC) | — | 13.2 | (2.7 | ) | — | — | 10.5 | |||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 10.5 | — | 10.5 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (4.4 | ) | (4.4 | ) | ||||||||||||||||
| Changes from currency forward derivative hedges | — | — | — | — | (9.9 | ) | (9.9 | ) | ||||||||||||||||
| Changes from interest rate swap derivative hedges | — | — | — | — | 3.3 | 3.3 | ||||||||||||||||||
| Balance -- |
$ | 1,824.1 | $ | (2.5 | ) | $ | 973.5 | $ | (1,358.3 | ) | $ | (26.2 | ) | $ | 1,410.6 | |||||||||
| Balance -- |
$ | 1,764.5 | $ | (48.9 | ) | $ | 1,029.8 | $ | (1,255.6 | ) | $ | (26.8 | ) | $ | 1,463.0 | |||||||||
| Capital transactions: | 9 | |||||||||||||||||||||||
| Issuance of capital stock | 0.2 | — | (0.1 | ) | — | — | 0.1 | |||||||||||||||||
| Repurchase of capital stock for cancellation (c) | (10.8 | ) | — | 10.5 | — | — | (0.3 | ) | ||||||||||||||||
| Purchase of treasury stock for SBC plans (d) | — | (1.0 | ) | — | — | — | (1.0 | ) | ||||||||||||||||
| Equity-settled SBC | — | 30.9 | (15.8 | ) | — | — | 15.1 | |||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 21.8 | — | 21.8 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (2.8 | ) | (2.8 | ) | ||||||||||||||||
| Changes from currency forward derivative hedges | — | — | — | — | 3.0 | 3.0 | ||||||||||||||||||
| Changes from interest rate swap derivative hedges | — | — | — | — | 10.5 | 10.5 | ||||||||||||||||||
| Balance -- |
$ | 1,753.9 | $ | (19.0 | ) | $ | 1,024.4 | $ | (1,233.8 | ) | $ | (16.1 | ) | $ | 1,509.4 | |||||||||
(a) Accumulated other comprehensive loss is net of tax.
(b) Includes
(c) We paid
(d) We paid
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of
(unaudited)
| Three months ended | ||||||||
| Note | 2021 | 2022 | ||||||
| Cash provided by (used in): | ||||||||
| Operating activities: | ||||||||
| Net earnings for the period | $ | 10.5 | $ | 21.8 | ||||
| Adjustments to net earnings for items not affecting cash: | ||||||||
| Depreciation and amortization | 30.3 | 35.9 | ||||||
| Equity-settled employee SBC expense | 9 | 10.1 | 14.6 | |||||
| Other charges (recoveries) | 10 | (1.1 | ) | 0.3 | ||||
| Finance costs | 8.0 | 9.8 | ||||||
| Income tax expense | 5.2 | 9.0 | ||||||
| Other | 5.6 | 0.7 | ||||||
| Changes in non-cash working capital items: | ||||||||
| Accounts receivable | 128.4 | 16.9 | ||||||
| Inventories | (62.1 | ) | (237.8 | ) | ||||
| Other current assets | (1.7 | ) | (10.5 | ) | ||||
| Accounts payable, accrued and other current liabilities and provisions | (67.3 | ) | 183.8 | |||||
| Non-cash working capital changes | (2.7 | ) | (47.6 | ) | ||||
| Net income tax paid | (17.1 | ) | (9.2 | ) | ||||
| Net cash provided by operating activities | 48.8 | 35.3 | ||||||
| Investing activities: | ||||||||
| Purchase of computer software and property, plant and equipment | (12.6 | ) | (16.4 | ) | ||||
| Net cash used in investing activities | (12.6 | ) | (16.4 | ) | ||||
| Financing activities: | ||||||||
| Repayments under term loans | 8 | (30.0 | ) | (4.6 | ) | |||
| Lease payments | (9.6 | ) | (11.2 | ) | ||||
| Issuance of capital stock | — | 0.1 | ||||||
| Repurchase of capital stock for cancellation | 9 | (5.3 | ) | (7.8 | ) | |||
| Purchase of treasury stock for stock-based plans | 9 | — | (34.8 | ) | ||||
| Finance costs paid(a) | 8 | (5.7 | ) | (8.0 | ) | |||
| Net cash used in financing activities | (50.6 | ) | (66.3 | ) | ||||
| Net decrease in cash and cash equivalents | (14.4 | ) | (47.4 | ) | ||||
| Cash and cash equivalents, beginning of period | 463.8 | 394.0 | ||||||
| Cash and cash equivalents, end of period | $ | 449.4 | $ | 346.6 | ||||
(a) Finance costs paid include debt issuance costs paid of
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
1. REPORTING ENTITY
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated financial statements for the quarter ended
The Q1 2022 Interim Financial Statements were authorized for issuance by our board of directors on
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 related disclosures with respect to contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts (including, in recent periods, the prolonged impact of coronavirus disease 2019 and related mutations (COVID-19) and materials constraints), historical experience and various other factors that we believe are reasonable under the circumstances. The economic environment also impacts certain estimates and discount rates necessary to prepare our consolidated financial statements, including significant estimates and discount rates applicable to the determination of the recoverable amounts used in the impairment testing of our non-financial assets. Our assessment of these factors forms the basis for our judgments on the carrying values of our assets and liabilities, and the accrual of our costs and expenses. Actual results could differ materially from our 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 also impact future periods.
Our review of the estimates, judgments and assumptions used in the preparation of our financial statements for Q1 2022 included those relating to, among others: our determination of the timing of revenue recognition, the determination of whether indicators of impairment existed for our assets and cash generating units (CGUs1), our measurement of deferred tax assets and liabilities, our estimated inventory provisions and expected credit losses, customer creditworthiness, and the determination of the fair value of assets acquired and liabilities assumed in connection with a business combination. Any revisions to estimates, judgments or assumptions may result in, among other things, write-downs or impairments to our assets or CGUs, and/or adjustments to the carrying amount of our accounts receivable (A/R) and/or inventories, or to the valuation of our deferred tax assets, any of which could have a material impact on our financial performance and financial condition.
Accounting policies:
The Q1 2022 Interim Financial Statements are based on accounting policies consistent with those described in note 2 to our 2021 AFS.
3. SEGMENT AND CUSTOMER REPORTING
Segments:
Information regarding the performance of our reportable segments is set forth below:
| Revenue by segment: | Three months ended |
||||||||
| 2021 | 2022 | ||||||||
| % of total | % of total | ||||||||
| ATS | $ | 531.3 | 43 | % | $ | 696.7 | 44 | % | |
| CCS | 703.6 | 57 | % | 870.2 | 56 | % | |||
| Communications end market revenue as a % of total revenue | 40 | % | 38 | % | |||||
| Enterprise end market revenue as a % of total revenue | 17 | % | 18 | % | |||||
| Total | $ | 1,234.9 | $ | 1,566.9 | |||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Three months ended |
|||||||||
| Note | 2021 | 2022 | ||||||||
| Segment Margin |
Segment Margin |
|||||||||
| ATS segment income and margin | $ | 21.3 | 4.0 | % | $ | 35.1 | 5.0 | % | ||
| CCS segment income and margin | 22.0 | 3.1 | % | 34.2 | 3.9 | % | ||||
| Total segment income | 43.3 | 69.3 | ||||||||
| Reconciling items: | ||||||||||
| Finance costs | 8 | 8.0 | 9.8 | |||||||
| Employee stock-based compensation (SBC) expense | 10.1 | 14.6 | ||||||||
| Amortization of intangible assets (excluding computer software) | 4.9 | 9.3 | ||||||||
| Other charges | 10 | 4.6 | 4.8 | |||||||
| IFRS earnings before income taxes | $ | 15.7 | $ | 30.8 | ||||||
Customers:
No individual customer represented 10% or more of total revenue in either Q1 2022 or in the first quarter of 2021 (Q1 2021).
Seasonality:
From time to time, we experience some level of seasonality in our quarterly revenue patterns across certain of our businesses. Typically, revenue from our Enterprise end market decreases in the first quarter of the year compared to the previous quarter, and then increases in the second quarter, reflecting an increase in customer demand. We also typically experience our lowest overall revenue levels during the first quarter of each year. There can be no assurance that these patterns will continue. The addition of new customers has also introduced different demand cycles from our existing customers, creating more volatility and unpredictability in our revenue patterns. These and other factors make it difficult to isolate the impact of seasonality on our business.
4. ACQUISITION
On
Details of our final purchase price allocation for the PCI acquisition are as follows:
| PCI | ||||||
| Accounts receivable and other current assets | $ | 68.9 | ||||
| Inventories | 83.6 | |||||
| Property, plant and equipment | 22.8 | |||||
| Customer intangible assets | 176.1 | |||||
| Other non-current assets | 6.9 | |||||
| 123.8 | ||||||
| Accounts payable and accrued liabilities | (121.3 | ) | ||||
| Other current liabilities | (8.1 | ) | ||||
| Deferred income taxes and other long-term liabilities | (38.0 | ) | ||||
| $ | 314.7 | |||||
Due to the acquisition, our amortization of intangible assets will increase by approximately
We engaged third-party consultants to provide valuations of certain inventory, property, plant and equipment and intangible assets in connection with our acquisition of PCI. The fair value of the acquired tangible assets was measured by applying the market (sales comparison, brokers' quotes), cost or replacement cost, or the income (discounted cash flow) approach, as deemed appropriate. The valuation of the intangible assets by the third-party consultants was primarily based on the income approach using a discounted cash flow model and forecasts based on management's subjective estimates and assumptions. Various Level 2 and 3 data inputs of the fair value measurement hierarchy (described in note 20 to the 2021 AFS) were used in the valuation of the foregoing assets.
We recorded Acquisition Costs (defined in note 10) of
5. ACCOUNTS RECEIVABLE
Accounts receivable (A/R) sales program and supplier financing programs (SFPs):
We are party to an agreement with a third-party bank to sell up to
As of
At
Contract assets:
At
6. INVENTORIES
We record inventory provisions, net of valuation recoveries, in cost of sales. Inventory provisions reflect write-downs in the value of our inventory to net realizable value, and valuation recoveries primarily reflect gains on the disposition of previously written-down inventory. We recorded net inventory provisions of
We receive cash deposits from certain of our customers primarily to help mitigate the impact of higher inventory levels carried due to the current constrained materials environment, and to reduce risks related to excess and/or obsolete inventory. Such deposits as of
7. ASSETS CLASSIFIED AS HELD FOR SALE
In
8. CREDIT FACILITIES AND LEASE OBLIGATIONS
We are party to a credit agreement (Credit Facility) with
The Initial Term Loan matures in
The Credit Facility has an accordion feature that allows us to increase the Term Loans and/or commitments under the Revolver by
Borrowings under the Revolver bear interest, depending on the currency of the borrowing and our election for such currency, at LIBOR, Base Rate, Canadian Prime, an Alternative Currency Daily Rate, or an Alternative Currency Term Rate (each as defined in the Credit Facility) plus a specified margin. The margin for borrowings under the Revolver and the Incremental Term Loan ranges from 1.50% — 2.25% for LIBOR borrowings and Alternative Currency borrowings, and between 0.50% — 1.25% for Base Rate and Canadian Prime borrowings, in each case depending on the rate we select and our consolidated leverage ratio (as defined in the Credit Facility). Commitment fees range between 0.30% and 0.45% depending on our consolidated leverage ratio. The Initial Term Loan currently bears interest at LIBOR plus 2.125%. The Incremental Term Loan currently bears interest at LIBOR plus 2.0%. See note 12 for a description of the LIBOR successor provisions under the Credit Facility. Prior to the amendments to our Credit Facility in
The Incremental Term Loan requires quarterly principal repayments of
Activity under our Credit Facility during 2021 and Q1 2022 is set forth below:
| Revolver | Term loans | ||||||
| Outstanding balances as of |
$ | — | $ | 470.4 | |||
| Amount repaid in Q1 2021(1) | — | (30.0 | ) | ||||
| Amount borrowed in Q4 2021(2) | 220.0 | 365.0 | |||||
| Amount repaid in Q4 2021(2) | (220.0 | ) | (145.0 | ) | |||
| Outstanding balances as of |
$ | — | $ | 660.4 | |||
| Amount repaid in Q1 2022(3) | — | (4.6 | ) | ||||
| Outstanding balances as of |
$ | — | $ | 655.8 | |||
(1) Represents a prepayment under the Terminated Term Loan.
(2) On
(3) Represents the scheduled quarterly principal repayment under the Incremental Term Loan.
At
The following tables set forth, at the dates shown: outstanding borrowings under the Credit Facility, excluding ordinary course letters of credit (L/Cs); notional amounts under our interest rate swap agreements; and outstanding lease obligations:
| Outstanding borrowings | Notional amounts under interest rate swaps (note 12) |
||||||||||||
2021 |
2022 |
2021 |
2022 |
||||||||||
| Borrowings under the Revolver | $ | — | $ | — | $ | — | $ | — | |||||
| Borrowings under term loans: | |||||||||||||
| Initial Term Loan | $ | 295.4 | $ | 295.4 | $ | 100.0 | $ | 100.0 | |||||
| Incremental Term Loan | 365.0 | 360.4 | 100.0 | 230.0 | |||||||||
| Total | $ | 660.4 | $ | 655.8 | $ | 200.0 | $ | 330.0 | |||||
| Total borrowings under Credit Facility | $ | 660.4 | $ | 655.8 | |||||||||
| Unamortized debt issuance costs related to our term loans (1) | (4.6 | ) | (4.5 | ) | |||||||||
| Lease obligations(2) | 138.6 | 134.4 | |||||||||||
| $ | 794.4 | $ | 785.7 | ||||||||||
| Total Credit Facility and lease obligations: | |||||||||||||
| Current portion | $ | 51.5 | $ | 59.6 | |||||||||
| Long-term portion | 742.9 | 726.1 | |||||||||||
| $ | 794.4 | $ | 785.7 | ||||||||||
(1) We incur debt issuance costs upon execution and amendment of the Credit Facility. Debt issuance costs incurred in Q1 2022 in connection with our Revolver totaling
(2) These lease obligations represent the present value of unpaid lease payments which have been discounted using our incremental borrowing rate on the lease commencement dates. In addition to these lease obligations, we have commitments under additional real property leases not recognized as liabilities as of
The following table sets forth, at the dates shown, information regarding outstanding L/Cs, surety bonds and overdraft facilities:
2021 |
2022 |
|||||
| Outstanding L/Cs under the Revolver | $ | 21.0 | $ | 21.0 | ||
| Outstanding L/Cs and surety bonds outside the Revolver | 27.1 | 28.2 | ||||
| Total | $ | 48.1 | $ | 49.2 | ||
| Available uncommitted bank overdraft facilities | $ | 198.5 | $ | 198.5 | ||
| Amounts outstanding under available uncommitted bank overdraft facilities | $ | — | $ | — | ||
Finance costs consist of interest expense and fees related to our Credit Facility (including debt issuance and related amortization costs), our interest rate swap agreements, our A/R sales program and SFPs, and interest expense on our lease obligations, net of interest income earned.
9. CAPITAL STOCK
SVS Repurchase Plans:
In recent years, we have repurchased SVS in the open market, or as otherwise permitted, for cancellation through normal course issuer bids (NCIBs), which allow us to repurchase a limited number of SVS during a specified period. The maximum number of SVS we are permitted to repurchase for cancellation under each NCIB is reduced by the number of SVS purchased by a broker in the open market during the term of such NCIB to satisfy delivery obligations under our SBC plans. We from time-to-time enter into automatic share purchase plans (ASPPs) with a broker, instructing the broker to purchase our SVS in the open market on our behalf (for cancellation under an NCIB or for delivery under our SBC plans), including during any applicable trading blackout periods (ASPP Purchases), up to specified daily maximums (subject to certain conditions) at specified prices through the term of each ASPP. No ASPPs were entered into in Q1 2022.
On
On
In
In
SVS repurchases:
Information regarding SVS repurchase activities for the periods indicated is set forth below:
| Three months ended |
|||||
| 2021 | 2022 | ||||
| Aggregate cost(1) of SVS repurchased for cancellation (2) | $ | 5.3 | $ | 7.8 | |
| Number of SVS repurchased for cancellation (in millions) (3) | 0.6 | 0.7 | |||
| Weighted average price per share for repurchases | $ | 8.35 | $ | 11.50 | |
| Aggregate cost(1) of SVS repurchased for delivery under SBC plans (see below) | $ | — | $ | 34.8 | |
| Number of SVS repurchased for delivery under SBC plans (in millions) (4) | — | 3.0 | |||
(1) Includes transaction fees.
(2) For Q1 2021, excludes an accrual of
(3) For Q1 2021 and Q1 2022, includes 0.01 million and 0.2 million ASPP Purchases of SVS for cancellation, respectively.
(4) For Q1 2022, represents 3.0 million ASPP Purchases of SVS for SBC delivery obligations.
SBC:
From time to time, we pay cash to a broker to purchase SVS in the open market to satisfy delivery requirements under our SBC plans. At
We grant restricted share units (RSUs) and performance share units (PSUs), and from time-to-time stock options, to employees under our SBC plans. The majority of RSUs vest one-third per year over a three-year period. Stock options generally vest 25% per year over a four-year period. The number of outstanding PSUs that will actually vest will vary from 0% to 200% of a target amount granted based on the level of achievement of a pre-determined non-market performance measurement in the final year of a three-year performance period, subject to modification by each of a separate pre-determined non-market financial target and our relative Total Shareholder Return (TSR) performance over the three-year vesting period. The portion of our expense that relates to non-TSR-based performance is subject to adjustment in any period to reflect changes in the estimated level of achievement of pre-determined goals and financial targets. We also grant deferred share units (DSUs) and RSUs (under specified circumstances) to directors as compensation under our Directors' Share Compensation Plan. See note 2(l) to the 2021 AFS for further detail.
Information regarding RSU, PSU, and DSU grants to employees and directors, as applicable, for the periods indicated is set forth below (no stock options were granted in either period):
| Three months ended |
|||||
| 2021 | 2022 | ||||
| RSUs Granted: | |||||
| Number of awards (in millions) | 2.4 | 1.7 | |||
| Weighted average grant date fair value per unit | $ | 8.11 | $ | 12.42 | |
| PSUs Granted: | |||||
| Number of awards (in millions, representing 100% of target) | 1.8 | 1.2 | |||
| Weighted average grant date fair value per unit | $ | 8.82 | $ | 14.40 | |
| DSUs Granted: | |||||
| Number of awards (in millions) | 0.03 | 0.03 | |||
| Weighted average grant date fair value per unit | $ | 8.37 | $ | 11.91 | |
Information regarding employee and director SBC expense for the periods indicated is set forth below:
| Three months ended |
|||||
| 2021 | 2022 | ||||
| Employee SBC expense in cost of sales | $ | 4.9 | $ | 5.6 | |
| Employee SBC expense in SG&A | 5.2 | 9.0 | |||
| Total | $ | 10.1 | $ | 14.6 | |
| Director SBC expense in SG&A (1) | $ | 0.5 | $ | 0.6 | |
(1) Expense consists of director compensation to be settled with SVS, or SVS and cash, as elected by each director.
10. OTHER CHARGES (RECOVERIES)
| Three months ended |
||||||
| 2021 | 2022 | |||||
| Restructuring (a) | $ | 5.8 | $ | 3.1 | ||
| Transition Costs (b) | 0.1 | 1.5 | ||||
| Acquisition Costs (Recoveries) and Other (c) | (1.3 | ) | 0.2 | |||
| $ | 4.6 | $ | 4.8 | |||
(a) Restructuring:
Our restructuring activities for Q1 2022 consisted primarily of actions to adjust our cost base to address reduced levels of demand in certain of our businesses and geographies.
In Q1 2022, we recorded cash restructuring charges of
(b) Transition Costs:
Transition Costs consist of costs recorded in connection with: (i) the relocation of our
(c) Acquisition Costs (Recoveries) and Other:
We incur consulting, transaction and integration costs relating to potential and completed acquisitions. We also incur charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with acquisitions, when applicable. Collectively, these costs, charges and releases are referred to as Acquisition Costs (Recoveries).
We recorded Acquisition Costs of
11. INCOME TAXES
Our income tax expense or recovery for each quarter is determined by multiplying the earnings or losses before tax for such quarter by management’s best estimate of the weighted-average annual income tax rate expected for the full year, taking into account the tax effect of certain items recognized in the interim period. As a result, the effective income tax rates used in our interim financial statements may differ from management’s estimate of the annual effective tax rate for the annual financial statements. Our estimated annual effective income tax rate varies as the quarters progress, for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the
Our Q1 2022 net income tax expense of
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Our financial assets are comprised primarily of cash and cash equivalents, A/R, and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of accounts payable, certain accrued and other liabilities, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives.
Interest rate risk:
Borrowings under the Credit Facility expose us to interest rate risk due to the potential variability of market interest rates. In order to partially hedge against our exposure to interest rate variability on our Term Loans, we have entered into various agreements with third-party banks to swap the variable interest rate (based on LIBOR plus a margin) with a fixed rate of interest for a portion of the borrowings under our Term Loans. At
At
At
Global reform of major interest rate benchmarks is currently underway, including the anticipated replacement of some Interbank Offered Rates (including LIBOR) with alternative nearly risk-free rates. See note 2, "Recently issued accounting standards and amendments" of the 2021 AFS. We have obligations under our Credit Facility, certain lease arrangements and derivative instruments that are indexed to LIBOR (LIBOR Agreements). The interest rates under these agreements are subject to change when relevant LIBOR benchmark rates cease to exist. There remains uncertainty over the timing and methods of transition to such alternate rates.
Our Credit Facility provides that when the administrative agent, the majority of lenders or we determine that LIBOR (or the corresponding rate for any Alternative Currency, as defined in the Credit Facility), is unavailable or being replaced (or, in the case of LIBOR borrowings under the Revolver and the Incremental Term Loan, at our joint election with the administrative agent), then we and the administrative agent may amend the underlying credit agreement to reflect a successor rate as specified therein. Once LIBOR becomes unavailable, if no successor rate has been established, applicable loans under the Credit Facility accruing interest at LIBOR will convert to Base Rate loans. The Credit Facility has not yet been amended to reflect a successor rate for LIBOR. Certain of our lease arrangements that include progress payments provide that a successor rate will be determined by the lessor when LIBOR ceases to be available or is no longer representative, or if earlier, by mutually-agreed amendments to the lease agreement to adopt a replacement benchmark, but successor rates have not yet been implemented. It remains uncertain when the benchmark transitions will be complete or what replacement rates will be used.
Our variable rate Term Loans are partially hedged with interest rate swap agreements (described above). Hedge ineffectiveness could result due to the cessation of LIBOR, if such agreements transition using a different benchmark or spread adjustment as compared to the underlying hedged debt. The Second Extended Initial Swaps, the First Extended Incremental Swaps and the Additional Incremental Swaps mirror the LIBOR successor provisions under the Credit Facility, but have not yet transitioned to a successor rate. In Q1 2022, we also amended the swap agreement with one of the two counterparty banks under the Incremental Swaps (with a notional amount of
Our A/R sales program and three customers SFPs that were indexed to LIBOR have transitioned to alternative benchmark rates with predetermined spreads, with no significant impact on our consolidated financial statements.
While we expect that reasonable alternatives to LIBOR benchmarks will be implemented in advance of their cessation dates, we cannot assure that this will be the case. If relevant LIBOR benchmarks are no longer available and the alternative reference rate is higher, interest rates under the affected LIBOR Agreements would increase, which would adversely impact our interest expense, our financial performance and cash flows. We will continue to monitor developments with respect to the cessation of LIBOR, and will evaluate potential impacts on our LIBOR Agreements, processes, systems, risk management methodology and valuations, financial reporting, taxes, and financial results. However, we are currently unable to predict what the future replacement rates or consequences on our operations or financial results will be.
Currency risk:
The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. We cannot predict changes in currency exchange rates, the impact of exchange rate changes on our operating results, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Such changes, including negative impacts on currency exchange rates related to the COVID-19 pandemic, could have a material effect on our business, financial performance and financial condition.
Our major currency exposures at
| Canadian dollar |
Euro | Thai baht | Chinese renminbi |
||||||||||||
| Cash and cash equivalents | $ | 4.1 | $ | 9.5 | $ | 1.6 | $ | 18.1 | |||||||
| Accounts receivable | 8.0 | 44.0 | — | 19.8 | |||||||||||
| Income taxes and value-added taxes receivable | 16.7 | 0.2 | 12.7 | 6.3 | |||||||||||
| Other financial assets | — | 2.7 | 0.4 | 0.6 | |||||||||||
| Pension and non-pension post-employment liabilities | (79.7 | ) | (0.5 | ) | (19.2 | ) | (0.8 | ) | |||||||
| Income taxes and value-added taxes payable | — | (0.2 | ) | (5.0 | ) | (13.4 | ) | ||||||||
| Accounts payable and certain accrued and other liabilities and provisions | (60.8 | ) | (34.1 | ) | (35.0 | ) | (54.0 | ) | |||||||
| Net financial assets (liabilities) | $ | (111.7 | ) | $ | 21.6 | $ | (44.5 | ) | $ | (23.4 | ) | ||||
We enter into foreign currency forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge the exposures of our monetary assets and liabilities denominated in foreign currencies. While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates.
At
| Currency | Contract amount in U.S. dollars |
Weighted average exchange rate in U.S. dollars (1) |
Maximum period in months |
Fair value gain (loss) |
|||||||
| Canadian dollar | $ | 225.0 | $ | 0.79 | 13 | $ | 4.1 | ||||
| Thai baht | 106.4 | 0.03 | 12 | (0.5 | ) | ||||||
| Malaysian ringgit | 94.5 | 0.24 | 12 | — | |||||||
| Mexican peso | 26.6 | 0.05 | 12 | 1.1 | |||||||
| British pound | 0.4 | 1.33 | 4 | — | |||||||
| Chinese renminbi | 43.9 | 0.16 | 12 | 0.5 | |||||||
| Euro | 28.1 | 1.12 | 7 | 0.5 | |||||||
| Romanian leu | 35.6 | 0.23 | 12 | (1.2 | ) | ||||||
| 20.8 | 0.74 | 12 | (0.1 | ) | |||||||
| Japanese yen | 14.0 | 0.0084 | 4 | 0.7 | |||||||
| Korean won | 5.7 | 0.0008 | 4 | 0.1 | |||||||
| Total | $ | 601.0 | $ | 5.2 | |||||||
| Fair values of outstanding foreign currency forward and swap contracts related to effective cash flow hedges where we applied hedge accounting | 1.4 | ||||||||||
| Fair values of outstanding foreign currency forward and swap contracts related to economic hedges where we record the changes in the fair values of such contracts through our consolidated statement of operations | 3.8 | ||||||||||
| $ | 5.2 | ||||||||||
(1) Represents the
At
Credit risk:
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our credit risk of counterparty non-performance continues to be relatively low. We are in regular contact with our customers, suppliers and logistics providers, and have not experienced significant counterparty credit-related non-performance in 2021 or Q1 2022. However, if a key supplier (or any company within such supplier's supply chain) or customer fails to comply with their contractual obligations, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign currency exchange contracts and swaps, interest rate swaps, or annuities for our pension plans defaults on their contractual obligations. With respect to our financial market activities, we have adopted a policy of dealing only with counterparties we deem to be creditworthy. No significant adjustments were made to our allowance for doubtful accounts during Q1 2022 or Q1 2021 in connection with our ongoing credit risk assessments.
Liquidity risk:
Liquidity risk is the risk that we may not have cash available to satisfy our financial obligations as they come due. The majority of our financial liabilities recorded in accounts payable, accrued and other current liabilities and provisions are due within 90 days. We manage liquidity risk through maintenance of cash on hand and access to the various financing arrangements described in notes 5 and 8. We believe that cash flow from operating activities, together with cash on hand, cash from accepted sales of A/R, and borrowings available under the Revolver and potentially available under uncommitted intraday and overnight bank overdraft facilities, are sufficient to fund our currently anticipated financial obligations, and will remain available in the current environment. As our A/R sales program and SFPs are each uncommitted, however, there can be no assurance that any participant bank will purchase any of the A/R that we wish to sell.
13. COVID-19 GOVERNMENT SUBSIDIES
We determined that we qualified for COVID-19-related government subsidies, grants and/or credits (COVID Subsidies) during 2021 from various government authorities, the most significant of which were provided under the Canadian Emergency Wage Subsidy (CEWS) first announced by the
For Q1 2022, we recorded no COVID Subsidies. For Q1 2021, we recorded approximately
14. COMMITMENTS AND 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 where required. Although it is not always possible to estimate the extent of potential costs, if any, we believe that the ultimate resolution of all such pending matters will not have a material adverse impact on our financial performance, financial position or liquidity.
Taxes and Other Matters:
In 2017, the
In the third quarter of 2021 (Q3 2021), the Romanian tax authorities issued a final assessment in the aggregate amount of approximately 31 million Romanian leu (approximately
The successful pursuit of assertions made by any government authority, including tax authorities, could result in our owing significant amounts of tax or other reimbursements, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and in excess of amounts accrued.
1 CGUs are the smallest identifiable group of assets that cannot be tested individually and generate cash inflows that are largely independent of those of other assets or groups of assets, and can be comprised of a single site, a group of sites, or a line of business.
Contacts:Celestica Global Communications (416) 448-2200 media@celestica.com Celestica Investor Relations (416) 448-2211 clsir@celestica.com
Source: Celestica International LP