Celestica Announces Third Quarter 2017 Financial Results and Intention to Launch Normal Course Issuer Bid
Third Quarter 2017 Highlights
- Revenue:
$1.53 billion , within our previously provided guidance range of$1.5 to $1.6 billion , decreased 2% compared to the third quarter of 2016 - Revenue dollars from our Communications end market increased 2% compared to the third quarter of 2016, and represented 45% of total revenue, compared to 43% of total revenue for the third quarter of 2016
- Revenue dollars from our Advanced Technology Solutions* end market decreased 4% compared to the third quarter of 2016, and represented 31% of total revenue, compared to 32% of total revenue for the third quarter of 2016
- Revenue dollars from our Enterprise* end market decreased 5% compared to the third quarter of 2016, and represented 24% of total revenue, compared to 25% of total revenue for the third quarter of 2016
- IFRS EPS:
$0.23 per share, compared to$0.37 per share for the third quarter of 2016. IFRS EPS for the third quarter of 2016 included a net benefit of$0.11 per share related to income taxes (Net Tax Benefit), discussed below - Adjusted EPS (non-IFRS):
$0.31 per share, within our previously provided guidance range of$0.28 to $0.34 per share, compared to$0.43 per share for the third quarter of 2016. Adjusted EPS for the third quarter of 2016 included the$0.11 per share Net Tax Benefit - Operating margin (non-IFRS): 3.6%, compared to 3.7% at the mid-point of our expectations, and 3.8% for the third quarter of 2016
- Adjusted ROIC (non-IFRS): 18.9%, compared to 21.2% for the third quarter of 2016
- Free cash flow (non-IFRS): negative
$44.1 million , compared to positive$99.5 million for the third quarter of 2016 (positive$2.2 million for the first nine months of 2017 compared to positive$40.9 million for the first nine months of 2016)
"Despite some headwinds driven by dynamic demand and volatility in the market, we remain committed to our strategy," said
"Moving forward, we will continue to invest to grow our business, pursue strategic acquisitions and return cash to our shareholders."
* Our Advanced Technology Solutions (ATS) end market is comprised of our aerospace and defense, industrial, smart energy, healthcare, semiconductor equipment, and consumer businesses. Our Enterprise end market is comprised of our servers and storage businesses.
Third Quarter Summary
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||
| Revenue (in millions) | $ | 1,554.0 | $ | 1,528.2 | $ | 4,392.8 | $ | 4,556.6 | ||||
| IFRS net earnings (in millions)(i) | $ | 53.6 | $ | 33.4 | $ | 115.4 | $ | 90.6 | ||||
| IFRS EPS(i)(ii) | $ | 0.37 | $ | 0.23 | $ | 0.80 | $ | 0.62 | ||||
| Non-IFRS adjusted net earnings (in millions) (ii) | $ | 62.0 | $ | 44.5 | $ | 141.4 | $ | 132.6 | ||||
| Non-IFRS adjusted EPS (ii) | $ | 0.43 | $ | 0.31 | $ | 0.98 | $ | 0.91 | ||||
| Non-IFRS adjusted return on invested capital (adjusted ROIC)(ii) | 21.2 | % | 18.9 | % | 20.1 | % | 19.8 | % | ||||
| Non-IFRS operating margin(ii) | 3.8 | % | 3.6 | % | 3.6 | % | 3.6 | % | ||||
- International Financial Reporting Standards (IFRS) earnings per share (EPS) for the third quarter of 2017 included an aggregate charge of
$0.08 (pre-tax) per share for employee stock-based compensation expense, amortization of intangible assets (excluding computer software) and restructuring charges. This aggregate charge is within the range of between$0.06 and $0.12 per share that we provided onJuly 25, 2017 for these items (see the tables in Schedule 1 attached hereto for per-item charges).
IFRS EPS for the first nine months of 2017 was favorably impacted by a$0.03 per share deferred income tax benefit recorded in the second quarter of 2017 related to the write-downs and impairments of our solar assets recorded in several prior quarters. In connection with our exit from the solar panel manufacturing business, we withdrew one of our tax incentives inThailand during the second quarter of 2017. The withdrawal of this incentive allows us to apply future tax losses arising from the ultimate disposition of our solar assets against other fully taxable profits inThailand , resulting in the deferred income tax benefit. - IFRS EPS and adjusted EPS (non-IFRS) for the third quarter of 2016 were favorably impacted by a
$0.11 per share net benefit related to income taxes, comprised primarily of a$0.24 per share income tax recovery attributable to the resolution of certain previously disputed tax matters inCanada (including the accrual of related refund interest income), offset in part by: (i) an aggregate$0.09 per share negative impact from current and deferred withholding taxes and other deferred tax charges, (ii) a$0.02 per share income tax expense related to taxable foreign exchange resulting from the weakening of the Malaysian ringgit and Chinese renminbi relative to the U.S. dollar, and (iii) a$0.02 per share negative impact for other tax items. See note 12 to ourSeptember 30, 2017 unaudited interim condensed consolidated financial statements.
Non-IFRS measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other public companies that use IFRS or other generally accepted accounting principles (GAAP). See "Non-IFRS Supplementary Information" below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures.
End Markets by Quarter as a Percentage of Total Revenue
As previously disclosed, commencing in the first quarter of 2017, we have aligned our end markets into two customer focused areas: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS end market consists of our former Diversified and Consumer end markets, and is comprised of our aerospace and defense, industrial, smart energy, healthcare, semiconductor equipment, and consumer businesses. CCS consists of our Communications and Enterprise end markets. Our Enterprise end market is comprised of our servers and storage businesses, which were combined into one end market as a result of their converging technologies. All period percentages herein reflect these changes.
| 2016 | 2017 | |||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | FY | Q1 | Q2 | Q3 | |||||||||||||||||
| Communications | 38 | % | 41 | % | 43 | % | 44 | % | 42 | % | 42 | % | 44 | % | 45 | % | ||||||||
| Advanced Technology Solutions | 37 | % | 33 | % | 32 | % | 29 | % | 32 | % | 34 | % | 31 | % | 31 | % | ||||||||
| Enterprise | 25 | % | 26 | % | 25 | % | 27 | % | 26 | % | 24 | % | 25 | % | 24 | % | ||||||||
| Revenue (in billions) | $ | 1.35 | $ | 1.49 | $ | 1.55 | $ | 1.62 | $ | 6.02 | $ | 1.47 | $ | 1.56 | $ | 1.53 | ||||||||
Intention to Launch Normal Course Issuer Bid (NCIB)
We intend to file with the
Executive Leadership Change
As previously announced, Mr.
Fourth Quarter 2017 Outlook
For the quarter ending
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 provided without the most directly comparable IFRS financial measures may vary materially from the corresponding IFRS financial measures.
Third Quarter 2017 Webcast
Management will host its third quarter 2017 results conference call today at
Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS,
About
For more information, visit http://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 news release contains forward-looking statements, including, without limitation, those related to our future growth; trends in the electronics manufacturing services (EMS) industry; our anticipated financial and/or operational results, including our quarterly revenue, non-IFRS operating margin and earnings guidance; the impact of acquisitions and program wins or losses on our financial results and working capital requirements; anticipated expenses, restructuring actions and charges, and capital expenditures, including the anticipated timing and funding thereof and other anticipated working capital requirements; our intention to launch a new NCIB, and if accepted, the number of subordinate voting shares we may be permitted to purchase thereunder, and the timing and manner of such purchases; the impact of tax and litigation outcomes; our cash flows, financial targets and priorities; intended investments in our business; changes in our mix of revenue by end market; our ability to diversify and grow our customer base and develop new capabilities; the impact of increased competition and pricing pressures on our financial results; the possibility of future write-downs on unrecovered amounts from solar receivables or sale proceeds below the carrying amount of our solar equipment; the anticipated termination and settlement of our solar equipment leases; our intention to settle outstanding equity awards with subordinate voting shares; the potential impact of new accounting standards on our consolidated financial statements and the timing of related transition activities; and our intentions with respect to our U.K. Supplementary pension plan. 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 for the purpose of assisting readers in understanding management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. Forward-looking statements are not guarantees of future performance and are subject to risks that could cause actual results to differ materially from conclusions, forecasts or projections expressed in such forward-looking statements, including, among others, risks related to: our customers' ability to compete and succeed in the marketplace with the services we provide and the products we manufacture; changes in our mix of customers and/or the types of products or services we provide; seasonality impacting the quarterly revenue of some of our businesses; price, margin pressures, and other competitive factors generally affecting, and the highly competitive nature of, the EMS industry; price and other competitive factors affecting our Communications and Enterprise end markets; managing our operations and our working capital performance during uncertain market and economic conditions; responding to changes in demand, rapidly evolving and changing technologies, and changes in our customers' business and outsourcing strategies, including the insourcing of programs; customer concentration and the challenges of diversifying our customer base and replacing revenue from completed or lost programs, or customer disengagements; customer, competitor and/or supplier consolidation; changing commodity, material and component costs, as well as labor costs and 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 control, including as a result of
Our revenue, earnings and other financial guidance, as 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: production schedules from our customers, which generally range from 30 days to 90 days and can fluctuate significantly in terms of volume and mix of products or services; the timing and execution of, and investments associated with, ramping new business; the success in the marketplace of our customers' products; the pace of change in our traditional end markets and our ability to retain programs and customers; the stability of general economic and market conditions, currency exchange rates, and interest rates; our pricing, the competitive environment and contract terms and conditions; supplier performance, pricing and terms; compliance by third parties with their contractual obligations, the accuracy of their representations and warranties, and the performance of their covenants; the costs and availability of components, materials, services, plant and capital equipment, labor, energy and transportation; operational and financial matters including the extent, timing and costs of replacing revenue from completed or lost programs, or customer disengagements; technological developments; the timing and extent of recoveries from the sale of manufacturing equipment related to our exit from the solar panel manufacturing business and our ability to recover accounts receivable outstanding from a former solar supplier; the timing, execution and effect of restructuring actions; our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities; our ability to diversify our customer base and develop new capabilities; the availability of cash for repurchases of outstanding subordinate voting shares under an NCIB; and compliance with applicable laws and regulations pertaining to NCIBs. While management believes these assumptions to be reasonable under the current circumstances, they may prove to be inaccurate. 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 as a percentage of revenue), adjusted net earnings, adjusted earnings per share, adjusted return on invested capital (adjusted ROIC), free cash flow and adjusted effective tax rate. Adjusted EBIAT, adjusted ROIC, free cash flow 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, other solar charges (described below), the write-down of goodwill, intangible assets and property, plant and equipment, all net of the associated tax adjustments (which are set forth in the table below), and deferred tax write-offs/costs or recoveries associated with restructuring actions or restructured sites.
We believe the non-IFRS measures we present herein are useful, as they enable investors to evaluate and compare our results from operations and cash resources generated from our business in a more consistent manner (by excluding specific items that we do not consider to be reflective of our ongoing operating results) and provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of 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 may not be comparable to similar measures presented by other public companies that use IFRS, or who report under U.S. GAAP and use non-U.S. GAAP measures to describe similar operating metrics. Non-IFRS measures are not measures of performance under IFRS and should not be considered in isolation or as a substitute for any standardized measure under IFRS. The most significant limitation to management's use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS measures are nonetheless charges or credits that are recognized under IFRS and that have an economic impact on the company. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of the company's performance, and reconciling non-IFRS results back to IFRS results.
The economic substance of these exclusions 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 U.S. GAAP and use non-U.S. GAAP measures to present similar metrics.
Amortization charges (excluding computer software) consist of non-cash charges against intangible assets that are impacted by the timing and magnitude of acquired businesses. Amortization of intangible assets varies among our competitors, and we believe that excluding these charges permits a better comparison of core operating results with those of our competitors who also generally exclude amortization charges in assessing operating performance.
Restructuring and other charges, net of recoveries, include 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, acquisition-related integration, transaction and consulting costs, and legal settlements (recoveries). We exclude restructuring and other charges, net of recoveries, because we believe that they are not directly related to ongoing core 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.
Other solar charges, consisting of non-cash charges to further write down the carrying value of our then-remaining solar panel inventory and the write-down of solar accounts receivable (A/R) (primarily as a result of a solar customer's bankruptcy) to estimated recoverable amounts, were recorded in the second quarter of 2017 through cost of sales and SG&A expenses, respectively. Both of these impairment charges, which were identified during the wind down phase of our solar operations after our decision to exit the solar panel manufacturing business, are excluded as they pertain to a business we have exited, and we therefore believe they are no longer directly related to our ongoing core operating results. Although we recorded significant impairment charges to write down our solar panel inventory in the third quarter of 2016, those charges were not excluded in the determination of our non-IFRS financial measures for such period, as we were then still engaged in the solar panel manufacturing business. In connection with this wind down, we also recorded non-cash impairment charges to further write down the carrying value of our solar panel manufacturing equipment held for sale to its estimated fair value (at period-end) less costs to sell, which we recorded through other charges in the second quarter of 2017.
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.
Deferred tax write-offs/costs or recoveries associated with restructuring actions or restructured sites are excluded, as we believe that these write-offs/costs or recoveries do not reflect core operating performance and vary significantly among those of our competitors who also generally exclude these charges or recoveries in assessing operating performance.
The following table sets forth, for the periods indicated, the various non-IFRS measures discussed above, and a reconciliation of IFRS to non-IFRS measures (in millions, except percentages and per share amounts):
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||
| 2016 | 2017 | 2016 | 2017 | ||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||
| IFRS revenue | $ | 1,554.0 | $ | 1,528.2 | $ | 4,392.8 | $ | 4,556.6 | |||||||||||||
| IFRS gross profit | $ | 111.1 | 7.1 | % | $ | 104.1 | 6.8 | % | $ | 315.7 | 7.2 | % | $ | 315.4 | 6.9 | % | |||||
| Employee stock-based compensation expense | 2.9 | 2.9 | 10.4 | 11.4 | |||||||||||||||||
| Other solar charges (inventory write-down) | - | - | - | 0.9 | |||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 114.0 | 7.3 | % | $ | 107.0 | 7.0 | % | $ | 326.1 | 7.4 | % | $ | 327.7 | 7.2 | % | |||||
| IFRS SG&A | $ | 51.5 | 3.3 | % | $ | 48.0 | 3.1 | % | $ | 157.9 | 3.6 | % | $ | 152.1 | 3.3 | % | |||||
| Employee stock-based compensation expense | (3.5 | ) | (3.1 | ) | (12.2 | ) | (11.3 | ) | |||||||||||||
| Other solar charges (A/R write-down) | - | - | - | (0.5 | ) | ||||||||||||||||
| Non-IFRS adjusted SG&A | $ | 48.0 | 3.1 | % | $ | 44.9 | 2.9 | % | $ | 145.7 | 3.3 | % | $ | 140.3 | 3.1 | % | |||||
| IFRS earnings before income taxes | $ | 53.4 | 3.4 | % | $ | 40.8 | 2.7 | % | $ | 131.7 | 3.0 | % | $ | 110.3 | 2.4 | % | |||||
| Finance costs | 2.4 | 2.3 | 7.3 | 7.5 | |||||||||||||||||
| Refund interest income | (6.0 | ) | - | (6.0 | ) | - | |||||||||||||||
| Employee stock-based compensation expense | 6.4 | 6.0 | 22.6 | 22.7 | |||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 1.5 | 1.4 | 4.5 | 4.4 | |||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 1.0 | 3.9 | (0.3 | ) | 19.5 | ||||||||||||||||
| Other solar charges (inventory and A/R write-down) | - | - | - | 1.4 | |||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) (1). | $ | 58.7 | 3.8 | % | $ | 54.4 | 3.6 | % | $ | 159.8 | 3.6 | % | $ | 165.8 | 3.6 | % | |||||
| IFRS net earnings | $ | 53.6 | 3.4 | % | $ | 33.4 | 2.2 | % | $ | 115.4 | 2.6 | % | $ | 90.6 | 2.0 | % | |||||
| Employee stock-based compensation expense | 6.4 | 6.0 | 22.6 | 22.7 | |||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 1.5 | 1.4 | 4.5 | 4.4 | |||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 1.0 | 3.9 | (0.3 | ) | 19.5 | ||||||||||||||||
| Other solar charges (inventory and A/R write-down) | - | - | - | 1.4 | |||||||||||||||||
| Adjustments for taxes (2) | (0.5 | ) | (0.2 | ) | (0.8 | ) | (6.0 | ) | |||||||||||||
| Non-IFRS adjusted net earnings | $ | 62.0 | $ | 44.5 | $ | 141.4 | $ | 132.6 | |||||||||||||
| Diluted EPS | |||||||||||||||||||||
| Weighted average # of shares (in millions) | 143.0 | 145.7 | 144.0 | 145.1 | |||||||||||||||||
| IFRS earnings per share | $ | 0.37 | $ | 0.23 | $ | 0.80 | $ | 0.62 | |||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.43 | $ | 0.31 | $ | 0.98 | $ | 0.91 | |||||||||||||
| # of shares outstanding at period end (in millions) | 140.8 | 143.7 | 140.8 | 143.7 | |||||||||||||||||
| IFRS cash provided by (used in) operations | $ | 108.6 | $ | (7.5 | ) | $ | 85.8 | $ | 83.3 | ||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (11.7 | ) | (32.2 | ) | (45.3 | ) | (81.2 | ) | |||||||||||||
| Finance lease payments | (1.1 | ) | (1.7 | ) | (3.5 | ) | (4.8 | ) | |||||||||||||
| Repayments from former solar supplier | 6.0 | - | 11.0 | 12.5 | |||||||||||||||||
| Finance costs paid | (2.3 | ) | (2.7 | ) | (7.1 | ) | (7.6 | ) | |||||||||||||
| Non-IFRS free cash flow (3) | $ | 99.5 | $ | (44.1 | ) | $ | 40.9 | $ | 2.2 | ||||||||||||
| IFRS ROIC % (4) | 19.3 | % | 14.2 | % | 16.6 | % | 13.2 | % | |||||||||||||
| Non-IFRS adjusted ROIC % (4) | 21.2 | % | 18.9 | % | 20.1 | % | 19.8 | % | |||||||||||||
| (1) | Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess our operational performance related to our core operations. Non-IFRS adjusted EBIAT is defined as earnings before finance costs (consisting of interest and fees related to our credit facility, our accounts receivable sales program and a customer's supplier financing program), amortization of intangible assets (excluding computer software) and income taxes. Non-IFRS adjusted EBIAT also excludes, in periods where such charges have been recorded, employee stock-based compensation expense, restructuring and other charges, including acquisition-related integration, transaction, and consulting costs (net of recoveries), impairment charges, other solar charges, and refund interest income with respect to amounts previously held on account with Canadian tax authorities. |
| (2) | The adjustments for taxes, as applicable, represent the tax effects on our non-IFRS adjustments and tax write-offs/costs or recoveries related to restructured sites (described below). |
| Our effective tax rate for the third quarter of 2017 was 18%. After excluding the tax effects of non-IFRS adjustments, our non-IFRS adjusted effective tax rate for the third quarter of 2017 was 15%. Our non-IFRS adjusted effective tax rate for the third quarter of 2017 was determined by excluding $0.2 million of tax benefits from our IFRS tax expense for the period, related to employee stock-based compensation. Our effective tax rate for the nine months ended September 30, 2017 was 18%. After excluding the tax effects of non-IFRS adjustments and tax recoveries related to restructured sites, our non-IFRS adjusted effective tax rate for the nine months ended September 30, 2017 was 16%. Our non-IFRS adjusted effective tax rate for the nine months ended September 30, 2017 was determined by excluding $6.0 million of tax benefits from our IFRS tax expense for the period, comprised of tax benefits related to employee stock-based compensation expense of $0.8 million, tax benefits related to net restructuring, impairment and other charges (including other solar charges) of $1.8 million, tax benefits of $3.2 million in the second quarter of 2017 related to solar impairments recorded in several prior quarters, and other tax benefits related to restructured sites of $0.2 million. | |
| Our effective tax rate for the third quarter of 2016 was (0.4)%. After excluding the tax effects of non-IFRS adjustments, our non-IFRS adjusted effective tax rate for the third quarter of 2016 was 0.5%. Our non-IFRS adjusted effective tax rate for the third quarter of 2016 was determined by excluding $0.5 million of tax benefits from our IFRS tax expense for the period, comprised primarily of tax benefits related to employee stock-based compensation expense of $0.4 million. Our effective tax rate for the nine months ended September 30, 2016 was 12%. After excluding the tax effects of non-IFRS adjustments and tax write-offs related to restructured sites, our non-IFRS adjusted effective tax rate for the nine months ended September 30, 2016 was 11%. Our non-IFRS adjusted effective tax rate for the nine months ended September 30, 2016 was determined by excluding $0.8 million of net tax benefits from our IFRS tax expense for the period, comprised of tax benefits related to employee stock-based compensation expense of $1.4 million and tax benefits related to restructuring, impairment and other charges of $0.3 million; offset in part by tax costs related to restructured sites of $0.9 million. | |
| (3) | Management uses non-IFRS free cash flow as a measure, in addition to IFRS cash flow 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), finance lease payments, repayments from a former solar supplier, and finance costs paid. In periods when it is relevant (third quarter of 2015), non-IFRS free cash flow also includes deposits received on the anticipated sale of real property (see note 18 to our 2016 annual audited consolidated financial statements). Note that non-IFRS free cash flow, however, does not represent residual cash flow available to Celestica for discretionary expenditures. |
| (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. Our non-IFRS adjusted ROIC measure reflects non-IFRS operating earnings, working capital management and asset utilization. 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) consists of the following IFRS measures: total assets less cash, accounts payable, accrued and other current liabilities and provisions, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter and a four-point average to calculate average net invested capital for the nine-month period. A comparable measure under IFRS would be determined by dividing IFRS earnings before income taxes by 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. |
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 September 30 | Nine months ended September 30 | |||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||
| IFRS earnings before income taxes | $ | 53.4 | $ | 40.8 | $ | 131.7 | $ | 110.3 | ||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | ||||||||
| Annualized IFRS earnings before income taxes | $ | 213.6 | $ | 163.2 | $ | 175.6 | $ | 147.0 | ||||
| Average net invested capital for the period | $ | 1,108.5 | $ | 1,149.3 | $ | 1,059.0 | $ | 1,116.3 | ||||
| IFRS ROIC % (1) | 19.3 | % | 14.2 | % | 16.6 | % | 13.2 | % | ||||
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 58.7 | $ | 54.4 | $ | 159.8 | $ | 165.8 | ||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | ||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 234.8 | $ | 217.6 | $ | 213.0 | $ | 221.0 | ||||
| Average net invested capital for the period | $ | 1,108.5 | $ | 1,149.3 | $ | 1,059.0 | $ | 1,116.3 | ||||
| Non-IFRS adjusted ROIC % (1) | 21.2 | % | 18.9 | % | 20.1 | % | 19.8 | % | ||||
| December 31 2016 |
March 31 2017 |
June 30 2017 |
September 30 2017 |
|||||||||
| Net invested capital consists of: | ||||||||||||
| Total assets | $ | 2,822.3 | $ | 2,814.6 | $ | 2,857.7 | $ | 2,871.7 | ||||
| Less: cash | 557.2 | 558.0 | 582.7 | 527.0 | ||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,189.7 | 1,165.5 | 1,168.4 | 1,152.7 | ||||||||
| Net invested capital at period end (1) | $ | 1,075.4 | $ | 1,091.1 | $ | 1,106.6 | $ | 1,192.0 | ||||
| December 31 2015 |
March 31 2016 |
June 30 2016 |
September 30 2016 |
|||||||||
| Net invested capital consists of: | ||||||||||||
| Total assets | $ | 2,612.0 | $ | 2,621.9 | $ | 2,720.1 | $ | 2,813.7 | ||||
| Less: cash | 545.3 | 511.5 | 472.9 | 542.0 | ||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,104.3 | 1,053.8 | 1,122.5 | 1,179.4 | ||||||||
| Net invested capital at period end (1) | $ | 962.4 | $ | 1,056.6 | $ | 1,124.7 | $ | 1,092.3 | ||||
| (1) | See footnote 4 of the previous table. |
GUIDANCE SUMMARY
| Q3 2017 Guidance | Q3 2017 Actual | Q4 2017 Guidance (1) | |
| IFRS revenue (in billions) | $1.5 to $1.6 | $1.53 | $1.5 to $1.6 |
| Non-IFRS operating margin | 3.7% at the mid-point of expectations | 3.6% | 3.6% at the mid-point of expectations |
| Non-IFRS adjusted EPS | $0.28 to $0.34 | $0.31 | $0.27 to $0.33 |
| (1) | For the fourth quarter of 2017, we anticipate a negative $0.09 to $0.15 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation expense, amortization of intangible assets (excluding computer software) and restructuring charges. Our estimate of restructuring charges included in this guidance represents completing actions previously identified as part of our OD and GBS initiatives (and does not account for any additional restructuring actions that may result from our operational review currently in progress). We cannot predict changes in currency exchange rates, the impact of such changes on our operating results, or the degree to which we will be able to manage such impacts. In addition, although we monitor potential triggering events throughout the year, we cannot predict the outcome of our annual impairment assessment of goodwill, intangible assets and property, plant and equipment, which is conducted in the fourth quarter of each year. |
| CELESTICA INC. | |||||||
| CONDENSED CONSOLIDATED BALANCE SHEET | |||||||
| (in millions of U.S. dollars) | |||||||
| (unaudited) | |||||||
| December 31 2016 |
September 30 2017 |
||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 557.2 | $ | 527.0 | |||
| Accounts receivable (note 5) | 790.5 | 732.3 | |||||
| Inventories (note 6) | 890.6 | 1,023.7 | |||||
| Income taxes receivable | 5.4 | 1.1 | |||||
| Assets classified as held-for-sale (note 7) | 28.9 | 28.6 | |||||
| Other current assets | 73.9 | 79.9 | |||||
| Total current assets | 2,346.5 | 2,392.6 | |||||
| Property, plant and equipment | 302.7 | 318.2 | |||||
| Goodwill | 23.2 | 23.2 | |||||
| Intangible assets | 25.5 | 22.6 | |||||
| Deferred income taxes | 36.4 | 40.9 | |||||
| Other non-current assets (note 8) | 88.0 | 74.2 | |||||
| Total assets | $ | 2,822.3 | $ | 2,871.7 | |||
| Liabilities and Equity | |||||||
| Current liabilities: | |||||||
| Current portion of borrowings under credit facility and finance lease obligations (notes 4 & 9) | $ | 56.0 | $ | 38.9 | |||
| Accounts payable | 876.9 | 864.0 | |||||
| Accrued and other current liabilities | 261.7 | 231.0 | |||||
| Income taxes payable | 32.4 | 40.2 | |||||
| Current portion of provisions | 18.7 | 17.5 | |||||
| Total current liabilities | 1,245.7 | 1,191.6 | |||||
| Long-term portion of borrowings under credit facility and finance lease obligations (notes 4 & 9) | 188.7 | 173.2 | |||||
| Pension and non-pension post-employment benefit obligations | 86.0 | 94.6 | |||||
| Provisions and other non-current liabilities | 28.3 | 30.4 | |||||
| Deferred income taxes | 34.8 | 24.4 | |||||
| Total liabilities | 1,583.5 | 1,514.2 | |||||
| Equity: | |||||||
| Capital stock (note 10) | 2,048.2 | 2,078.5 | |||||
| Treasury stock (note 10) | (15.3 | ) | (10.6 | ) | |||
| Contributed surplus | 862.6 | 851.4 | |||||
| Deficit | (1,632.0 | ) | (1,558.4 | ) | |||
| Accumulated other comprehensive loss | (24.7 | ) | (3.4 | ) | |||
| Total equity | 1,238.8 | 1,357.5 | |||||
| Total liabilities and equity | $ | 2,822.3 | $ | 2,871.7 | |||
Contingencies (note 14), Subsequent event (note 15)
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 September 30 | Nine months ended September 30 | ||||||||||||
| 2016 | 2017 | 2016 | 2017 | ||||||||||
| Revenue | $ | 1,554.0 | $ | 1,528.2 | $ | 4,392.8 | $ | 4,556.6 | |||||
| Cost of sales (note 6) | 1,442.9 | 1,424.1 | 4,077.1 | 4,241.2 | |||||||||
| Gross profit | 111.1 | 104.1 | 315.7 | 315.4 | |||||||||
| Selling, general and administrative expenses (SG&A) | 51.5 | 48.0 | 157.9 | 152.1 | |||||||||
| Research and development | 6.5 | 6.9 | 18.2 | 19.3 | |||||||||
| Amortization of intangible assets | 2.3 | 2.2 | 6.9 | 6.7 | |||||||||
| Other charges (recoveries) (note 11) | 1.0 | 3.9 | (0.3 | ) | 19.5 | ||||||||
| Earnings from operations | 49.8 | 43.1 | 133.0 | 117.8 | |||||||||
| Refund interest income (note 12) | (6.0 | ) | - | (6.0 | ) | - | |||||||
| Finance costs | 2.4 | 2.3 | 7.3 | 7.5 | |||||||||
| Earnings before income taxes | 53.4 | 40.8 | 131.7 | 110.3 | |||||||||
| Income tax expense (recovery) (note 12): | |||||||||||||
| Current | (14.2 | ) | 8.5 | 4.8 | 35.6 | ||||||||
| Deferred | 14.0 | (1.1 | ) | 11.5 | (15.9 | ) | |||||||
| (0.2 | ) | 7.4 | 16.3 | 19.7 | |||||||||
| Net earnings for the period | $ | 53.6 | $ | 33.4 | $ | 115.4 | $ | 90.6 | |||||
| Basic earnings per share | $ | 0.38 | $ | 0.23 | $ | 0.81 | $ | 0.63 | |||||
| Diluted earnings per share | $ | 0.37 | $ | 0.23 | $ | 0.80 | $ | 0.62 | |||||
| Shares used in computing per share amounts (in millions): | |||||||||||||
| Basic | 140.8 | 143.7 | 142.1 | 143.1 | |||||||||
| Diluted | 143.0 | 145.7 | 144.0 | 145.1 | |||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. | |||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | |||||||||||||
| (in millions of U.S. dollars) | |||||||||||||
| (unaudited) | |||||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||
| 2016 | 2017 | 2016 | 2017 | ||||||||||
| Net earnings for the period | $ | 53.6 | $ | 33.4 | $ | 115.4 | $ | 90.6 | |||||
| Other comprehensive income, net of tax: | |||||||||||||
| Items that will not be reclassified to net earnings: | |||||||||||||
| Loss on pension plan assets (note 8) | - | - | - | (17.0 | ) | ||||||||
| Items that may be reclassified to net earnings: | |||||||||||||
| Currency translation differences for foreign operations | 0.4 | (0.1 | ) | 2.6 | 0.7 | ||||||||
| Changes from derivatives designated as hedges | (2.5 | ) | 3.1 | 18.7 | 20.6 | ||||||||
| Total comprehensive income for the period | $ | 51.5 | $ | 36.4 | $ | 136.7 | $ | 94.9 | |||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. | ||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY | ||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| Capital stock (note 10) |
Treasury stock (note 10) |
Contributed surplus | Deficit | Accumulated other comprehensive loss (a) |
Total equity | |||||||||||||||
| Balance -- January 1, 2016 | $ | 2,093.9 | $ | (31.4 | ) | $ | 846.7 | $ | (1,785.4 | ) | $ | (32.8 | ) | $ | 1,091.0 | |||||
| Capital transactions (note 10): | ||||||||||||||||||||
| Issuance of capital stock | 5.3 | - | (2.0 | ) | - | - | 3.3 | |||||||||||||
| Repurchase of capital stock for cancellation. | (52.1 | ) | - | 17.8 | - | - | (34.3 | ) | ||||||||||||
| Purchase of treasury stock for stock-based plans | - | (5.3 | ) | (4.2 | ) | - | - | (9.5 | ) | |||||||||||
| Stock-based compensation and other | - | 27.2 | (3.1 | ) | - | - | 24.1 | |||||||||||||
| Total comprehensive income: | ||||||||||||||||||||
| Net earnings for the period | - | - | - | 115.4 | - | 115.4 | ||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||
| Currency translation differences for foreign operations | - | - | - | - | 2.6 | 2.6 | ||||||||||||||
| Changes from derivatives designated as hedges | - | - | - | - | 18.7 | 18.7 | ||||||||||||||
| Balance -- September 30, 2016 | $ | 2,047.1 | $ | (9.5 | ) | $ | 855.2 | $ | (1,670.0 | ) | $ | (11.5 | ) | $ | 1,211.3 | |||||
| Balance -- January 1, 2017 | $ | 2,048.2 | $ | (15.3 | ) | $ | 862.6 | $ | (1,632.0 | ) | $ | (24.7 | ) | $ | 1,238.8 | |||||
| Capital transactions (note 10): | ||||||||||||||||||||
| Issuance of capital stock | 30.3 | - | (16.8 | ) | - | - | 13.5 | |||||||||||||
| Purchase of treasury stock for stock-based plans | - | (12.2 | ) | - | - | - | (12.2 | ) | ||||||||||||
| Stock-based compensation and other | - | 16.9 | 5.6 | - | - | 22.5 | ||||||||||||||
| Total comprehensive income: | ||||||||||||||||||||
| Net earnings for the period | - | - | - | 90.6 | - | 90.6 | ||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Loss on pension plan assets (note 8) | - | - | - | (17.0 | ) | - | (17.0 | ) | ||||||||||||
| Currency translation differences for foreign operations | - | - | - | - | 0.7 | 0.7 | ||||||||||||||
| Changes from derivatives designated as hedges | - | - | - | - | 20.6 | 20.6 | ||||||||||||||
| Balance -- September 30, 2017 | $ | 2,078.5 | $ | (10.6 | ) | $ | 851.4 | $ | (1,558.4 | ) | $ | (3.4 | ) | $ | 1,357.5 | |||||
| (a) | Accumulated other comprehensive loss is net of tax. |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. | |||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS | |||||||||||||
| (in millions of U.S. dollars) | |||||||||||||
| (unaudited) | |||||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||
| 2016 | 2017 | 2016 | 2017 | ||||||||||
| Cash provided by (used in): | |||||||||||||
| Operating activities: | |||||||||||||
| Net earnings for the period | $ | 53.6 | $ | 33.4 | $ | 115.4 | $ | 90.6 | |||||
| Adjustments to net earnings for items not affecting cash: | |||||||||||||
| Depreciation and amortization | 18.5 | 19.4 | 55.3 | 56.9 | |||||||||
| Equity-settled stock-based compensation | 6.4 | 6.0 | 22.6 | 22.7 | |||||||||
| Other charges | - | - | 2.2 | 7.1 | |||||||||
| Finance costs, net of refund interest income | (3.6 | ) | 2.3 | 1.3 | 7.5 | ||||||||
| Income tax expense (recovery) | (0.2 | ) | 7.4 | 16.3 | 19.7 | ||||||||
| Other | 2.1 | 0.8 | 1.1 | (3.9 | ) | ||||||||
| Changes in non-cash working capital items: | |||||||||||||
| Accounts receivable | 25.8 | (0.5 | ) | (34.9 | ) | 58.2 | |||||||
| Inventories | (24.0 | ) | (47.8 | ) | (135.0 | ) | (133.1 | ) | |||||
| Other current assets | (2.3 | ) | (7.4 | ) | (12.8 | ) | 5.5 | ||||||
| Accounts payable, accrued and other current liabilities and provisions | 47.2 | (12.1 | ) | 86.5 | (23.5 | ) | |||||||
| Non-cash working capital changes | 46.7 | (67.8 | ) | (96.2 | ) | (92.9 | ) | ||||||
| Net income taxes paid | (14.9 | ) | (9.0 | ) | (32.2 | ) | (24.4 | ) | |||||
| Net cash provided by (used in) operating activities | 108.6 | (7.5 | ) | 85.8 | 83.3 | ||||||||
| Investing activities: | |||||||||||||
| Purchase of computer software and property, plant and equipment(a) | (11.9 | ) | (32.2 | ) | (46.2 | ) | (81.8 | ) | |||||
| Proceeds from sale of assets | 0.2 | - | 0.9 | 0.6 | |||||||||
| Repayments from solar supplier (note 4) | 6.0 | - | 11.0 | 12.5 | |||||||||
| Net cash used in investing activities | (5.7 | ) | (32.2 | ) | (34.3 | ) | (68.7 | ) | |||||
| Financing activities: | |||||||||||||
| Borrowings under credit facility (note 9) | - | - | 40.0 | - | |||||||||
| Repayments under credit facility (note 9) | (21.2 | ) | (6.2 | ) | (43.7 | ) | (33.7 | ) | |||||
| Finance lease payments (note 9) | (1.1 | ) | (1.7 | ) | (3.5 | ) | (4.8 | ) | |||||
| Issuance of capital stock (note 10) | 0.3 | 0.3 | 3.3 | 13.5 | |||||||||
| Repurchase of capital stock for cancellation (note 10) | - | - | (34.3 | ) | - | ||||||||
| Purchase of treasury stock for stock-based plans (note 10) | (9.5 | ) | (5.7 | ) | (9.5 | ) | (12.2 | ) | |||||
| Finance costs paid | (2.3 | ) | (2.7 | ) | (7.1 | ) | (7.6 | ) | |||||
| Net cash used in financing activities | (33.8 | ) | (16.0 | ) | (54.8 | ) | (44.8 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 69.1 | (55.7 | ) | (3.3 | ) | (30.2 | ) | ||||||
| Cash and cash equivalents, beginning of period | 472.9 | 582.7 | 545.3 | 557.2 | |||||||||
| Cash and cash equivalents, end of period | $ | 542.0 | $ | 527.0 | $ | 542.0 | $ | 527.0 | |||||
| (a) | Additional equipment of $5.0 was acquired through a finance lease in the first quarter and first nine months of 2017, respectively (second quarter and first nine months of 2016 - $0.3). |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)
1. REPORTING ENTITY
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the
These unaudited interim condensed consolidated financial statements were authorized for issuance by our board of directors on
Use of estimates and judgments:
These unaudited interim condensed consolidated financial statements are based upon estimates consistent with those used and described in note 2 of our 2016 annual audited consolidated financial statements. We base these estimates and assumptions on current facts, historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses. Actual results could differ materially from these estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. There have been no material changes to our significant accounting estimates and assumptions or the judgments affecting the application of such estimates and assumptions during the third quarter and first nine months of 2017 from those described in the notes to our 2016 annual audited consolidated financial statements, except for changes in the estimates and assumptions related to the recoverability of our remaining solar assets in the second quarter of 2017 (see note 4).
Accounting policies:
These unaudited interim condensed consolidated financial statements are based upon accounting policies consistent with those used and described in note 2 of our 2016 annual audited consolidated financial statements.
Recently issued accounting pronouncements:
IFRS 15, Revenue from Contracts with Customers:
In
IFRS 9, Financial Instruments:
In
IFRS 16, Leases:
In
3. SEGMENT AND CUSTOMER REPORTING
End markets:
The following table indicates revenue by end market as a percentage of total revenue for the periods indicated.
| Three months ended September 30 |
Nine months ended September 30 | |||
| 2016 | 2017 | 2016 | 2017 | |
| Communications | 43% | 45% | 41% | 44% |
| Advanced Technology Solutions (ATS) | 32% | 31% | 34% | 32% |
| Enterprise | 25% | 24% | 25% | 24% |
For reporting purposes, commencing in the first quarter of 2017, we combined our previously-reported Diversified and Consumer end markets to form our ATS end market, and combined our Servers and Storage end markets into a single "Enterprise" end market. All period percentages herein reflect these changes.
Customers:
For each of the third quarter and first nine months of 2017, we had two customers that individually represented more than 10% of total revenue (third quarter and first nine months of 2016 - two customers).
Seasonality:
From time to time, we experience some level of seasonality in our quarterly revenue patterns across some of our businesses. However, numerous factors affecting our period-to-period results make it difficult to isolate the impact of seasonality and other external factors on our business. In the past, revenue from our Enterprise business 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. 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.
4. SOLAR INVESTMENTS
During the fourth quarter of 2016, we made the decision to exit the solar panel manufacturing business, and terminated (prior to its scheduled expiration) a supply agreement pursuant to which we had previously made certain cash advances to an
In connection with our exit from the solar panel manufacturing business, we wrote down the carrying values of our solar panel manufacturing equipment and inventories during 2016 to then-recoverable amounts (see note 6), and completed production of the final solar panels in the first quarter of 2017. During the second quarter of 2017, we recorded additional provisions of
5. ACCOUNTS RECEIVABLE
We have an agreement to sell accounts receivable on an uncommitted basis (subject to pre-determined limits by customer) to two third-party banks. In
At
The accounts receivable sold under both of these arrangements are de-recognized from our accounts receivable balance and removed from our consolidated balance sheet, and the proceeds are reflected as cash provided by operating activities in our consolidated statement of cash flows. Upon sale, we assign the rights to the accounts receivable to the banks. We pay interest which we record in finance costs in our consolidated statement of operations.
6. INVENTORIES
We record our inventory provisions, net of valuation recoveries, in cost of sales. We recorded net inventory provisions of
7. ASSETS CLASSIFIED AS HELD-FOR-
As a result of previously announced restructuring actions, we have reclassified certain assets as held for sale. These assets were reclassified at the lower of their carrying value and estimated fair value less costs to sell at the time of reclassification. We have programs underway to sell these assets. As a result of then-recent broker estimates, we recorded impairment charges of
8. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS
We provide pension and non-pension post-employment defined benefit plans for our employees. Such plans include defined benefit pension plans for our employees in the
In
In
9. CREDIT FACILITIES AND LONG-TERM DEBT
Our credit facility consists of a
During the first quarter of 2016, we borrowed
The following table sets forth our borrowings under the Revolving Facility and Term Loan, and our finance lease obligations as of the period-ends indicated:
| December 31 2016 |
September 30 2017 |
|||||
| Borrowings under the Revolving Facility | $ | 15.0 | $ | - | ||
| Term Loan | 212.5 | 193.8 | ||||
| Total borrowings under credit facility | 227.5 | 193.8 | ||||
| Less: unamortized debt issuance costs | (1.2 | ) | (0.9 | ) | ||
| Finance lease obligations (1) | 18.4 | 19.2 | ||||
| $ | 244.7 | $ | 212.1 | |||
| Comprised of: | ||||||
| Current portion of borrowings under credit facility and finance lease obligations (1) | $ | 56.0 | $ | 38.9 | ||
| Long-term portion of borrowings under credit facility and finance lease obligations | 188.7 | 173.2 | ||||
| $ | 244.7 | $ | 212.1 | |||
| (1) | At September 30, 2017, $12.2 (December 31, 2016 - $15.3) of our finance lease obligations relate to manufacturing equipment for our former solar panel business. As a result of our decision in 2016 to exit this business, we intend to terminate and settle these lease obligations in the fourth quarter of 2017 and have recorded all remaining payments thereunder as current liabilities on our consolidated balance sheet commencing December 31, 2016. See note 4. |
The Term Loan requires quarterly principal repayments of
At
We also have a total of
10. CAPITAL STOCK
Share repurchase plans:
We have repurchased subordinate voting shares in the open market and otherwise for cancellation in recent years pursuant to NCIBs and substantial issuer bids, which allow us to repurchase a limited number of subordinate voting shares during a specified period. The maximum number of subordinate voting shares we are permitted to repurchase for cancellation under each NCIB is reduced by the number of subordinate voting shares purchased in the open market under such NCIB to satisfy obligations under our stock-based compensation plans. In
Stock-based compensation:
We grant share unit awards to employees under our stock-based compensation plans. From time-to-time, we pay cash for the purchase by a broker of subordinate voting shares in the open market to satisfy the delivery of shares upon vesting of such awards. For accounting purposes, we classify these shares as treasury stock until they are delivered pursuant to the stock-based compensation plans. During the third quarter and first nine months of 2017, we paid
The following table outlines the activities for stock-based awards granted to employees (activities for deferred share units (DSUs) issued to directors are excluded) for the nine months ended
| Number of awards (in millions) | Options | RSUs (i) | PSUs (i) | ||||||
| Outstanding at December 31, 2016 | 2.1 | 3.8 | 6.1 | ||||||
| Granted (i) | - | 1.6 | 1.8 | ||||||
| Exercised or settled (ii) | (1.7 | ) | (1.7 | ) | (0.8 | ) | |||
| Forfeited and canceled | - | (0.3 | (1.9 | ) | |||||
| Outstanding at September 30, 2017 | 0.4 | 3.4 | 5.2 | ||||||
| Weighted-average grant date fair value of options and share units granted | $ | - | $ | 13.58 | $ | 17.18 | |||
| (i) | During the first nine months of 2017, we granted 1.6 million (first nine months of 2016 - 2.2 million) restricted share units (RSUs), primarily granted in the first quarter of each such year, which vest one-third per year over a three-year period. The cost we record for RSUs is based on the market value of our subordinate voting shares at the time of grant. During the first nine months of 2017, we granted 1.8 million (first nine months of 2016 - 2.5 million) PSUs, primarily granted in the first quarter of each such year, of which 60% vest based on achievement of a market performance condition tied to Total Shareholder Return (TSR), and the balance vest based on a non-market performance condition based on pre-determined financial targets. See note 2(n) of our 2016 annual audited consolidated financial statements for a description of TSR. We estimated the grant date fair value of the TSR-based PSUs using a Monte Carlo simulation model and a premium of 143% (2016 grants - premium of 109%). The grant date fair value of the non TSR-based PSUs is determined by the market value of our subordinate voting shares at the time of grant and may be adjusted in subsequent periods to reflect a change in the estimated level of achievement related to the applicable performance condition. The number of PSUs that will actually vest will vary from 0 to the amount set forth in the table above as outstanding at September 30, 2017 (representing the maximum potential payout) depending on the level of achievement of the relevant performance condition. We amortize the cost of our awards to compensation expense in our consolidated statement of operations, with a corresponding charge to contributed surplus in our consolidated balance sheet, over the vesting period. We expect to settle these awards with subordinate voting shares purchased in the open market by a broker or issued from treasury. |
| (ii) | During the third quarter and first nine months of 2017, we received cash proceeds of $0.3 and $13.5, respectively (third quarter and first nine months of 2016 - $0.3 and $3.3, respectively) relating to the exercise of vested employee stock options. |
For the third quarter and first nine months of 2017, we recorded aggregate employee stock-based compensation expense (excluding DSU expense) through cost of sales and SG&A of
As a result of the resignation of one of our directors during the third quarter of 2017, we paid
11. OTHER CHARGES (RECOVERIES)
| Three months ended September 30 | Nine months ended September 30 | |||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||
| Restructuring (a) | $ | 1.0 | $ | 4.1 | $ | 7.5 | $ | 15.7 | ||
| Loss on pension annuity purchase (see note 8) | - | - | - | 1.9 | ||||||
| Other (b) | - | (0.2 | ) | (7.8 | ) | 1.9 | ||||
| $ | 1.0 | $ | 3.9 | $ | (0.3 | ) | $ | 19.5 | ||
(a) Restructuring:
We perform ongoing evaluations of our business, operational efficiency and cost structure, and implement restructuring actions as we deem necessary. In connection therewith, we recorded restructuring charges of
During the fourth quarter of 2016, we made the decision to exit the solar panel manufacturing business, and recorded restructuring charges during that period related to, among other items, the closure of our solar panel manufacturing operations, including the write down of our solar panel manufacturing equipment at our two locations. We completed the production of the final solar panels during the first quarter of 2017, and are actively engaged in the disposition of our solar panel manufacturing equipment. As a result of then-recent broker estimates, we recorded impairment charges of
(b) Other:
During the third quarter of 2017, we recorded
In the second quarter of 2016, we recorded Damage Recoveries of
12. INCOME TAXES
Our effective income tax rate can vary significantly from quarter-to-quarter for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the
Our income tax expense for the first nine months of 2017 was favorably impacted by the recognition of a
Our income tax recovery for the third quarter of 2016 was favorably impacted by the reversal of provisions previously recorded for tax uncertainties related to the resolution of a transfer pricing matter for one of our Canadian subsidiaries. In connection therewith, we recorded income tax recoveries of
Our income tax recovery for the third quarter of 2016 was negatively impacted by withholding taxes of
We are subject to tax audits of historical information by tax authorities in various jurisdictions, which could result in additional tax expense in future periods relating to prior results. Reviews by tax authorities generally focus on, but are not limited to, the validity of our inter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and a significant degree of judgment. If any of these tax authorities are successful with their challenges, our income tax expense may be adversely affected and we could also be subject to interest and penalty charges.
The successful pursuit of assertions made by any taxing authority could result in our owing significant amounts of tax, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse tax 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 could be in excess of amounts accrued.
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 Loan, borrowings under the Revolving Facility (when applicable), and derivatives. There have been no significant changes to the classification or to the source of the inputs used to measure our financial assets or liabilities since
Currency risk:
The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. As part of our risk management program, we attempt to mitigate currency risk through a hedging program using forecasts of our anticipated future cash flows and balance sheet exposures denominated in foreign currencies. We enter into foreign exchange forward contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability of our operating costs and future cash flows denominated in local 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. Our major currency exposures at
| Canadian dollar |
British pound sterling | Euro | Thai baht |
Chinese renminbi | |||||||||||
| Cash and cash equivalents | $ | 10.2 | $ | 0.2 | $ | 12.3 | $ | 1.9 | $ | 14.7 | |||||
| Accounts receivable | 0.6 | - | 28.3 | 2.7 | 7.9 | ||||||||||
| Pension and non-pension post-employment assets | - | 54.4 | - | - | - | ||||||||||
| Income taxes and value-added taxes receivable | 19.6 | - | 5.7 | 6.6 | 9.0 | ||||||||||
| Other financial assets | 6.7 | - | 2.4 | 0.3 | 0.7 | ||||||||||
| Pension and non-pension post-employment liabilities | (74.1 | ) | - | (0.4 | ) | (13.7 | ) | (0.9 | ) | ||||||
| Income taxes and value-added taxes payable | (5.3 | ) | - | (1.0 | ) | (0.6 | ) | - | |||||||
| Accounts payable and certain accrued and other liabilities and provisions | (50.9 | ) | (0.9 | ) | (25.9 | ) | (18.3 | ) | (20.8 | ) | |||||
| Net financial assets (liabilities) | $ | (93.2 | ) | $ | 53.7 | $ | 21.4 | $ | (21.1 | ) | $ | 10.6 | |||
We enter into foreign exchange forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge our balance sheet exposures. 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 | $ | 214.2 | $ | 0.78 | 12 | $ | 9.2 | |
| Thai baht | 80.6 | 0.03 | 12 | 1.7 | ||||
| Malaysian ringgit | 49.3 | 0.23 | 12 | 1.3 | ||||
| Mexican peso | 27.5 | 0.05 | 12 | 0.8 | ||||
| British pound | 52.8 | 1.33 | 4 | (1.7 | ) | |||
| Chinese renminbi | 71.8 | 0.15 | 12 | 0.7 | ||||
| Euro | 39.6 | 1.15 | 12 | 0.3 | ||||
| Romanian leu | 24.7 | 0.25 | 12 | 1.1 | ||||
| Singapore dollar | 22.8 | 0.72 | 12 | 0.5 | ||||
| Other | 7.1 | 0.1 | ||||||
| Total | $ | 590.4 | $ | 14.0 | ||||
At
14. 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 impact on our financial performance, financial position or liquidity.
In 2007, securities class action proceedings were initiated against us and our former Chief Executive and Chief Financial Officers in the
Other Matters:
In the third quarter of 2017, the
15. SUBSEQUENT EVENT
In October, we announced our intention to file with the TSX a notice of intention to commence a new NCIB during the fourth quarter of 2017. If this notice is accepted by the TSX, we expect to be permitted to repurchase for cancellation, at our discretion during the 12 months following such acceptance, up to 10% of the "public float" (calculated in accordance with the rules of the TSX) of our issued and outstanding subordinate voting shares. Purchases under the NCIB, if accepted, will be conducted in the open market or as otherwise permitted, subject to the terms and limitations to be applicable to such NCIB, and will be made through the facilities of the TSX.
Contacts:
(416) 448-2200
media@celestica.com
Celestica Investor Relations
(416) 448-2211
clsir@celestica.com