Celestica Announces Second Quarter 2019 Financial Results
Q2 2019 Highlights
- Revenue:
$1.45 billion , at the midpoint of our Q2 2019 guidance range of$1.4 to$1.5 billion , decreased 15% compared to$1.70 billion for the second quarter of 2018 (Q2 2018).
- Operating margin (non-IFRS)*: 2.5%, slightly above our Q2 2019 guidance of 2.4% at the midpoint of our revenue and non-IFRS adjusted EPS* guidance ranges, compared to 3.1% for Q2 2018.
Advanced Technology Solutions (ATS) segment revenue** increased 2% compared to Q2 2018, and represented 39% of total revenue as compared to 33% for Q2 2018; ATS segment margin** was 2.8% compared to 5.1% for Q2 2018, driven primarily by losses within our capital equipment business (see Segment Updates below).
- Connectivity & Cloud Solutions (CCS) segment revenue** decreased 23% compared to Q2 2018, and represented 61% of total revenue as compared to 67% for Q2 2018; CCS segment margin** was 2.4% compared to 2.2% for Q2 2018.
- IFRS earnings (loss) per share:
$0.05 loss per share, compared to$0.11 earnings per share for Q2 2018.
- Adjusted EPS (non-IFRS)*:
$0.12 per share, at the midpoint of our Q2 2019 guidance range of$0.09 to$0.15 per share, compared to$0.29 per share for Q2 2018.
- Adjusted ROIC (non-IFRS)*: 8.4%, compared to 16.0% for Q2 2018.
- Free cash flow (non-IFRS)*: positive
$46.5 million , compared to negative$45.6 million for Q2 2018.
- Repurchased and cancelled 3.2 million subordinate voting shares for
$22.8 million under our normal course issuer bid.
"
"While the ongoing weak demand in our Capital Equipment business continues to adversely impact our ATS segment performance, our other ATS businesses are performing well, as we ramp new programs and continue to drive productivity. Despite the volatility, we believe that capital equipment remains an attractive market in the long term, and that we have the right strategy, relationships and capabilities in place to be successful in this business in future periods."
"As we navigate the challenging demand environment, we remain committed to executing our transformation plan. We believe that the end result will be a more diversified business, capable of delivering consistent, profitable growth."
*Non-IFRS (International Financial Reporting Standards) 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
** Our ATS segment consists of our ATS end market, and is comprised of our aerospace and defense (A&D), industrial, smart energy, healthtech, and capital equipment businesses (consisting of semiconductor, display, and power & signal distribution equipment). Our CCS segment consists of our Communications and Enterprise end markets, and is comprised of our enterprise communications, telecommunications, servers and storage businesses. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 25 to our 2018 audited consolidated financial statements for further detail.
Segment Updates
ATS
Capital Equipment Business: Revenue from our semiconductor capital equipment customers continues to be adversely impacted by cyclical decreases in demand that started in the second half of 2018. As a result, our capital equipment business operated at a loss in the second quarter of 2019 (Q2 2019) in the high single-digit million dollar range, which was higher than expected due to lower demand and continued volatility in this business. In addition, some next generation display programs that were originally anticipated to ramp in the second half of 2019 have been further delayed as lower capital spending is delaying the ramp up of next generation programs. We currently expect this demand softness to persist into 2020. Although we remain focused on implementing actions intended to better align this business to the current demand environment, while maintaining our capabilities in this market, we expect to operate at a similar loss in the third quarter of 2019. Notwithstanding the foregoing, we continue to believe that new program wins, market share gains, and anticipated growth in electronic content position us favorably to benefit from potential growth in this business in the future.
Industrial and Healthtech Businesses: Although the cost of ramping multiple new programs as we expand our presence in these businesses adversely impacted their profitability in the first quarter of 2019 (Q1 2019), their profitability improved in Q2 2019.
A&D Business: We saw marginal improvement in materials availability and improved profitability in our A&D business for Q2 2019. This business continued to be adversely impacted by materials shortages in Q2 2019 particularly with respect to the availability of certain high reliability parts resulting in a continued backlog of orders. We currently expect this backlog to improve gradually in the second half of the year.
More generally, we continue to pursue new customers and invest in our ATS segment to expand our market share, to diversify our end market mix, and to enhance and add new technologies and capabilities to our offerings.
CCS
We continue to make progress on actions associated with the comprehensive review of our CCS revenue portfolio (CCS Review) and expect to complete the majority of the remaining actions identified by the CCS Review in 2019, including intended restructuring actions (which have been built into our current cost efficiency initiative). Actions associated with the CCS Review are currently expected to result in an aggregate annualized decline in our CCS segment revenue of approximately
As a result of the CCS segment declines and lower Capital Equipment demand, we expect total company revenue for 2019 to decrease in the low teens percentage range year over year, which is above the high single digit percentage range previously anticipated.
Restructuring Update
We have recorded approximately
Guidance Summary and Q3 2019 Outlook
| Q2 2019 Guidance (1) | Q2 2019 Actual (1) | Q3 2019 Guidance (2) | |||
| IFRS revenue (in billions) | |||||
| Non-IFRS operating margin | 2.4% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges | 2.5% | 2.5% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges | ||
| Non-IFRS adjusted SG&A (in millions) | |||||
| Non-IFRS adjusted EPS |
(1) For Q2 2019, our revenue was at the mid-point of our guidance range. Overall revenue from our ATS segment was in line with our expectations, while stronger-than-expected demand from our Enterprise customers offset weaker-than-expected demand from our Communications customers. Non-IFRS operating margin for Q2 2019 was slightly above the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, resulting primarily from beneficial changes in mix, offsetting higher than expected losses in our capital equipment business. Non-IFRS adjusted SG&A for Q2 2019 was slightly above our guidance range, resulting primarily from foreign exchange losses. Non-IFRS adjusted EPS was at the mid-point of our guidance range, notwithstanding a
IFRS loss per share of
IFRS loss per share for Q2 2019 included an aggregate
IFRS EPS for Q2 2018 and the first half of 2018 (1H 2018) included an aggregate
(2) For the third quarter of 2019 (Q3 2019), we expect a negative
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 measures to the most directly comparable IFRS 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.
Q22019 Webcast
Management will host its Q2 2019 results conference call today at
Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS,
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 measures to the most directly comparable IFRS measures. See footnotes (3) and (4) to the reconciliation table in Schedule 1 for a discussion of modifications to our calculation of each of non-IFRS free cash flow and non-IFRS adjusted ROIC commencing in Q1 2019.
About
For more information, visit www.celestica.com. Our securities filings can also be accessed at www.sedar.com and www.sec.gov.
Cautionary Note Regarding Forward-looking Statements
This press release contains forward-looking statements, including, without limitation, those related to our priorities, goals and strategies; trends in the electronics manufacturing services (EMS) industry in general and in each of our segments, and their anticipated impact on our business; the anticipated continuation and impact of specified adverse market conditions in each of our segments; our anticipated financial and/or operational results, and our anticipated Q3 2019 and 2019 annual non-IFRS adjusted effective tax rate; the range and timing of our cost efficiency initiative; the anticipated impact of our CCS Review; the timing of the commencement of, and amount of payments under, a lease for our new corporate headquarters; anticipated costs and expenses; amortization of certain intangible assets; the timing and amounts of restructuring actions and charges; and the impact of tax and litigation outcomes. 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, where applicable, and applicable Canadian securities laws.
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: our customers’ ability to compete and succeed with our products and services; customer and segment concentration; challenges of replacing revenue from completed or lost programs or customer disengagements; changes in our mix of customers and/or the types of products or services we provide; the impact on gross profit of higher concentrations of lower margin programs; competitive factors and adverse market conditions affecting the EMS industry in general and our segments in particular; the cyclical nature of our capital equipment business, in particular our semiconductor business; delays in the delivery and availability of components, services and materials; the expansion or consolidation of our operations; defects or deficiencies in our products, services or designs; integrating acquisitions and "operate-in-place" arrangements, and achieving the anticipated benefits therefrom; negative impacts on our business resulting from recent increases in third-party indebtedness; our response to changes in demand, and rapidly evolving and changing technologies; challenges associated with new customers or programs, or the provision of new services; the incurrence of future restructuring charges, impairment charges or other write-downs of assets; managing our operations, growth initiatives, and our working capital performance during uncertain market and economic conditions; disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of global or local events outside our/their control and the impact of significant tariffs on items imported into the
Our revenue, earnings and other financial guidance contained in this press release is based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions include those related to the following: fluctuation of production schedules from our customers in terms of volume and mix of products or services; the timing and execution of, and investments associated with, ramping new business; the successful pursuit, completion and integration of acquisitions; the success of our customers’ products; our ability to retain programs and customers; the stability of general economic and market conditions, currency exchange rates, and interest rates; supplier performance, pricing and terms; compliance by third parties with their contractual obligations and the accuracy of their representations and warranties; the costs and availability of components, materials, services, equipment, labor, energy and transportation; that our customers will retain liability for recently-imposed tariffs and countermeasures; our ability to keep pace with rapidly changing technological developments; the timing, execution and effect of restructuring actions; the successful resolution of quality issues that arise from time to time; our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities; our ability to successfully diversify our customer base and develop new capabilities; the availability of cash resources for repurchases of outstanding subordinate voting shares; that we achieve the expected benefits from our recent acquisitions; and the impact of the CCS Review on our business. Although management believes its assumptions to be reasonable under the current circumstances, they may prove to be inaccurate, which could cause actual results to differ materially (and adversely) from those that would have been achieved had such assumptions been accurate. Forward-looking statements speak only as of the date on which they are made, and 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, except as required by applicable law.
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 or operating earnings as a percentage of revenue), adjusted net earnings, adjusted earnings per share, 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 (including a description of modifications to our calculation of adjusted ROIC and free cash flow commencing in Q1 2019), adjusted tax expense and adjusted effective tax rate are further described in the tables below. In calculating these non-IFRS financial measures, management excludes the following items, where applicable: employee stock-based compensation expense, amortization of intangible assets (excluding computer software), restructuring and other charges, net of recoveries (as defined below), impairment charges, and acquisition inventory fair value adjustments, all net of the associated tax adjustments (which are set forth 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 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 ongoing operating results), to evaluate cash resources that we generate 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 provides improved insight into the tax effects of our ongoing business operations, and is 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 the ordinary course of the ongoing operation of our business.
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 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 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 financial measures back to the most directly comparable IFRS financial measures.
The economic substance of the exclusions described above and management’s rationale for excluding them 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 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, including those competitors who report under
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.
Restructuring and other 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, reductions in infrastructure, Transition Costs (Recoveries) (defined below), acquisition-related consulting, transaction and integration costs, and in 2019, charges related to the subsequent re-measurement of indemnification assets recorded in connection with acquisitions (Acquisition Costs), legal settlements (recoveries), and the accelerated amortization of unamortized deferred financing costs recorded on the extinguishment of our prior credit facility during the second quarter of 2018. We exclude these 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.
Transition Costs are costs recorded in connection with the relocation of our
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, and 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.
Acquisition inventory fair value adjustments relate to the write-up of the inventory acquired in connection with our acquisitions, representing the difference between the cost and fair value of such inventory. We exclude the impact of the recognition of these adjustments, when incurred, because we believe such exclusion permits a better comparison of our core operating results from period-to-period, as their impact is not indicative of our ongoing operating performance.
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 sets forth, for the periods indicated, the various non-IFRS measures discussed above, and a reconciliation of non-IFRS measures to the most directly comparable IFRS measures (in millions, except percentages and per share amounts):
| Three months ended |
Six months ended |
||||||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||||
| IFRS revenue | $ | 1,695.2 | $ | 1,445.6 | $ | 3,194.9 | $ | 2,878.7 | |||||||||||||||
| IFRS gross profit | $ | 104.8 | 6.2 | % | $ | 97.8 | 6.8 | % | $ | 198.3 | 6.2 | % | $ | 185.2 | 6.4 | % | |||||||
| Employee stock-based compensation expense | 2.8 | 3.4 | 7.9 | 10.0 | |||||||||||||||||||
| Acquisition inventory fair value adjustment | 1.6 | — | 1.6 | — | |||||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 109.2 | 6.4 | % | $ | 101.2 | 7.0 | % | $ | 207.8 | 6.5 | % | $ | 195.2 | 6.8 | % | |||||||
| IFRS SG&A | $ | 52.7 | 3.1 | % | $ | 60.7 | 4.2 | % | $ | 105.0 | 3.3 | % | $ | 116.8 | 4.1 | % | |||||||
| Employee stock-based compensation expense | (4.4 | ) | (4.8 | ) | (9.7 | ) | (10.0 | ) | |||||||||||||||
| Non-IFRS adjusted SG&A | $ | 48.3 | 2.8 | % | $ | 55.9 | 3.9 | % | $ | 95.3 | 3.0 | % | $ | 106.8 | 3.7 | % | |||||||
| IFRS earnings (loss) before income taxes | $ | 20.9 | 1.2 | % | $ | (1.0 | ) | — | % | $ | 40.3 | 1.2 | % | $ | 93.8 | 3.2 | % | ||||||
| Finance costs (1) | 4.9 | 12.6 | 8.2 | 26.2 | |||||||||||||||||||
| Employee stock-based compensation expense | 7.2 | 8.2 | 17.6 | 20.0 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.4 | 3.8 | 12.8 | |||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 15.8 | 10.5 | 26.3 | (81.0 | ) | ||||||||||||||||||
| Acquisition inventory fair value adjustment | 1.6 | — | 1.6 | — | |||||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) (1) | $ | 53.1 | 3.1 | % | $ | 36.7 | 2.5 | % | $ | 97.8 | 3.1 | % | $ | 71.8 | 2.5 | % | |||||||
| IFRS net earnings (loss) | $ | 16.1 | 0.9 | % | $ | (6.1 | ) | (0.4 | )% | $ | 30.2 | 0.9 | % | $ | 84.2 | 2.9 | % | ||||||
| Employee stock-based compensation expense | 7.2 | 8.2 | 17.6 | 20.0 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.4 | 3.8 | 12.8 | |||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 15.8 | 10.5 | 26.3 | (81.0 | ) | ||||||||||||||||||
| Acquisition inventory fair value adjustment | 1.6 | — | 1.6 | — | |||||||||||||||||||
| Adjustments for taxes (2) | (3.2 | ) | (3.6 | ) | (5.4 | ) | (4.8 | ) | |||||||||||||||
| Non-IFRS adjusted net earnings | $ | 40.2 | $ | 15.4 | $ | 74.1 | $ | 31.2 | |||||||||||||||
| Diluted EPS | |||||||||||||||||||||||
| Weighted average # of shares (in millions) (5) | 140.7 | 131.9 | 142.1 | 134.3 | |||||||||||||||||||
| IFRS earnings (loss) per share (5) | $ | 0.11 | $ | (0.05 | ) | $ | 0.21 | $ | 0.63 | ||||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.29 | $ | 0.12 | $ | 0.52 | $ | 0.23 | |||||||||||||||
| # of shares outstanding at period end (in millions) | 139.3 | 128.4 | 139.3 | 128.4 | |||||||||||||||||||
| (restated) | (restated) | ||||||||||||||||||||||
| IFRS cash provided by (used in) operations | $ | (14.9 | ) | $ | 90.3 | $ | (20.3 | ) | $ | 161.6 | |||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (25.1 | ) | (23.2 | ) | (38.8 | ) | 70.1 | ||||||||||||||||
| Lease payments (3) | (0.8 | ) | (9.5 | ) | (12.6 | ) | (18.8 | ) | |||||||||||||||
| Finance costs paid (excluding debt issuance costs paid) (3) | (4.8 | ) | (11.1 | ) | (8.0 | ) | (21.7 | ) | |||||||||||||||
| Non-IFRS free cash flow (3) | $ | (45.6 | ) | $ | 46.5 | $ | (79.7 | ) | $ | 191.2 | |||||||||||||
| IFRS ROIC % (4) | 6.3 | % | (0.2 | )% | 6.2 | % | 10.6 | % | |||||||||||||||
| Non-IFRS adjusted ROIC % (4) | 16.0 | % | 8.4 | % | 15.1 | % | 8.1 | % | |||||||||||||||
(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 below), amortization of intangible assets (excluding computer software), employee stock-based compensation expense, net restructuring and other charges (recoveries) (defined above), impairment charges (recoveries), and in applicable periods, acquisition inventory fair value adjustments. 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 a customer's supplier financing program, and, beginning Q1 2019, interest expense on our lease obligations under IFRS 16. See note 11 to our Q2 2019 Interim Financial Statements for separate quantification and discussion of impairment charges, if any, and the components of net restructuring and other charges (recoveries).
(2) The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments and non-core tax impacts (described in the table below).
(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 (including
(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 defined as total assets less: cash, ROU assets (described below), 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. A comparable measure under IFRS would be determined by dividing IFRS earnings before income taxes by average net invested capital (which we have set forth in the charts above and below), however, this measure (which we have called IFRS ROIC), is not a measure defined under IFRS. In connection with our adoption of IFRS 16 as of
(5) IFRS earnings (loss) per diluted share is calculated by dividing IFRS net earnings (loss) by the number of diluted weighted average shares outstanding (DWAS). In order to calculate IFRS loss per diluted share for Q2 2019, we used a DWAS of 131.1 million as at
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 | Six months ended | ||||||||||||||||||||||
| 2018 | Effective tax rate |
2019 | Effective tax rate |
2018 | Effective tax rate | 2019 | Effective tax rate | ||||||||||||||||
| IFRS tax expense and IFRS effective tax rate | $ | 4.8 | 23 | % | $ | 5.1 | (510 | )% | $ | 10.1 | 25 | % | $ | 9.6 | 10 | % | |||||||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||||||||||||||||
| Employee stock-based compensation expense | 0.6 | 0.1 | 1.0 | 0.5 | |||||||||||||||||||
| Net restructuring, impairment and other charges | 0.5 | 0.2 | 0.4 | 0.4 | |||||||||||||||||||
| Non-core tax impact related to tax uncertainties* | — | 3.3 | — | 3.9 | |||||||||||||||||||
| Non-core tax impact related to fair value adjustment on acquisitions** | 3.7 | (1.3 | ) | 3.7 | (1.3 | ) | |||||||||||||||||
| Non-core tax impacts related to restructured sites* | (1.6 | ) | 1.3 | 0.3 | 1.3 | ||||||||||||||||||
| Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 8.0 | 17 | % | $ | 8.7 | 36 | % | $ | 15.5 | 17 | % | $ | 14.4 | 32 | % | |||||||
*See note 12 to the Q2 2019 Interim Financial Statements.
** Consists of the Atrenne DTA for the 2018 periods, and a deferred tax adjustment attributable to our Impakt acquisition for the 2019 periods.
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 | Six months ended | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| IFRS earnings (loss) before income taxes | $ | 20.9 | $ | (1.0 | ) | $ | 40.3 | $ | 93.8 | ||||||
| Multiplier to annualize earnings | 4 | 4 | 2 | 2 | |||||||||||
| Annualized IFRS earnings (loss) before income taxes | $ | 83.6 | $ | (4.0 | ) | $ | 80.6 | $ | 187.6 | ||||||
| Average net invested capital for the period | $ | 1,329.6 | $ | 1,750.8 | $ | 1,293.2 | $ | 1,768.2 | |||||||
| IFRS ROIC % (1) | 6.3 | % | (0.2 | )% | 6.2 | % | 10.6 | % | |||||||
| Three months ended | Six months ended | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 53.1 | $ | 36.7 | $ | 97.8 | $ | 71.8 | |||||||
| Multiplier to annualize earnings | 4 | 4 | 2 | 2 | |||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 212.4 | $ | 146.8 | $ | 195.6 | $ | 143.6 | |||||||
| Average net invested capital for the period | $ | 1,329.6 | $ | 1,750.8 | $ | 1,293.2 | $ | 1,768.2 | |||||||
| Non-IFRS adjusted ROIC % (1) | 16.0 | % | 8.4 | % | 15.1 | % | 8.1 | % | |||||||
2018 |
2019 |
2019 |
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| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 3,737.7 | $ | 3,688.1 | $ | 3,633.7 | |||||||||
| Less: cash | 422.0 | 457.8 | 436.5 | ||||||||||||
| Less: right-of-use assets | — | 115.8 | 116.2 | ||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,512.6 | 1,344.8 | 1,349.2 | ||||||||||||
| Net invested capital at period end (1) | $ | 1,803.1 | $ | 1,769.7 | $ | 1,731.8 | |||||||||
2017 |
2018 |
2018 |
|||||||||||||
| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 2,964.2 | $ | 2,976.0 | $ | 3,212.2 | |||||||||
| Less: cash | 515.2 | 435.7 | 401.4 | ||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,228.6 | 1,278.1 | 1,413.8 | ||||||||||||
| Net invested capital at period end (1) | $ | 1,220.4 | $ | 1,262.2 | $ | 1,397.0 | |||||||||
(1) See footnote 4 of the previous table.
CELESTICA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars)
(unaudited)
| Note | 2018 |
2019 |
||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 422.0 | $ | 436.5 | ||||
| Accounts receivable | 5 | 1,206.6 | 1,023.6 | |||||
| Inventories | 6 | 1,089.9 | 1,085.9 | |||||
| Income taxes receivable | 5.0 | 6.8 | ||||||
| Assets classified as held for sale | 7 | 27.4 | 12.9 | |||||
| Other current assets | 72.6 | 63.8 | ||||||
| Total current assets | 2,823.5 | 2,629.5 | ||||||
| Property, plant and equipment | 365.3 | 358.0 | ||||||
| Right-of-use assets | 2 | — | 116.2 | |||||
| 4 | 198.4 | 202.6 | ||||||
| Intangible assets | 4 | 283.6 | 266.3 | |||||
| Deferred income taxes | 36.7 | 33.4 | ||||||
| Other non-current assets | 8 | 30.2 | 27.7 | |||||
| Total assets | $ | 3,737.7 | $ | 3,633.7 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility and lease obligations | 9 | $ | 107.7 | $ | 89.9 | |||
| Accounts payable | 1,126.7 | 937.9 | ||||||
| Accrued and other current liabilities | 6 | 320.4 | 345.7 | |||||
| Income taxes payable | 42.3 | 44.5 | ||||||
| Current portion of provisions | 23.2 | 21.1 | ||||||
| Total current liabilities | 1,620.3 | 1,439.1 | ||||||
| Long-term portion of borrowings under credit facility and lease obligations | 9 | 650.2 | 679.5 | |||||
| Pension and non-pension post-employment benefit obligations | 8 | 88.8 | 92.7 | |||||
| Provisions and other non-current liabilities | 20.6 | 28.6 | ||||||
| Deferred income taxes | 25.5 | 21.8 | ||||||
| Total liabilities | 2,405.4 | 2,261.7 | ||||||
| Equity: | ||||||||
| Capital stock | 10 | 1,954.1 | 1,827.0 | |||||
| 10 | (20.2 | ) | (6.5 | ) | ||||
| Contributed surplus | 906.6 | 973.5 | ||||||
| Deficit | (1,481.7 | ) | (1,397.5 | ) | ||||
| Accumulated other comprehensive loss | (26.5 | ) | (24.5 | ) | ||||
| Total equity | 1,332.3 | 1,372.0 | ||||||
| Total liabilities and equity | $ | 3,737.7 | $ | 3,633.7 | ||||
Commitments and Contingencies (note 14), Transitional adjustment related to adoption of IFRS 16 (note 2).
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 | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Revenue | 3 | $ | 1,695.2 | $ | 1,445.6 | $ | 3,194.9 | $ | 2,878.7 | |||||||
| Cost of sales | 6 | 1,590.4 | 1,347.8 | 2,996.6 | 2,693.5 | |||||||||||
| Gross profit | 104.8 | 97.8 | 198.3 | 185.2 | ||||||||||||
| Selling, general and administrative expenses (SG&A) | 52.7 | 60.7 | 105.0 | 116.8 | ||||||||||||
| Research and development | 6.8 | 7.2 | 12.8 | 13.8 | ||||||||||||
| Amortization of intangible assets | 3.7 | 7.8 | 5.7 | 15.6 | ||||||||||||
| Other charges (recoveries) | 11 | 15.8 | 10.5 | 26.3 | (81.0 | ) | ||||||||||
| Earnings from operations | 25.8 | 11.6 | 48.5 | 120.0 | ||||||||||||
| Finance costs | 4.9 | 12.6 | 8.2 | 26.2 | ||||||||||||
| Earnings (loss) before income taxes | 20.9 | (1.0 | ) | 40.3 | 93.8 | |||||||||||
| Income tax expense (recovery) | 12 | |||||||||||||||
| Current | 5.6 | 3.9 | 19.4 | 9.6 | ||||||||||||
| Deferred | (0.8 | ) | 1.2 | (9.3 | ) | — | ||||||||||
| 4.8 | 5.1 | 10.1 | 9.6 | |||||||||||||
| Net earnings (loss) for the period | $ | 16.1 | $ | (6.1 | ) | $ | 30.2 | $ | 84.2 | |||||||
| Basic earnings (loss) per share | $ | 0.12 | $ | (0.05 | ) | $ | 0.21 | $ | 0.63 | |||||||
| Diluted earnings (loss) per share | $ | 0.11 | $ | (0.05 | ) | $ | 0.21 | $ | 0.63 | |||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||||||
| Basic | 139.6 | 131.1 | 140.9 | 133.4 | ||||||||||||
| Diluted | 140.7 | 131.1 | 142.1 | 134.3 | ||||||||||||
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 | Six months ended | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Net earnings (loss) for the period | $ | 16.1 | $ | (6.1 | ) | $ | 30.2 | $ | 84.2 | |||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Items that will not be reclassified to net earnings: | ||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 8 | (63.3 | ) | — | (63.3 | ) | — | |||||||||
| Items that may be reclassified to net earnings (loss): | ||||||||||||||||
| Currency translation differences for foreign operations | (1.1 | ) | 0.3 | 0.2 | 0.1 | |||||||||||
| Changes from currency forward derivatives designated as hedges | 13 | (16.3 | ) | 5.2 | (17.8 | ) | 10.8 | |||||||||
| Changes from interest rate swap derivatives designated as hedges | 13 | — | (5.4 | ) | — | (8.9 | ) | |||||||||
| Total comprehensive income (loss) for the period | $ | (64.6 | ) | $ | (6.0 | ) | $ | (50.7 | ) | $ | 86.2 | |||||
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 10) |
(note 10) |
Contributed surplus |
Deficit | Accumulated other comprehensive loss(a) |
Total equity | ||||||||||||||||||
| Balance -- |
$ | 2,048.3 | $ | (8.7 | ) | $ | 863.0 | $ | (1,525.7 | ) | $ | (6.7 | ) | $ | 1,370.2 | |||||||||
| Capital transactions | 10 | |||||||||||||||||||||||
| Issuance of capital stock | 12.7 | — | (12.3 | ) | — | — | 0.4 | |||||||||||||||||
| Repurchase of capital stock for cancellation | (57.1 | ) | — | 18.8 | — | — | (38.3 | ) | ||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (9.6 | ) | — | — | — | (9.6 | ) | ||||||||||||||||
| Stock-based compensation and other | — | 6.4 | 12.0 | — | — | 18.4 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 30.2 | — | 30.2 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 8 | — | — | — | (63.3 | ) | — | (63.3 | ) | |||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | (17.8 | ) | (17.8 | ) | ||||||||||||||||
| Balance -- |
$ | 2,003.9 | $ | (11.9 | ) | $ | 881.5 | $ | (1,558.8 | ) | $ | (24.3 | ) | $ | 1,290.4 | |||||||||
| Balance -- |
$ | 1,954.1 | $ | (20.2 | ) | $ | 906.6 | $ | (1,481.7 | ) | $ | (26.5 | ) | $ | 1,332.3 | |||||||||
| Capital transactions | 10 | |||||||||||||||||||||||
| Issuance of capital stock | 5.3 | — | (5.3 | ) | — | — | — | |||||||||||||||||
| Repurchase of capital stock for cancellation | (132.4 | ) | — | 65.1 | — | — | (67.3 | ) | ||||||||||||||||
| Stock-based compensation and other | — | 13.7 | 7.1 | — | — | 20.8 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 84.2 | — | 84.2 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | 10.8 | 10.8 | ||||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | — | — | — | — | (8.9 | ) | (8.9 | ) | ||||||||||||||||
| Balance -- |
$ | 1,827.0 | $ | (6.5 | ) | $ | 973.5 | $ | (1,397.5 | ) | $ | (24.5 | ) | $ | 1,372.0 | |||||||||
(a) Accumulated other comprehensive loss is net of tax.
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 | Six months ended | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating activities: | ||||||||||||||||
| Net earnings (loss) for the period | $ | 16.1 | $ | (6.1 | ) | $ | 30.2 | $ | 84.2 | |||||||
| Adjustments to net earnings (loss) for items not affecting cash: | ||||||||||||||||
| Depreciation and amortization | 21.6 | 34.2 | 42.9 | 68.7 | ||||||||||||
| Equity-settled stock-based compensation | 10 | 7.2 | 8.2 | 17.6 | 20.0 | |||||||||||
| Other charges (recoveries) | 1.1 | 3.1 | 1.4 | (98.2 | ) | |||||||||||
| Finance costs | 4.9 | 12.6 | 8.2 | 26.2 | ||||||||||||
| Income tax expense | 4.8 | 5.1 | 10.1 | 9.6 | ||||||||||||
| Other | (4.4 | ) | 1.2 | (7.4 | ) | 11.1 | ||||||||||
| Changes in non-cash working capital items: | ||||||||||||||||
| Accounts receivable | (104.8 | ) | 12.3 | (86.4 | ) | 182.8 | ||||||||||
| Inventories | (65.3 | ) | (7.7 | ) | (170.1 | ) | 4.0 | |||||||||
| Other current assets | (6.2 | ) | 20.6 | (9.6 | ) | 15.3 | ||||||||||
| Accounts payable, accrued and other current liabilities and provisions | 121.4 | 11.6 | 166.6 | (152.8 | ) | |||||||||||
| Non-cash working capital changes | (54.9 | ) | 36.8 | (99.5 | ) | 49.3 | ||||||||||
| Net income tax paid | (11.3 | ) | (4.8 | ) | (23.8 | ) | (9.3 | ) | ||||||||
| Net cash provided by (used in) operating activities | (14.9 | ) | 90.3 | (20.3 | ) | 161.6 | ||||||||||
| Investing activities: | ||||||||||||||||
| Acquisitions, net of cash acquired | 4 | (141.7 | ) | 1.4 | (141.7 | ) | 1.4 | |||||||||
| Purchase of computer software and property, plant and equipment(a) | (25.1 | ) | (23.2 | ) | (42.3 | ) | (42.9 | ) | ||||||||
| Proceeds related to the sale of assets | 11 | — | — | 3.5 | 113.0 | |||||||||||
| Net cash provided by (used in) investing activities | (166.8 | ) | (21.8 | ) | (180.5 | ) | 71.5 | |||||||||
| Financing activities: | ||||||||||||||||
| Borrowings under prior credit facility | 9 | 163.0 | — | 163.0 | — | |||||||||||
| Repayments under prior credit facility | 9 | (344.3 | ) | — | (350.5 | ) | — | |||||||||
| Borrowings under current credit facility | 9 | 350.0 | — | 350.0 | 48.0 | |||||||||||
| Repayments under current credit facility | 9 | — | (45.5 | ) | — | (157.0 | ) | |||||||||
| Payment of lease obligations | (0.8 | ) | (9.5 | ) | (12.6 | ) | (18.8 | ) | ||||||||
| Issuance of capital stock | 0.2 | — | 0.4 | — | ||||||||||||
| Repurchase of capital stock for cancellation | 10 | (3.2 | ) | (22.8 | ) | (38.3 | ) | (67.3 | ) | |||||||
| Purchase of treasury stock for stock-based plans | 10 | (5.3 | ) | — | (9.6 | ) | — | |||||||||
| Finance costs paid (b) | 9 | (12.2 | ) | (12.0 | ) | (15.4 | ) | (23.5 | ) | |||||||
| Net cash provided by (used in) financing activities | 147.4 | (89.8 | ) | 87.0 | (218.6 | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (34.3 | ) | (21.3 | ) | (113.8 | ) | 14.5 | |||||||||
| Cash and cash equivalents, beginning of period | 435.7 | 457.8 | 515.2 | 422.0 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 401.4 | $ | 436.5 | $ | 401.4 | $ | 436.5 | ||||||||
(a) No additional equipment was acquired through finance leases in the second quarter of 2019, and
(b) Includes debt issuance costs paid of
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of
(unaudited)
1. REPORTING ENTITY
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated financial statements for the period ended
The Q2 2019 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 the related disclosures of contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts, historical experience and various other factors that we believe are reasonable under the circumstances. The economic environment could also impact certain estimates necessary to prepare our consolidated financial statements, including estimates related to the recoverable amounts used in our impairment testing of our non-financial assets, the discount rates applied to our net pension and non-pension post-employment benefit assets or liabilities, and the discount rates applied to our right-of-use (ROU) assets and related lease obligations under IFRS 16. Our assessment of these factors forms the basis for our judgments on the carrying values of 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 impact future periods as well. There have been no significant changes to our assumptions or the judgments affecting the application of our estimates and assumptions during Q2 2019 or 1H 2019 from those described in the notes to our 2018 AFS. However, see “Accounting policies” below for a discussion of recently adopted accounting standards.
Accounting policies:
The Q2 2019 Interim Financial Statements are based upon accounting policies consistent with those used and described in note 2 of our 2018 AFS, except for the recently adopted accounting standard discussed below. As a result, the following should be read as a modification to notes 2(j) and (x) to our 2018 AFS.
Recently adopted accounting standard:
IFRS 16, Leases:
(a) Initial adoption and application:
We adopted IFRS 16, which brings most leases on-balance sheet for lessees under a single model, effective
The following table sets forth the adjustments to our operating lease commitments at
| Operating lease commitments at |
$ | 107.4 | |
| Discounted using our incremental borrowing rate at |
(13.2 | ) | |
| Recognition exemption for short-term and low-value leases | (1.9 | ) | |
| Extension options reasonably certain to be exercised | 19.7 | ||
| Lease obligations recognized at |
112.0 | ||
| Lease obligations previously classified as finance leases under IAS 17 | 10.4 | ||
| Total lease obligations at |
$ | 122.4 | |
(b) Lease assessment:
We are the lessee of property, plant and equipment, primarily buildings and machinery. At the inception of a contract, we assess whether the arrangement is, or contains, a lease in accordance with IFRS 16. If we determine that it does, we recognize an ROU asset and a related lease obligation on the applicable lease commencement date. An ROU asset is initially measured based on the initial amount of the related lease obligation, subject to certain adjustments, if any, and then subsequently measured at such cost less accumulated depreciation and any accumulated impairment. Depreciation expense on an ROU asset is recorded using the straight-line method over the lease term in cost of sales or SG&A in our consolidated statement of operations, primarily based on the nature and use of the asset. The lease obligation is initially measured at the present value of the unpaid lease payments on the commencement date, discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, we use our incremental borrowing rate (taking country-specific risks into consideration), based on information available on the lease commencement date. We generally use our incremental borrowing rate as the discount rate. The interest expense on the lease obligations is recognized as finance costs in our consolidated statement of operations. The lease obligation is remeasured when there are adjustments to future lease payments arising from a change in applicable indices or rates, changes in the estimated amount expected to be payable under a residual value guarantee, or if we change our assessment of whether we will exercise an applicable purchase, extension or termination option. Upon any such remeasurement, a corresponding adjustment is made to the carrying amount of the related ROU asset, or is recorded in our consolidated statement of operations if the carrying amount of such ROU asset has been impaired.
(c) ROU assets and liabilities:
At
3. SEGMENT AND CUSTOMER REPORTING
Segments:
Information regarding the results of each reportable segment is set forth below:
| Revenue by segment: | Three months ended |
Six months ended |
||||||||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | |||||||||||||||||||||||
| % of total | % of total | % of total | % of total | |||||||||||||||||||||||
| ATS | $ | 553.2 | 33 | % | $ | 562.7 | 39 | % | $ | 1,086.0 | 34 | % | $ | 1,140.9 | 40 | % | ||||||||||
| CCS | 1,142.0 | 67 | % | 882.9 | 61 | % | 2,108.9 | 66 | % | 1,737.8 | 60 | % | ||||||||||||||
| Communications end market revenue as a % of total revenue | 42 | % | 39 | % | 41 | % | 39 | % | ||||||||||||||||||
| Enterprise end market revenue as a % of total revenue | 25 | % | 22 | % | 25 | % | 21 | % | ||||||||||||||||||
| Total | $ | 1,695.2 | $ | 1,445.6 | $ | 3,194.9 | $ | 2,878.7 | ||||||||||||||||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings (loss) before income taxes: | Three months ended |
Six months ended |
||||||||||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | Segment Margin | |||||||||||||||||||||
| ATS segment income and margin | $ | 28.2 | 5.1 | % | $ | 15.8 | 2.8 | % | $ | 56.1 | 5.2 | % | $ | 30.9 | 2.7 | % | ||||||||
| CCS segment income and margin | 24.9 | 2.2 | % | 20.9 | 2.4 | % | 41.7 | 2.0 | % | 40.9 | 2.4 | % | ||||||||||||
| Total segment income | 53.1 | 36.7 | 97.8 | 71.8 | ||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||
| Finance costs | 4.9 | 12.6 | 8.2 | 26.2 | ||||||||||||||||||||
| Employee stock-based compensation expense | 7.2 | 8.2 | 17.6 | 20.0 | ||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.4 | 3.8 | 12.8 | ||||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 11 | 15.8 | 10.5 | 26.3 | (81.0 | ) | ||||||||||||||||||
| Inventory fair value adjustment | 4 | 1.6 | — | 1.6 | — | |||||||||||||||||||
| IFRS earnings (loss) before income taxes | $ | 20.9 | $ | (1.0 | ) | $ | 40.3 | $ | 93.8 | |||||||||||||||
Customers:
For Q2 2019 and 1H 2019, we had two customers, one from each of our segments, that individually represented more than 10% of total revenue. For the second quarter of 2018 (Q2 2018) and the first half of 2018 (1H 2018), we had one customer from our CCS segment, that individually represented more than 10% of total revenue.
Seasonality:
From time to time, we experience some level of seasonality in our quarterly revenue patterns across some of our businesses. In recent periods, revenue from the storage component of our Enterprise end market has increased in the fourth quarter of the year compared to the third quarter, and then decreased in the first quarter of the following year, reflecting the increase in customer demand we typically experience in this business in the fourth quarter of each year. In addition, we typically experience our lowest overall revenue levels during the first quarter of each year. There is no assurance that these patterns will continue. The addition of new customers may also introduce different demand cycles than our existing businesses, creating more volatility and unpredictability in our revenue patterns as we adjust to this shift. These and other factors make it difficult to isolate the impact of seasonality on our business.
4. ACQUISITIONS
In
Details of our final purchase price allocation for the Atrenne acquisition are as follows:
| Atrenne | |||
| Current assets, net of |
$ | 31.5 | |
| Property, plant and equipment | 7.8 | ||
| Customer intangible assets and computer software assets | 51.0 | ||
| 62.6 | |||
| Current liabilities | (8.5 | ) | |
| Deferred income taxes and other long-term liabilities | (4.1 | ) | |
| $ | 140.3 | ||
In connection with our purchase of Atrenne, we recorded a
In
Details of our preliminary purchase price allocation for the Impakt acquisition are as follows:
| Impakt | |||
| Current assets, net of |
$ | 46.3 | |
| Property, plant and equipment and other long-term assets | 20.6 | ||
| Customer intangible assets and computer software assets | 219.3 | ||
| 116.9 | |||
| Current liabilities | (25.9 | ) | |
| Deferred income taxes | (51.8 | ) | |
| $ | 325.4 | ||
In 1H 2019, we updated the fair value assessment for certain Impakt assets and liabilities, resulting in a net
We engaged third-party consultants to provide valuations of certain inventory, property, plant and equipment and intangible assets in connection with our purchases of Atrenne and Impakt. The fair value of the acquired tangible assets was measured based on their value in-use, 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 were used in the valuation of the above-mentioned assets.
We incur consulting, transaction and integration costs relating to potential and completed acquisitions, including with respect to Atrenne and Impakt, and in 2019, charges related to the subsequent re-measurement of indemnification assets recorded in connection with our Impakt acquisition (collectively, Acquisition Costs). During Q2 2019 and 1H 2019, we recorded Acquisition Costs of
5. ACCOUNTS RECEIVABLE
Accounts receivable (A/R) sales program and supplier financing program (SFP):
We have an agreement to sell up to
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 realized gains on the disposition of previously written-down inventory. We recorded net inventory provisions of
Certain of our contracts provide for customer cash deposits to cover our risk of excess and obsolete inventory and/or for working capital requirements. Such deposits as of
7. ASSETS CLASSIFIED AS HELD FOR SALE
At
8. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS
We provide pension and non-pension post-employment defined benefit plans to our employees, including defined benefit pension plans for our employees in the
In
9. CREDIT FACILITIES AND LONG-TERM DEBT
In
As of
During Q1 2019, we borrowed
At
The following table sets forth our borrowings under the Credit Facility, and our lease obligations, at the dates shown:
2018 |
2019 |
||||||
| Borrowings under the Revolver (1) | $ | 159.0 | $ | 53.0 | |||
| Borrowings under the Term Loans (1) | 598.3 | 595.3 | |||||
| Total borrowings under Credit Facility | 757.3 | 648.3 | |||||
| Less: unamortized debt issuance costs related to our Term Loans(1) | (9.8 | ) | (10.2 | ) | |||
| Lease obligations (including lease obligations under IFRS 16 (note 2)) | 10.4 | 131.3 | |||||
| $ | 757.9 | $ | 769.4 | ||||
| Comprised of: | |||||||
| Current portion of borrowings under Credit Facility and lease obligations | $ | 107.7 | $ | 89.9 | |||
| Long-term portion of borrowings under Credit Facility and lease obligations | 650.2 | 679.5 | |||||
| $ | 757.9 | $ | 769.4 | ||||
(1) Debt issuance costs incurred in connection with our Revolver totaling
At
Finance costs consist of interest expense and fees paid related to our Credit Facility (including debt issuance and related amortization costs), our interest rate swap agreements, our AR sales program, the SFP, and commencing in Q1 2019, interest expense on our ROU lease obligations under IFRS 16. We paid finance costs of
At
10. CAPITAL STOCK
Share repurchase plans:
In
Stock-based compensation:
During Q2 2019 and 1H 2019, we did not purchase subordinate voting shares in the open market to satisfy delivery requirements under our stock-based compensation plans. During Q2 2018 and 1H 2018, we paid
During Q2 2019 and 1H 2019, we granted 0.2 million and 2.7 million restricted share units (RSUs), respectively (Q2 2018 and 1H 2018 — 0.1 million and 1.8 million RSUs, respectively), the majority of which vest one-third per year over a three-year period. During Q2 2019 and 1H 2019, we granted 0.03 million and 2.1 million performance share units (PSUs), respectively (Q2 2018 and 1H 2018 — 0.1 million and 1.6 million PSUs, respectively), representing 100% of target. The number of PSUs granted in 2019 and 2018 that will actually vest will vary from 0 to 200% of the target amount granted based on the level of achievement of a pre-determined non-market performance measurement in the final year of the three-year performance period, subject to modification by a separate pre-determined non-market financial target and our relative Total Shareholder Return (TSR) performance over the 3-year vesting period. The weighted average grant date fair value of RSUs granted in Q2 2019 and 1H 2019 was
For Q2 2019 and 1H 2019, we recorded aggregate employee stock-based compensation expense (excluding deferred share unit (DSU) expense) through cost of sales and SG&A of
11. OTHER CHARGES (RECOVERIES)
| Three months ended |
Six months ended |
||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Restructuring (a) | $ | 8.8 | $ | 9.0 | $ | 15.7 | $ | 16.1 | |||||||
| Transition Costs (Recoveries) (b) | 3.5 | 0.6 | 5.2 | (98.2 | ) | ||||||||||
| Accelerated amortization of unamortized deferred financing costs* | 1.2 | — | 1.2 | — | |||||||||||
| Acquisition costs and other (c) | 2.3 | 0.9 | 4.2 | 1.1 | |||||||||||
| $ | 15.8 | $ | 10.5 | $ | 26.3 | $ | (81.0 | ) | |||||||
* Recorded in connection with the extinguishment of our prior credit facility (see note 9).
(a) Restructuring:
We are currently implementing restructuring actions under a cost efficiency initiative (CEI), including actions related to our previously-disclosed CCS segment portfolio review (CCS Review) and our capital equipment business. See note 16(a) of our 2018 AFS for further detail. We recorded cash restructuring charges of
As of
(b) Transition Costs (Recoveries):
Transition Costs are comprised of transition-related relocation and duplicate costs pertaining to the relocation of our
In
In connection with the then-anticipated sale, we entered into a long-term lease in
(c) Acquisition costs and other:
During Q2 2019 and 1H 2019, we recorded
12. INCOME TAXES
Our effective income tax rate can vary significantly period-to-period for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the
No net tax impact was recorded on the Property Gain, as such gain was offset by the utilization of previously unrecognized tax losses.
During Q2 2019, our net income taxes were favorably impacted by a
During Q2 2018 and 1H 2018, our net income taxes were favorably impacted by the recognition of
13. 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, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives.
Currency risk:
The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. Our major currency exposures at
| Canadian dollar | Romanian Leu | Euro | Thai baht | Chinese renminbi | |||||||||||||||
| Cash and cash equivalents | $ | 4.4 | $ | 0.4 | $ | 15.1 | $ | 2.2 | $ | 26.8 | |||||||||
| Accounts receivable | 1.6 | 0.5 | 52.6 | 0.8 | 17.8 | ||||||||||||||
| Income taxes and value-added taxes receivable | 17.5 | 0.7 | 1.4 | 1.7 | 15.4 | ||||||||||||||
| Other financial assets | — | 1.0 | 1.7 | 0.4 | 0.6 | ||||||||||||||
| Pension and non-pension post-employment liabilities | (68.9 | ) | (0.1 | ) | (0.5 | ) | (14.4 | ) | (0.6 | ) | |||||||||
| Income taxes and value-added taxes payable | (1.8 | ) | — | (0.4 | ) | (1.9 | ) | — | |||||||||||
| Accounts payable and certain accrued and other liabilities and provisions | (51.3 | ) | (10.7 | ) | (44.5 | ) | (35.4 | ) | (23.1 | ) | |||||||||
| Net financial assets (liabilities) | $ | (98.5 | ) | $ | (8.2 | ) | $ | 25.4 | $ | (46.6 | ) | $ | 36.9 | ||||||
We enter into foreign exchange forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge our balance sheet exposures, generally for periods of up to 12 months. 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 |
Maximum period in months |
Fair value gain (loss) |
|||||||||
| Canadian dollar | $ | 209.5 | $ | 0.76 | 12 | $ | 3.1 | ||||||
| Thai baht | 92.0 | 0.03 | 12 | 3.1 | |||||||||
| Malaysian ringgit | 52.4 | 0.24 | 12 | (0.1 | ) | ||||||||
| Mexican peso | 22.2 | 0.05 | 12 | 0.6 | |||||||||
| British pound | 1.8 | 1.29 | 4 | (0.1 | ) | ||||||||
| Chinese renminbi | 75.4 | 0.15 | 12 | (0.3 | ) | ||||||||
| Euro | 36.3 | 1.14 | 12 | (0.3 | ) | ||||||||
| Romanian leu | 34.1 | 0.24 | 12 | — | |||||||||
| 25.6 | 0.74 | 12 | 0.1 | ||||||||||
| Other | 5.7 | 4 | (0.1 | ) | |||||||||
| Total | $ | 555.0 | $ | 6.0 | |||||||||
At
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 the Term Loans, we entered into 5-year agreements with a syndicate of third-party banks in August and
At
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, 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.
Other Matters:
In 2017, the
In
Contacts:Celestica Communications (416) 448-2200 media@celestica.com Celestica Investor Relations (416) 448-2211 clsir@celestica.com
Source: Celestica International Inc