Celestica Announces Third Quarter 2019 Financial Results
Q3 2019 Highlights
- Revenue:
$1.52 billion , above our Q3 2019 guidance range of$1.4 to$1.5 billion , decreased 11% compared to$1.71 billion for the third quarter of 2018 (Q3 2018).
- Operating margin (non-IFRS)*: 2.8%, above our Q3 2019 guidance of 2.5% at the midpoint of our revenue and non-IFRS adjusted EPS* guidance ranges, compared to 3.3% for Q3 2018.
Advanced Technology Solutions (ATS) segment revenue**: relatively flat compared to Q3 2018, and represented 37% of total revenue, compared to 33% of total revenue for Q3 2018; ATS segment margin** was 2.8%, compared to 4.6% for Q3 2018 (see Segment Updates below).
- Connectivity & Cloud Solutions (CCS) segment revenue**: decreased 17% compared to Q3 2018, and represented 63% of total revenue, compared to 67% of total revenue for Q3 2018; CCS segment margin** was 2.8%, compared to 2.7% for Q3 2018.
- IFRS earnings (loss) per share:
$0.05 loss per share, compared to$0.06 earnings per share for Q3 2018.
- Adjusted EPS (non-IFRS)*:
$0.13 per share, above the midpoint of our Q3 2019 guidance range of$0.09 to$0.15 per share, compared to$0.26 per share for Q3 2018. Adjusted EPS for Q3 2019 and Q3 2018 included a$0.02 and$0.03 per share negative impact, respectively, resulting from taxable foreign exchange (see Guidance Summary and Q4 2019 Outlook below).
- Adjusted return on invested capital (non-IFRS)*: 10.1%, compared to 16.2% for Q3 2018.
- Free cash flow (non-IFRS)*:
$66.2 million , compared to$24.6 million for Q3 2018.
"
"While our ATS segment continues to be impacted by softness in our capital equipment business, our CCS segment delivered sequential and year over year segment margin improvement, driven by our cost efficiency initiatives and improved mix, supported by our CCS portfolio review."
"We believe the actions we are taking are strengthening our company. We remain focused on driving productivity, successfully ramping new programs and diversifying our revenue mix to improve profitability and deliver strong and consistent financial returns over the long term."
*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, 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 Segment
Demand in our capital equipment business continues to remain soft. However, although 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, we are seeing some signs of improvement, and our customers are forecasting moderate demand growth in the first half of 2020. We expect the soft display market to continue in the near term, with modest recovery in late 2020, as we anticipate an increase in the demand for next generation smart phones and large form factor displays. For Q3 2019, our capital equipment business operated at a loss in the mid single-digit million dollar range, which was slightly better than expected, due to stronger-than-anticipated demand and the impact of our cost reduction initiatives. 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 loss in the low single-digit million dollar range in the fourth quarter of 2019 (Q4 2019), and are working towards achieving break-even profitability or better in the near term. Notwithstanding the foregoing, we continue to believe that new program wins, market share gains, and new applications position us favorably to benefit from potential growth in this business in the future.
Our industrial and healthtech businesses are producing strong revenue growth as we continue to ramp new program wins. Although the cost of ramping multiple new programs in these businesses adversely impacted their profitability in Q1 2019, their profitability improved in the second quarter of 2019 and stabilized in Q3 2019.
Although the availability of previously constrained materials has improved generally, our A&D business continued to be negatively impacted by materials shortages in Q3 2019, particularly with respect to the availability of certain high reliability parts, resulting in operational and materials inefficiencies, and a continued backlog of orders. We currently expect gradual improvement in this backlog over the next several quarters.
Our energy business experienced revenue weakness in Q3 2019, primarily due to planned disengagements from dilutive programs.
The decrease in ATS segment margin in Q3 2019 as compared to Q3 2018 was attributable primarily to the losses in our capital equipment business and softer performance in our A&D business (largely due to materials constraints), offset in part by improvements from the ramping of new programs in our other ATS businesses.
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 Segment
In Q3 2019, we continued to make progress on actions associated with the comprehensive review of our CCS revenue portfolio (CCS Review), including further planned program disengagements and associated restructuring actions in our Enterprise end market. As a result of our CCS Review, we successfully negotiated improved commercial terms on a number of programs, and had identified programs, largely in our Enterprise end market, that are expected to result in an aggregate annualized decline in our CCS segment revenue of approximately
However, our Communications end market has also been adversely impacted (including significant revenue declines) over the last two years as a result of program-specific market dynamics, which have in some cases resulted in returns below our financial targets. Although we have been in active discussions with a number of our Communications customers in an effort to improve our returns, we have come to a mutual agreement with our largest customer, Cisco Systems, Inc. (Cisco), to a phased exit of existing programs commencing in 2020. As a result, we are adding our Cisco programs to the CCS segment disengagements currently underway, thereby expanding the revenue impact of our CCS Review to include our revenue from Cisco.
In Q3 2019, revenue from Cisco represented 13% of our consolidated revenue, which we estimate will represent approximately
The decrease in CCS segment revenue in Q3 2019 as compared to the prior year period was primarily due to planned Enterprise end market program disengagements, and continuing demand softness from certain Communications customers. We expect these adverse market dynamics to continue into Q4 2019.
As a result of the CCS segment revenue declines and lower capital equipment demand, we expect total company revenue for 2019 to decrease by approximately 11% to 12% compared to 2018. While we are not providing guidance for 2020, we anticipate 2020 revenue to decline relative to 2019, and 2020 non-IFRS operating margin and non-IFRS adjusted EPS to increase relative to 2019.
Restructuring Update
We have recorded
Guidance Summary and Q4 2019 Outlook
| Q3 2019 Guidance (1) | Q3 2019 Actual (1) | Q4 2019 Guidance (2) | |||
| IFRS revenue (in billions) | |||||
| Non-IFRS operating margin | 2.5% at the mid-point of our revenue and non- IFRS adjusted EPS guidance ranges |
2.8% | 2.8% 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 Q3 2019, our revenue was above our guidance range. Revenue from our CCS segment was above our expectations, primarily due to stronger-than-expected demand in our Enterprise end market. ATS segment revenue was slightly above our expectations due to stronger-than-expected demand in our capital equipment and industrial businesses. Non-IFRS operating margin for Q3 2019 was above the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, resulting from the higher revenue and beneficial changes in mix, particularly within our CCS segment. Non-IFRS adjusted SG&A for Q3 2019 was below our guidance range, resulting primarily from foreign exchange gains of
IFRS loss per share of
IFRS loss per share for Q3 2019 included an aggregate
IFRS earnings per share for Q3 2018 included an aggregate
(2) For Q4 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.
Q3 2019 Webcast
Management will host its Q3 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, including a description of a modification to our calculation of Transition Costs commencing in Q3 2019. Also 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 (including the components thereof), and their anticipated impact on our business; the anticipated continuation and impact of specified adverse market conditions in each of our segments (and/or component businesses), including the anticipated Q4 2019 loss in our capital equipment business and near term expectations; our anticipated financial and/or operational results, and our anticipated Q4 2019 non-IFRS adjusted effective tax rate; the range and timing of our cost efficiency initiative; the range and timing of anticipated restructuring charges associated with the phased non-renewal of our programs with Cisco; estimated 2019 annual Cisco revenue; 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; the timing and amounts of restructuring actions and charges; and the potential 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, including our intended disengagements from programs with Cisco and other disengagements resulting from the CCS review; 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; a failure to properly estimate the magnitude of anticipated losses in our capital equipment business; a failure to achieve anticipated benefits from our CCS Review and/or cost efficiency initiative; 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, a failure to achieve anticipated benefits from actions associated with the CCS Review, including disengagements from our programs with Cisco; 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; global tax legislation changes; 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 actions associated with our CCS Review; the magnitude of the anticipated Q4 2019 loss in our capital equipment business; and the impact of actions associated with the CCS Review (including disengagements from our programs with Cisco) 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. A description of modifications to our calculation of Transition Costs (used in the determination of operating earnings, adjusted net earnings and adjusted EPS), commencing in Q3 2019, is also included below. In calculating these non-IFRS financial measures, management excludes the following items, where applicable: employee SBC 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 SBC expense, which represents the estimated fair value of stock options, restricted share units and performance share units granted to employees, is excluded because grant activities vary significantly from quarter-to-quarter in both quantity and fair value. In addition, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude employee SBC expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do, 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 beginning in the first quarter of 2019 (and as applicable), charges related to the subsequent re-measurement of indemnification assets recorded in connection with our
Transition Costs consist of: (i) 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 |
Nine months ended |
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| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| % of revenue |
% of revenue |
% of revenue |
% of revenue |
||||||||||||||||||||
| IFRS revenue | $ | 1,711.3 | $ | 1,517.9 | $ | 4,906.2 | $ | 4,396.6 | |||||||||||||||
| IFRS gross profit | $ | 112.2 | 6.6 | % | $ | 97.7 | 6.4 | % | $ | 310.5 | 6.3 | % | $ | 282.9 | 6.4 | % | |||||||
| Employee SBC expense | 3.0 | 1.9 | 10.9 | 11.9 | |||||||||||||||||||
| Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 115.2 | 6.7 | % | $ | 99.6 | 6.6 | % | $ | 323.0 | 6.6 | % | $ | 294.8 | 6.7 | % | |||||||
| IFRS SG&A | $ | 54.4 | 3.2 | % | $ | 53.4 | 3.5 | % | $ | 159.4 | 3.2 | % | $ | 170.2 | 3.9 | % | |||||||
| Employee SBC expense | (4.4 | ) | (4.8 | ) | (14.1 | ) | (14.8 | ) | |||||||||||||||
| Non-IFRS adjusted SG&A | $ | 50.0 | 2.9 | % | $ | 48.6 | 3.2 | % | $ | 145.3 | 3.0 | % | $ | 155.4 | 3.5 | % | |||||||
| IFRS earnings before income taxes | $ | 21.5 | 1.3 | % | $ | 6.4 | 0.4 | % | $ | 61.8 | 1.3 | % | $ | 100.2 | 2.3 | % | |||||||
| Finance costs (1) | 7.0 | 12.0 | 15.2 | 38.2 | |||||||||||||||||||
| Employee SBC expense | 7.4 | 6.7 | 25.0 | 26.7 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.0 | 6.5 | 18.8 | |||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 17.8 | 11.5 | 44.1 | (69.5 | ) | ||||||||||||||||||
| Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) (1) | $ | 56.4 | 3.3 | % | $ | 42.6 | 2.8 | % | $ | 154.2 | 3.1 | % | $ | 114.4 | 2.6 | % | |||||||
| IFRS net earnings (loss) | $ | 8.6 | 0.5 | % | $ | (6.9 | ) | (0.5 | )% | $ | 38.8 | 0.8 | % | $ | 77.3 | 1.8 | % | ||||||
| Employee SBC expense | 7.4 | 6.7 | 25.0 | 26.7 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.0 | 6.5 | 18.8 | |||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 17.8 | 11.5 | 44.1 | (69.5 | ) | ||||||||||||||||||
| Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
| Adjustments for taxes (2) | (0.5 | ) | (0.7 | ) | (5.9 | ) | (5.5 | ) | |||||||||||||||
| Non-IFRS adjusted net earnings | $ | 36.0 | $ | 16.6 | $ | 110.1 | $ | 47.8 | |||||||||||||||
| Diluted EPS | |||||||||||||||||||||||
| Weighted average # of shares (in millions) * | 140.3 | 128.5 | 141.5 | 132.6 | |||||||||||||||||||
| IFRS earnings (loss) per share * | $ | 0.06 | $ | (0.05 | ) | $ | 0.27 | $ | 0.58 | ||||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.26 | $ | 0.13 | $ | 0.78 | $ | 0.36 | |||||||||||||||
| # of shares outstanding at period end (in millions) | 137.4 | 128.4 | 137.4 | 128.4 | |||||||||||||||||||
| (restated) | (restated) | ||||||||||||||||||||||
| IFRS cash provided by operations | $ | 55.3 | $ | 106.9 | $ | 35.0 | $ | 268.5 | |||||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (20.9 | ) | (19.9 | ) | (59.7 | ) | 50.2 | ||||||||||||||||
| Lease payments (3) | (3.5 | ) | (10.6 | ) | (16.1 | ) | (29.4 | ) | |||||||||||||||
| Finance costs paid (excluding debt issuance costs paid) (3) | (6.3 | ) | (10.2 | ) | (14.3 | ) | (31.9 | ) | |||||||||||||||
| Non-IFRS free cash flow (3) | $ | 24.6 | $ | 66.2 | $ | (55.1 | ) | $ | 257.4 | ||||||||||||||
| IFRS ROIC % (4) | 6.2 | % | 1.5 | % | 6.3 | % | 7.7 | % | |||||||||||||||
| Non-IFRS adjusted ROIC % (4) | 16.2 | % | 10.1 | % | 15.6 | % | 8.8 | % | |||||||||||||||
* 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 Q3 2019, we used a DWAS of 128.5 million as at
(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), employee SBC expense, amortization of intangible assets (excluding computer software), 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 Q3 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 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 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
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 | Nine 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 | $ | 12.9 | 60 | % | $ | 13.3 | 208 | % | $ | 23.0 | 37 | % | $ | 22.9 | 23 | % | |||||||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||||||||||||||||
| Employee SBC expense | 0.2 | 0.1 | 1.2 | 0.6 | |||||||||||||||||||
| Net restructuring, impairment and other charges | 0.3 | 1.0 | 0.7 | 1.4 | |||||||||||||||||||
| Non-core tax impact related to tax uncertainties* | — | — | — | 3.9 | |||||||||||||||||||
| Non-core tax impact related to fair value adjustments on acquisitions ** | — | (0.2 | ) | 3.7 | (1.5 | ) | |||||||||||||||||
| Non-core tax impacts related to restructured sites* | — | (0.2 | ) | 0.3 | 1.1 | ||||||||||||||||||
| Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 13.4 | 27 | % | $ | 14.0 | 46 | % | $ | 28.9 | 21 | % | $ | 28.4 | 37 | % | |||||||
*See note 12 to the Q3 2019 Interim Financial Statements.
** Consists of the Atrenne DTA recorded in the second quarter of 2018, and deferred tax adjustments attributable to our Impakt acquisition recorded in the second and third quarters of 2019.
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 %).
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| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| IFRS earnings before income taxes | $ | 21.5 | $ | 6.4 | $ | 61.8 | $ | 100.2 | |||||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | |||||||||||
| Annualized IFRS earnings before income taxes | $ | 86.0 | $ | 25.6 | $ | 82.4 | $ | 133.6 | |||||||
| Average net invested capital for the period | $ | 1,391.1 | $ | 1,695.2 | $ | 1,316.2 | $ | 1,740.8 | |||||||
| IFRS ROIC % (1) | 6.2 | % | 1.5 | % | 6.3 | % | 7.7 | % | |||||||
| Three months ended | Nine months ended | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 56.4 | $ | 42.6 | $ | 154.2 | $ | 114.4 | |||||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | |||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 225.6 | $ | 170.4 | $ | 205.5 | $ | 152.5 | |||||||
| Average net invested capital for the period | $ | 1,391.1 | $ | 1,695.2 | $ | 1,316.2 | $ | 1,740.8 | |||||||
| Non-IFRS adjusted ROIC % (1) | 16.2 | % | 10.1 | % | 15.6 | % | 8.8 | % | |||||||
2018 |
2019 |
2019 |
2019 |
||||||||||||
| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 3,737.7 | $ | 3,688.1 | $ | 3,633.7 | $ | 3,557.6 | |||||||
| Less: cash | 422.0 | 457.8 | 436.5 | 448.9 | |||||||||||
| Less: right-of-use assets | — | 115.8 | 116.2 | 107.8 | |||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,512.6 | 1,344.8 | 1,349.2 | 1,342.3 | |||||||||||
| Net invested capital at period end (1) | $ | 1,803.1 | $ | 1,769.7 | $ | 1,731.8 | $ | 1,658.6 | |||||||
2017 |
2018 |
2018 |
2018 |
||||||||||||
| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 2,964.2 | $ | 2,976.0 | $ | 3,212.2 | $ | 3,316.1 | |||||||
| Less: cash | 515.2 | 435.7 | 401.4 | 457.7 | |||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,228.6 | 1,278.1 | 1,413.8 | 1,473.3 | |||||||||||
| Net invested capital at period end (1) | $ | 1,220.4 | $ | 1,262.2 | $ | 1,397.0 | $ | 1,385.1 | |||||||
(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 | $ | 448.9 | ||||
| Accounts receivable | 5 | 1,206.6 | 1,014.5 | |||||
| Inventories | 6 | 1,089.9 | 1,033.6 | |||||
| Income taxes receivable | 5.0 | 5.9 | ||||||
| Assets classified as held for sale | 7 | 27.4 | 12.9 | |||||
| Other current assets | 72.6 | 63.3 | ||||||
| Total current assets | 2,823.5 | 2,579.1 | ||||||
| Property, plant and equipment | 365.3 | 355.0 | ||||||
| Right-of-use assets | 2 | — | 107.8 | |||||
| 4 | 198.4 | 198.1 | ||||||
| Intangible assets | 4 | 283.6 | 257.9 | |||||
| Deferred income taxes | 36.7 | 31.9 | ||||||
| Other non-current assets | 30.2 | 27.8 | ||||||
| Total assets | $ | 3,737.7 | $ | 3,557.6 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility and lease obligations | 9 | $ | 107.7 | $ | 629.2 | |||
| Accounts payable | 1,126.7 | 937.2 | ||||||
| Accrued and other current liabilities | 6 | 320.4 | 332.4 | |||||
| Income taxes payable | 42.3 | 50.2 | ||||||
| Current portion of provisions | 23.2 | 22.5 | ||||||
| Total current liabilities | 1,620.3 | 1,971.5 | ||||||
| Long-term portion of borrowings under credit facility and lease obligations | 9 | 650.2 | 91.3 | |||||
| Pension and non-pension post-employment benefit obligations | 88.8 | 92.4 | ||||||
| Provisions and other non-current liabilities | 20.6 | 15.6 | ||||||
| Deferred income taxes | 25.5 | 21.7 | ||||||
| Total liabilities | 2,405.4 | 2,192.5 | ||||||
| Equity: | ||||||||
| Capital stock | 10 | 1,954.1 | 1,827.0 | |||||
| 10 | (20.2 | ) | (6.3 | ) | ||||
| Contributed surplus | 906.6 | 980.5 | ||||||
| Deficit | (1,481.7 | ) | (1,404.4 | ) | ||||
| Accumulated other comprehensive loss | (26.5 | ) | (31.7 | ) | ||||
| Total equity | 1,332.3 | 1,365.1 | ||||||
| Total liabilities and equity | $ | 3,737.7 | $ | 3,557.6 | ||||
Commitments and Contingencies (note 14), Transitional adjustment related to adoption of IFRS 16 (note 2), Subsequent events (notes 3 & 9).
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 | Nine months ended | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Revenue | 3 | $ | 1,711.3 | $ | 1,517.9 | $ | 4,906.2 | $ | 4,396.6 | |||||||
| Cost of sales | 6 | 1,599.1 | 1,420.2 | 4,595.7 | 4,113.7 | |||||||||||
| Gross profit | 112.2 | 97.7 | 310.5 | 282.9 | ||||||||||||
| Selling, general and administrative expenses (SG&A) | 54.4 | 53.4 | 159.4 | 170.2 | ||||||||||||
| Research and development | 7.9 | 7.3 | 20.7 | 21.1 | ||||||||||||
| Amortization of intangible assets | 3.6 | 7.1 | 9.3 | 22.7 | ||||||||||||
| Other charges (recoveries) | 11 | 17.8 | 11.5 | 44.1 | (69.5 | ) | ||||||||||
| Earnings from operations | 28.5 | 18.4 | 77.0 | 138.4 | ||||||||||||
| Finance costs | 7.0 | 12.0 | 15.2 | 38.2 | ||||||||||||
| Earnings before income taxes | 21.5 | 6.4 | 61.8 | 100.2 | ||||||||||||
| Income tax expense (recovery) | 12 | |||||||||||||||
| Current | 13.5 | 11.6 | 32.9 | 21.2 | ||||||||||||
| Deferred | (0.6 | ) | 1.7 | (9.9 | ) | 1.7 | ||||||||||
| 12.9 | 13.3 | 23.0 | 22.9 | |||||||||||||
| Net earnings (loss) for the period | $ | 8.6 | $ | (6.9 | ) | $ | 38.8 | $ | 77.3 | |||||||
| Basic earnings (loss) per share | $ | 0.06 | $ | (0.05 | ) | $ | 0.28 | $ | 0.59 | |||||||
| Diluted earnings (loss) per share | $ | 0.06 | $ | (0.05 | ) | $ | 0.27 | $ | 0.58 | |||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||||||
| Basic | 139.0 | 128.5 | 140.3 | 131.8 | ||||||||||||
| Diluted | 140.3 | 128.5 | 141.5 | 132.6 | ||||||||||||
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 | Nine months ended | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Net earnings (loss) for the period | $ | 8.6 | $ | (6.9 | ) | $ | 38.8 | $ | 77.3 | |||||||
| 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 | ) | — | ||||||||||
| Items that may be reclassified to net earnings (loss): | ||||||||||||||||
| Currency translation differences for foreign operations | (0.6 | ) | (1.0 | ) | (0.4 | ) | (0.9 | ) | ||||||||
| Changes from currency forward derivatives designated as hedges | 13 | 5.2 | (5.0 | ) | (12.6 | ) | 5.8 | |||||||||
| Changes from interest rate swap derivatives designated as hedges | 13 | 0.4 | (1.2 | ) | 0.4 | (10.1 | ) | |||||||||
| Total comprehensive income (loss) for the period | $ | 13.6 | $ | (14.1 | ) | $ | (37.1 | ) | $ | 72.1 | ||||||
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) |
stock (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 | (87.8 | ) | — | 26.2 | — | — | (61.6 | ) | ||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (9.6 | ) | — | — | — | (9.6 | ) | ||||||||||||||||
| Stock-based compensation (SBC) and other | — | 6.4 | 19.9 | — | — | 26.3 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 38.8 | — | 38.8 | ||||||||||||||||||
| 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 | — | — | — | — | (0.4 | ) | (0.4 | ) | ||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | (12.6 | ) | (12.6 | ) | ||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | — | — | — | — | 0.4 | 0.4 | ||||||||||||||||||
| Balance -- |
$ | 1,973.2 | $ | (11.9 | ) | $ | 896.8 | $ | (1,550.2 | ) | $ | (19.3 | ) | $ | 1,288.6 | |||||||||
| 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 | ) | ||||||||||||||||
| SBC and other | — | 13.9 | 14.1 | — | — | 28.0 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 77.3 | — | 77.3 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (0.9 | ) | (0.9 | ) | ||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | 5.8 | 5.8 | ||||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | — | — | — | — | (10.1 | ) | (10.1 | ) | ||||||||||||||||
| Balance -- |
$ | 1,827.0 | $ | (6.3 | ) | $ | 980.5 | $ | (1,404.4 | ) | $ | (31.7 | ) | $ | 1,365.1 | |||||||||
(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 | Nine months ended | |||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating activities: | ||||||||||||||||
| Net earnings (loss) for the period | $ | 8.6 | $ | (6.9 | ) | $ | 38.8 | $ | 77.3 | |||||||
| Adjustments to net earnings (loss) for items not affecting cash: | ||||||||||||||||
| Depreciation and amortization | 21.2 | 33.3 | 64.1 | 102.0 | ||||||||||||
| Equity-settled SBC expense | 10 | 7.4 | 6.7 | 25.0 | 26.7 | |||||||||||
| Other charges (recoveries) | — | 3.6 | 1.4 | (94.6 | ) | |||||||||||
| Finance costs | 7.0 | 12.0 | 15.2 | 38.2 | ||||||||||||
| Income tax expense | 12.9 | 13.3 | 23.0 | 22.9 | ||||||||||||
| Other | (1.7 | ) | 5.1 | (9.1 | ) | 16.2 | ||||||||||
| Changes in non-cash working capital items: | ||||||||||||||||
| Accounts receivable | (8.6 | ) | 9.1 | (95.0 | ) | 191.9 | ||||||||||
| Inventories | (55.5 | ) | 52.3 | (225.6 | ) | 56.3 | ||||||||||
| Other current assets | 19.9 | (2.3 | ) | 10.3 | 13.0 | |||||||||||
| Accounts payable, accrued and other current liabilities and provisions | 55.2 | (14.4 | ) | 221.8 | (167.2 | ) | ||||||||||
| Non-cash working capital changes | 11.0 | 44.7 | (88.5 | ) | 94.0 | |||||||||||
| Net income tax paid | (11.1 | ) | (4.9 | ) | (34.9 | ) | (14.2 | ) | ||||||||
| Net cash provided by operating activities | 55.3 | 106.9 | 35.0 | 268.5 | ||||||||||||
| Investing activities: | ||||||||||||||||
| Acquisitions, net of cash acquired | 4 | — | 1.3 | (141.7 | ) | 2.7 | ||||||||||
| Purchase of computer software and property, plant and equipment (a) | (21.1 | ) | (21.6 | ) | (63.4 | ) | (64.5 | ) | ||||||||
| Proceeds related to the sale of assets | 11 | 0.2 | 1.7 | 3.7 | 114.7 | |||||||||||
| Net cash provided by (used in) investing activities | (20.9 | ) | (18.6 | ) | (201.4 | ) | 52.9 | |||||||||
| Financing activities: | ||||||||||||||||
| Borrowings under prior credit facility | 9 | — | — | 163.0 | — | |||||||||||
| Repayments under prior credit facility | 9 | — | — | (350.5 | ) | — | ||||||||||
| Borrowings under current credit facility | 9 | 55.0 | — | 405.0 | 48.0 | |||||||||||
| Repayments under current credit facility | 9 | — | (54.5 | ) | — | (211.5 | ) | |||||||||
| Payment of lease obligations | (3.5 | ) | (10.6 | ) | (16.1 | ) | (29.4 | ) | ||||||||
| Issuance of capital stock | — | — | 0.4 | — | ||||||||||||
| Repurchase of capital stock for cancellation | 10 | (23.3 | ) | — | (61.6 | ) | (67.3 | ) | ||||||||
| Purchase of treasury stock for stock-based plans | 10 | — | — | (9.6 | ) | — | ||||||||||
| Finance costs paid (b) | 9 | (6.3 | ) | (10.8 | ) | (21.7 | ) | (34.3 | ) | |||||||
| Net cash provided by (used in) financing activities | 21.9 | (75.9 | ) | 108.9 | (294.5 | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | 56.3 | 12.4 | (57.5 | ) | 26.9 | |||||||||||
| Cash and cash equivalents, beginning of period | 401.4 | 436.5 | 515.2 | 422.0 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 457.7 | $ | 448.9 | $ | 457.7 | $ | 448.9 | ||||||||
(a) No additional equipment was acquired through finance leases in the third 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 Q3 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 and discount rates necessary to prepare our consolidated financial statements, including significant estimates and discount rates applicable to the determination of the recoverable amounts used in our impairment testing of our non-financial assets. 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 Q3 2019 or YTD 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 Q3 2019 Interim Financial Statements are based upon accounting policies consistent with those used and described in note 2 to 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 |
Nine months ended |
|||||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| % of total | % of total | % of total | % of total | ||||||||||||||||||||
| ATS | $ | 556.3 | 33 | % | $ | 559.0 | 37 | % | $ | 1,642.3 | 33 | % | $ | 1,699.9 | 39 | % | |||||||
| CCS | 1,155.0 | 67 | % | 958.9 | 63 | % | 3,263.9 | 67 | % | 2,696.7 | 61 | % | |||||||||||
| Communications end market revenue as a % of total revenue | 43 | % | 42 | % | 42 | % | 40 | % | |||||||||||||||
| Enterprise end market revenue as a % of total revenue | 24 | % | 21 | % | 25 | % | 21 | % | |||||||||||||||
| Total | $ | 1,711.3 | $ | 1,517.9 | $ | 4,906.2 | $ | 4,396.6 | |||||||||||||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Three months ended |
Nine months ended |
||||||||||||||||||||||
| Note | 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| Segment Margin |
Segment Margin |
Segment Margin |
Segment Margin |
|||||||||||||||||||||
| ATS segment income and margin | $ | 25.5 | 4.6 | % | $ | 15.5 | 2.8 | % | $ | 81.6 | 5.0 | % | $ | 46.4 | 2.7 | % | ||||||||
| CCS segment income and margin | 30.9 | 2.7 | % | 27.1 | 2.8 | % | 72.6 | 2.2 | % | 68.0 | 2.5 | % | ||||||||||||
| Total segment income | 56.4 | 42.6 | 154.2 | 114.4 | ||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||
| Finance costs | 7.0 | 12.0 | 15.2 | 38.2 | ||||||||||||||||||||
| Employee SBC expense | 7.4 | 6.7 | 25.0 | 26.7 | ||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 2.7 | 6.0 | 6.5 | 18.8 | ||||||||||||||||||||
| Net restructuring, impairment and other charges (recoveries) | 11 | 17.8 | 11.5 | 44.1 | (69.5 | ) | ||||||||||||||||||
| Inventory fair value adjustment | 4 | — | — | 1.6 | — | |||||||||||||||||||
| IFRS earnings before income taxes | $ | 21.5 | $ | 6.4 | $ | 61.8 | $ | 100.2 | ||||||||||||||||
Customers:
For Q3 2019, we had one customer (from our CCS segment) that individually represented more than 10% of total revenue (see below); for YTD 2019, we had two customers (one from each of our segments) that individually represented more than 10% of total revenue. For the third quarter of 2018 (Q3 2018) and the first nine months of 2018 (YTD 2018), we had two customers and one customer, respectively, in each case from our CCS segment, that individually represented more than 10% of total revenue.
In
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 final purchase price allocation for the Impakt acquisition are as follows:
| Impakt | |||
| Current assets, net of |
$ | 49.2 | |
| Property, plant and equipment and other long-term assets | 20.6 | ||
| Customer intangible assets and computer software assets | 219.3 | ||
| Goodwill | 112.6 | ||
| Current liabilities | (25.8 | ) | |
| Deferred income taxes | (51.8 | ) | |
| $ | 324.1 | ||
Our annual amortization of intangible assets has increased by approximately
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 beginning the first quarter of 2019 (and as applicable), charges related to the subsequent re-measurement of indemnification assets recorded in connection with our Impakt acquisition (collectively, Acquisition Costs). During Q3 2019 and YTD 2019, we recorded aggregate 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
As of
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 | $ | — | |||
| Borrowings under the Term Loans (1) | 598.3 | 593.8 | |||||
| Total borrowings under Credit Facility | 757.3 | 593.8 | |||||
| Less: unamortized debt issuance costs related to our Term Loans(1) | (9.8 | ) | (9.7 | ) | |||
| Lease obligations (including lease obligations under IFRS 16 (note 2)) | 10.4 | 121.9 | |||||
| $ | 757.9 | $ | 706.0 | ||||
| Comprised of: | |||||||
| Current portion of borrowings under Credit Facility and lease obligations (2) | $ | 107.7 | $ | 614.7 | |||
| Long-term portion of borrowings under Credit Facility and lease obligations | 650.2 | 91.3 | |||||
| $ | 757.9 | $ | 706.0 | ||||
(1) Debt issuance costs incurred in connection with our Revolver totaling
(2) In addition to the
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 A/R 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
Information regarding share repurchase activities under our NCIBs for the periods indicated is set forth below:
| Three months ended | Nine months ended | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Aggregate cost(1) of SVS repurchased for cancellation | $ | 23.3 | $ | — | $ | 61.6 | $ | 67.3 | |||||||
| Number of SVS repurchased for cancellation (in millions) | 1.9 | — | 5.5 | 8.3 | |||||||||||
| Weighted average price per share for repurchases | $ | 12.17 | $ | — | $ | 11.24 | $ | 8.15 | |||||||
| Aggregate cost(1) of SVS repurchased for delivery under SBC plans | $ | — | $ | — | $ | 9.6 | $ | — | |||||||
| Number of SVS repurchased for delivery under SBC plans (in millions) | — | — | 0.8 | — | |||||||||||
(1) Includes transaction fees
SBC:
From time to time, we pay cash to a broker to purchase SVS in the open market to satisfy delivery requirements under our SBC plans (see table above). The Repurchase Restriction is not applicable to open market purchases for this purpose. At
We grant restricted share units (RSUs) and performance share units (PSUs) to employees under our SBC plans. The majority of RSUs vest one-third per year over a three-year period. The number of PSUs granted in 2019 and 2018 that will actually vest will vary from 0 to 200% of a target amount granted based on the level of achievement of a pre-determined non-market performance measurement in the final year of 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. We also grant deferred share units and RSUs (under specified circumstances) to directors as compensation under the Directors' Share Compensation Plan.
Information regarding RSU and PSU grants for the periods indicated is set forth below:
| Three months ended |
Nine months ended |
||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| RSUs Granted: | |||||||||||||||
| Number of awards (in millions) | 0.2 | 0.2 | 2.0 | 2.9 | |||||||||||
| Weighted average grant date fair value per unit | $ | 12.07 | $ | 6.92 | $ | 10.69 | $ | 7.89 | |||||||
| PSUs Granted: | |||||||||||||||
| Number of awards (in millions, representing 100% of target) | — | — | 1.6 | 2.1 | |||||||||||
| Weighted average grant date fair value per unit | $ | — | $ | — | $ | 11.13 | $ | 8.16 | |||||||
Information regarding employee SBC expense and director SBC expense for the periods indicated is set forth below:
| Three months ended |
Nine months ended |
||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Employee SBC expense in cost of sales | $ | 3.0 | $ | 1.9 | $ | 10.9 | $ | 11.9 | |||||||
| Employee SBC expense in SG&A | 4.4 | 4.8 | 14.1 | 14.8 | |||||||||||
| Total | $ | 7.4 | $ | 6.7 | $ | 25.0 | $ | 26.7 | |||||||
| Director SBC expense in SG&A | $ | 0.5 | $ | 0.6 | $ | 1.5 | $ | 1.8 | |||||||
11. OTHER CHARGES (RECOVERIES)
| Three months ended |
Nine months ended |
||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Restructuring (a). | $ | 13.3 | $ | 10.5 | $ | 29.0 | $ | 26.6 | |||||||
| Transition Costs (Recoveries) (b) | 3.1 | 0.6 | 8.3 | (97.6 | ) | ||||||||||
| Accelerated amortization of unamortized deferred financing costs* | — | — | 1.2 | — | |||||||||||
| Acquisition Costs and other (c) | 1.4 | 0.4 | 5.6 | 1.5 | |||||||||||
| $ | 17.8 | $ | 11.5 | $ | 44.1 | $ | (69.5 | ) | |||||||
* 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) to 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: (i) the relocation of our
In
In connection with the then-anticipated sale, we entered into a long-term lease in
In addition, we recorded Internal Relocation Costs in Q3 2019 and YTD 2019 of
(c) Acquisition Costs and other:
Acquisition Costs in YTD 2019 (described in note 4) were offset in part by legal recoveries (for prior period freight charges) in connection with the settlement of class action lawsuits in which we were a plaintiff.
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 Q3 2019, our net income tax expense was adversely impacted by
During Q3 2018, our net income tax expense was negatively impacted by Currency Impacts arising primarily from the weakening of the Chinese renminbi relative to the
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Our financial assets are comprised primarily of cash and cash equivalents, A/R, and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of accounts payable, certain accrued and other liabilities and provisions, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives.
Interest rate risk:
Borrowings under the Credit Facility expose us to interest rate risk due to the potential variability of market interest rates. In order to partially hedge against our exposure to interest rate variability on the Term Loans, we entered into 5-year agreements with a syndicate of third-party banks in August and
At
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 | $ | 3.1 | $ | 0.5 | $ | 12.9 | $ | 2.2 | $ | 30.1 | |||||||||
| Accounts receivable | 1.6 | 0.5 | 53.1 | 1.6 | 10.0 | ||||||||||||||
| Income taxes and value-added taxes receivable | 15.9 | 0.6 | 1.2 | 3.1 | — | ||||||||||||||
| Other financial assets | — | 0.9 | 2.0 | 0.4 | 0.5 | ||||||||||||||
| Pension and non-pension post-employment liabilities | (68.2 | ) | (0.1 | ) | (0.5 | ) | (14.7 | ) | (0.3 | ) | |||||||||
| Income taxes and value-added taxes payable | (0.9 | ) | — | (0.5 | ) | (1.8 | ) | (6.2 | ) | ||||||||||
| Accounts payable and certain accrued and other liabilities and provisions | (53.5 | ) | (10.9 | ) | (41.6 | ) | (37.0 | ) | (16.6 | ) | |||||||||
| Net financial assets (liabilities) | $ | (102.0 | ) | $ | (8.5 | ) | $ | 26.6 | $ | (46.2 | ) | $ | 17.5 | ||||||
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 | $ | 209.8 | $ | 0.76 | 12 | $ | (1.3 | ) | |||||
| Thai baht | 109.4 | 0.03 | 12 | 1.3 | |||||||||
| Malaysian ringgit | 54.4 | 0.24 | 12 | (0.6 | ) | ||||||||
| Mexican peso | 22.7 | 0.05 | 12 | 0.1 | |||||||||
| British pound | 2.1 | 1.25 | 4 | (0.1 | ) | ||||||||
| Chinese renminbi | 55.9 | 0.15 | 12 | (0.4 | ) | ||||||||
| Euro | 33.5 | 1.12 | 12 | 0.9 | |||||||||
| Romanian leu | 35.1 | 0.24 | 12 | (1.0 | ) | ||||||||
| 26.3 | 0.74 | 12 | (0.3 | ) | |||||||||
| Other | 16.7 | 4 | 0.1 | ||||||||||
| Total | $ | 565.9 | $ | (1.3 | ) | ||||||||
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