EX-99.2 3 a17-18108_2ex99d2.htm EX-99.2

Exhibit 99.2

 

CELESTICA INC.

 

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions of U.S. dollars)

(unaudited)

 

 

 

December 31
2016

 

June 30
2017

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

557.2

 

$

582.7

 

Accounts receivable (note 5)

 

790.5

 

731.8

 

Inventories (note 6)

 

890.6

 

975.9

 

Income taxes receivable

 

5.4

 

1.0

 

Assets classified as held-for-sale (note 7)

 

28.9

 

28.6

 

Other current assets (note 4)

 

73.9

 

67.0

 

Total current assets

 

2,346.5

 

2,387.0

 

 

 

 

 

 

 

Property, plant and equipment

 

302.7

 

309.1

 

Goodwill

 

23.2

 

23.2

 

Intangible assets

 

25.5

 

23.2

 

Deferred income taxes

 

36.4

 

42.6

 

Other non-current assets (note 8)

 

88.0

 

72.6

 

Total assets

 

$

2,822.3

 

$

2,857.7

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of borrowings under credit facility and finance lease obligations (notes 4 & 9)

 

$

56.0

 

$

40.0

 

Accounts payable

 

876.9

 

888.7

 

Accrued and other current liabilities

 

261.7

 

221.8

 

Income taxes payable

 

32.4

 

40.4

 

Current portion of provisions

 

18.7

 

17.5

 

Total current liabilities

 

1,245.7

 

1,208.4

 

 

 

 

 

 

 

Long-term portion of borrowings under credit facility and finance lease obligations (notes 4 & 9)

 

188.7

 

179.7

 

Pension and non-pension post-employment benefit obligations

 

86.0

 

90.7

 

Provisions and other non-current liabilities

 

28.3

 

30.0

 

Deferred income taxes

 

34.8

 

27.2

 

Total liabilities

 

1,583.5

 

1,536.0

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Capital stock (note 10)

 

2,048.2

 

2,078.0

 

Treasury stock (note 10)

 

(15.3

)

(4.9

)

Contributed surplus

 

862.6

 

846.8

 

Deficit

 

(1,632.0

)

(1,591.8

)

Accumulated other comprehensive loss

 

(24.7

)

(6.4

)

Total equity

 

1,238.8

 

1,321.7

 

Total liabilities and equity

 

$

2,822.3

 

$

2,857.7

 

 

Contingencies (note 14)

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

1


 

CELESTICA INC.

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions of U.S. dollars, except per share amounts)

(unaudited)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2016

 

2017

 

2016

 

2017

 

Revenue

 

$

1,485.5

 

$

1,558.5

 

$

2,838.8

 

$

3,028.4

 

Cost of sales (note 6)

 

1,373.7

 

1,450.1

 

2,634.2

 

2,817.1

 

Gross profit

 

111.8

 

108.4

 

204.6

 

211.3

 

Selling, general and administrative expenses (SG&A)

 

54.4

 

50.4

 

106.4

 

104.1

 

Research and development

 

6.3

 

6.6

 

11.7

 

12.4

 

Amortization of intangible assets

 

2.3

 

2.2

 

4.6

 

4.5

 

Other charges (recoveries) (note 11)

 

(3.0

)

8.0

 

(1.3

)

15.6

 

Earnings from operations

 

51.8

 

41.2

 

83.2

 

74.7

 

Finance costs

 

2.7

 

2.6

 

4.9

 

5.2

 

Earnings before income taxes

 

49.1

 

38.6

 

78.3

 

69.5

 

Income tax expense (recovery) (note 12):

 

 

 

 

 

 

 

 

 

Current

 

10.0

 

12.9

 

19.0

 

27.1

 

Deferred

 

2.9

 

(8.7

)

(2.5

)

(14.8

)

 

 

12.9

 

4.2

 

16.5

 

12.3

 

Net earnings for the period

 

$

36.2

 

$

34.4

 

$

61.8

 

$

57.2

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.25

 

$

0.24

 

$

0.43

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.25

 

$

0.24

 

$

0.43

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing per share amounts (in millions):

 

 

 

 

 

 

 

 

 

Basic

 

142.1

 

143.4

 

142.8

 

142.9

 

Diluted

 

144.1

 

145.5

 

144.6

 

144.8

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

2


 

CELESTICA INC.

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions of U.S. dollars)

(unaudited)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2016

 

2017

 

2016

 

2017

 

Net earnings for the period

 

$

36.2

 

$

34.4

 

$

61.8

 

$

57.2

 

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

 

1.4

 

—

 

2.2

 

0.8

 

Changes from derivatives designated as hedges

 

(2.2

)

9.2

 

21.2

 

17.5

 

Total comprehensive income for the period

 

$

35.4

 

$

43.6

 

$

85.2

 

$

58.5

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

3


 

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

 

4.8

 

—

 

(1.8

)

—

 

—

 

3.0

 

Repurchase of capital stock for cancellation

 

(52.1

)

—

 

17.8

 

—

 

—

 

(34.3

)

Stock-based compensation and other

 

—

 

27.1

 

(9.9

)

—

 

—

 

17.2

 

Total comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

—

 

—

 

—

 

61.8

 

—

 

61.8

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation differences for foreign operations

 

—

 

—

 

—

 

—

 

2.2

 

2.2

 

Changes from derivatives designated as hedges

 

—

 

—

 

—

 

—

 

21.2

 

21.2

 

Balance — June 30, 2016

 

$

2,046.6

 

$

(4.3

)

$

852.8

 

$

(1,723.6

)

$

(9.4

)

$

1,162.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

29.8

 

—

 

(16.6

)

—

 

—

 

13.2

 

Purchase of treasury stock for stock-based plans

 

—

 

(6.5

)

—

 

—

 

—

 

(6.5

)

Stock-based compensation and other

 

—

 

16.9

 

0.8

 

—

 

—

 

17.7

 

Total comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

—

 

—

 

—

 

57.2

 

—

 

57.2

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on pension plan assets (note 8)

 

—

 

—

 

—

 

(17.0

)

—

 

(17.0

)

Currency translation differences for foreign operations

 

—

 

—

 

—

 

—

 

0.8

 

0.8

 

Changes from derivatives designated as hedges

 

—

 

—

 

—

 

—

 

17.5

 

17.5

 

Balance — June 30, 2017

 

$

2,078.0

 

$

(4.9

)

$

846.8

 

$

(1,591.8

)

$

(6.4

)

$

1,321.7

 

 

(a)  Accumulated other comprehensive loss is net of tax.

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

4


 

CELESTICA INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions of U.S. dollars)

(unaudited)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2016

 

2017

 

2016

 

2017

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

$

36.2

 

$

34.4

 

$

61.8

 

$

57.2

 

Adjustments to net earnings for items not affecting cash:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

19.0

 

19.1

 

36.8

 

37.5

 

Equity-settled stock-based compensation

 

6.8

 

5.7

 

16.2

 

16.7

 

Other charges

 

2.2

 

7.1

 

2.2

 

7.1

 

Finance costs

 

2.7

 

2.6

 

4.9

 

5.2

 

Income tax expense

 

12.9

 

4.2

 

16.5

 

12.3

 

Other

 

6.3

 

(1.2

)

(1.0

)

(4.7

)

Changes in non-cash working capital items:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(87.3

)

(6.5

)

(60.7

)

58.7

 

Inventories

 

(49.7

)

(19.8

)

(111.0

)

(85.3

)

Other current assets

 

(15.4

)

21.3

 

(10.5

)

12.9

 

Accounts payable, accrued and other current liabilities and provisions

 

70.5

 

(1.3

)

39.3

 

(11.4

)

Non-cash working capital changes

 

(81.9

)

(6.3

)

(142.9

)

(25.1

)

Net income taxes paid

 

(8.7

)

(10.4

)

(17.3

)

(15.4

)

Net cash provided by (used in) operating activities

 

(4.5

)

55.2

 

(22.8

)

90.8

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Purchase of computer software and property, plant and equipment(a)

 

(18.2

)

(24.1

)

(34.3

)

(49.6

)

Proceeds from sale of assets

 

0.5

 

—

 

0.7

 

0.6

 

Repayments from solar supplier (note 4)

 

2.0

 

5.7

 

5.0

 

12.5

 

Net cash used in investing activities

 

(15.7

)

(18.4

)

(28.6

)

(36.5

)

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Borrowings under credit facility (note 9)

 

—

 

—

 

40.0

 

—

 

Repayments under credit facility (note 9)

 

(16.3

)

(6.3

)

(22.5

)

(27.5

)

Finance lease payments (note 9)

 

(1.1

)

(1.6

)

(2.4

)

(3.1

)

Issuance of capital stock (note 10)

 

1.5

 

3.4

 

3.0

 

13.2

 

Repurchase of capital stock for cancellation (note 10)

 

—

 

—

 

(34.3

)

—

 

Purchase of treasury stock for stock-based plans (note 10)

 

—

 

(5.2

)

—

 

(6.5

)

Finance costs paid

 

(2.5

)

(2.4

)

(4.8

)

(4.9

)

Net cash used in financing activities

 

(18.4

)

(12.1

)

(21.0

)

(28.8

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(38.6

)

24.7

 

(72.4

)

25.5

 

Cash and cash equivalents, beginning of period

 

511.5

 

558.0

 

545.3

 

557.2

 

Cash and cash equivalents, end of period

 

$

472.9

 

$

582.7

 

$

472.9

 

$

582.7

 

 

(a) Additional equipment of $5.0 was acquired through a finance lease in the first quarter and first half of 2017 (second quarter and first half of 2016 - $0.3).

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

5


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

1.                                      REPORTING ENTITY

 

Celestica Inc. (Celestica) is incorporated in Ontario with its corporate headquarters located at 844 Don Mills Road, Toronto, Ontario, M3C 1V7.  Celestica’s subordinate voting shares are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).

 

Celestica delivers innovative supply chain solutions globally to customers in the following end markets: Communications (comprised of enterprise communications and telecommunications), Advanced Technology Solutions (comprised of our former Diversified and Consumer end markets, and consisting of aerospace and defense, industrial, healthcare, smart energy, semiconductor equipment, and consumer), and Enterprise (comprised of Servers and Storage). Our product lifecycle offerings include a range of services to our customers including design and development, engineering services, supply chain management, new product introduction, component sourcing, electronics manufacturing, assembly and test, complex mechanical assembly, systems integration, precision machining, order fulfillment, logistics and after-market repair and return services.

 

2.                                      BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Statement of compliance:

 

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB) and the accounting policies we have adopted in accordance with International Financial Reporting Standards (IFRS). These unaudited interim condensed consolidated financial statements should be read in conjunction with our 2016 annual audited consolidated financial statements and reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at June 30, 2017 and our financial performance, comprehensive income and cash flows for the three and six months ended June 30, 2017. These unaudited interim condensed consolidated financial statements are presented in U.S. dollars, which is also our functional currency.  Unless otherwise noted, all financial information is presented in millions of U.S. dollars (except percentages and per share amounts).

 

These unaudited interim condensed consolidated financial statements were authorized for issuance by our board of directors on July 25, 2017.

 

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 second quarter and first half 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 (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.

 

6


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

Recently issued accounting pronouncements:

 

IFRS 15, Revenue from Contracts with Customers:

 

In May 2014, the IASB issued this standard, which provides a single, principles-based five-step model for revenue recognition to be applied to all customer contracts, and requires enhanced disclosures. The new standard is effective January 1, 2018, and allows for early adoption. We have elected to adopt this standard in our consolidated financial statements for the year ending December 31, 2018 using the retrospective approach. Under this approach, we will restate each comparative reporting period presented and recognize the transitional adjustments through equity at the start of the first comparative reporting period presented (January 1, 2016). We have determined that the new standard will change the timing of revenue recognition for a significant portion of our business.  Under the new standard, revenue for certain customer contracts will be recognized earlier than under the current recognition rules (which is generally upon delivery). We believe the adoption of the new standard will materially impact our consolidated financial statements. However, the extent of the financial impacts cannot be reasonably estimated until we complete our detailed analysis during the remainder of 2017. We are also currently assessing the changes to our business processes, systems and controls that will be necessary to support the recognition and disclosures required by the new standard.

 

IFRS 9, Financial Instruments:

 

In July 2014, the IASB issued a final version of this standard, which replaces IAS 39, Financial Instruments: Recognition and Measurement, and is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The standard introduces a new model for the classification and measurement of financial assets, a single expected credit loss model for the measurement of the impairment of financial assets, and a new model for hedge accounting that is aligned with a company’s risk management activities. We do not intend to adopt this standard early and are currently evaluating the anticipated impact of adopting this standard on our consolidated financial statements.

 

IFRS 16, Leases:

 

In January 2016, the IASB issued this standard, which brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. IFRS 16 supersedes IAS 17, Leases, and related interpretations and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted. We do not intend to adopt this standard early and are currently evaluating the anticipated impact of adopting this standard on our consolidated financial statements.

 

3.                                      SEGMENT AND CUSTOMER REPORTING

 

End markets:

 

The following table indicates revenue by end market as a percentage of total revenue for the periods indicated.

 

 

 

Three months ended
June 30

 

Six months ended
June 30

 

 

 

2016

 

2017

 

2016

 

2017

 

Communications

 

41

%

44

%

40

%

43

%

Advanced Technology Solutions (ATS)

 

33

%

31

%

35

%

32

%

Enterprise

 

26

%

25

%

25

%

25

%

 

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 second quarter and first half of 2017, we had two customers that individually represented more than 10% of total revenue (second quarter and first half of 2016 — two customers).

 

7


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

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 storage 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 a 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 Asia-based solar cell supplier. During the second quarter of 2017, we received $5.7 from this solar supplier representing the final repayment of the cash we advanced to them. Under this supply agreement, we also manufactured and sold completed solar panels to this supplier as a customer. As of June 30, 2017, accounts receivable of $6.4 remain due from this solar supplier.

 

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, and completed production of the final solar panels in the first quarter of 2017.  We continue to be actively engaged in the disposition of our solar panel manufacturing equipment and remaining solar panel inventory, and in the recovery of amounts owed to us. However, during the second quarter of 2017, we recorded additional provisions of $0.9 in cost of sales, to further write down the carrying value of our remaining solar panel inventory to reflect lower prices obtained in recent purchase orders.  We also recorded provisions of $0.5 in SG&A expenses in our consolidated statement of operations, to write down the carrying value of solar accounts receivable, primarily as a result of a solar customer’s bankruptcy. We also recorded impairment charges of $5.2 in other charges, to further write down the carrying value of our solar panel manufacturing equipment to its estimated fair value (at period-end) less costs to sell, based on recent broker estimates (see note 11). As of June 30, 2017, and after reflecting such write-downs, we have $9.0 of remaining solar panel inventory, all of which we intend to ship to customers during the third quarter of 2017, $0.8 of outstanding accounts receivable from solar customers other than the former solar supplier described above, and $1.2 of solar panel manufacturing equipment which remains available for sale. See notes 6 and 7. A substantial portion of our solar panel manufacturing equipment is subject to finance lease agreements.  As of June 30, 2017, our remaining lease obligations for this solar equipment totaled $13.2, which we have recorded as current liabilities on our consolidated balance sheet as we currently intend to terminate and settle these lease obligations in 2017. See note 9.

 

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 March 2017, based on a review of our requirements, we amended this agreement to reduce its overall capacity from $250.0 to $200.0. The other provisions of the agreement remained unchanged. At June 30, 2017, $50.0 of accounts receivable were sold under this facility (December 31, 2016 — $50.0).

 

At June 30, 2017, we also sold $65.4 of accounts receivable under a customer’s supplier financing program (December 31, 2016 — $51.4), pursuant to which participating suppliers may sell accounts receivable from such customer to a third party bank on an uncommitted basis in order to receive earlier payment. We utilized this program to substantially offset the effect of extended payment terms required by such customer on our working capital for the period.

 

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.

 

8


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

6.                                      INVENTORIES

 

We record our inventory provisions, net of valuation recoveries in cost of sales. We recorded net inventory provisions of $0.9 and $3.2, respectively, for the second quarter and first half of 2017 (second quarter and first half of 2016 — net inventory recoveries of $0.4, and net inventory provisions of $0.2, respectively). We regularly review our estimates and assumptions used to value our inventory through analysis of historical performance. As a result of prices obtained in recent purchase orders for solar panels, we recorded an inventory provision of $0.9 during the second quarter of 2017 to write down the carrying amount of our remaining solar panel inventory to recoverable amounts.  We intend to ship these solar panels to customers during the third quarter of 2017.

 

7.                                      ASSETS CLASSIFIED AS HELD-FOR-SALE

 

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 recent broker estimates, we recorded impairment charges of $5.2 in other charges during the second quarter of 2017, to further write down the carrying value of our solar panel manufacturing equipment to its estimated fair value (at period end) less costs to sell. At June 30, 2017, and reflecting such write-downs, we had $28.6 (December 31, 2016 — $28.9) of assets classified as held for sale, which consisted primarily of land and buildings in Europe and North America and $1.2 of solar panel manufacturing equipment in Asia and North America.

 

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 United Kingdom (U.K.) that generally provide them with stated benefits on retirement based on their pensionable service, either in annuities and/or lump sum payments. The U.K. defined benefit pension plans are comprised of a Main pension plan and a Supplementary pension plan, both of which are closed to new members. The Main pension plan is our largest defined benefit pension plan. The Supplementary pension plan does not have any active members.

 

In March 2017, the Trustees of our U.K. Main pension plan entered into an agreement with a third party insurance company to purchase an annuity for participants in such plan who have retired.  The cost of the annuity was £123.7 million (approximately $154.3 at the exchange rate at the time of recording) and was funded with existing plan assets. The annuity is held as an asset of the Main plan. Although we retain ultimate responsibility for the payment of benefits to plan participants, the annuity substantially hedges the financial risk component of the associated pension obligations for such retired participants. The purchase of the annuity resulted in a non-cash loss of $17.0 which we recorded in other comprehensive income and simultaneously re-classified to deficit during the first quarter of 2017.  We also reduced the value of our pension assets by $17.0 which is recorded in other non-current assets on our consolidated balance sheet.

 

In April 2017, the Trustees of our U.K. Supplementary pension plan entered into an agreement with a third party insurance company to purchase an annuity for all participants of this plan. The cost of the annuity was £9.1 million (approximately $11.7 at the exchange rate at the time of recording) and was funded with existing plan assets. The annuity is held as an asset of such plan. For the Supplementary pension plan, we anticipate transferring the pension annuity to individual plan members and winding up the plan in the forthcoming year. Although we will retain responsibility for the payment of benefits to plan participants until such wind-up is complete, the annuity substantially hedges the financial risk component of the associated pension obligations for such participants. The purchase of the annuity resulted in a non-cash loss of $1.9 which we recorded in other charges (see note 11) in our consolidated statement of operations, with a corresponding reduction in the value of our pension assets which is recorded in other non-current assets on our consolidated balance sheet.

 

9


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

9.                                      CREDIT FACILITIES AND LONG-TERM DEBT

 

Our credit facility consists of a $250.0 term loan (Term Loan) and a $300.0 revolving credit facility (Revolving Facility), each maturing in May 2020. See note 12 of our 2016 annual audited consolidated financial statements for further details regarding the terms of our credit facility.

 

During the first quarter of 2016, we borrowed $40.0 under the Revolving Facility to fund the repurchase of shares under a normal course issuer bid (NCIB). During the second quarter of 2016, we made a scheduled quarterly principal repayment of $6.25 (first half of 2016 — $12.5) under the Term Loan, and a repayment of $10.0 under the Revolving Facility. During each of the first and second quarters of 2017, we made a scheduled quarterly principal repayment of $6.25 under the Term Loan, and made a $15.0 repayment under the Revolving Facility in the first quarter of 2017. As of June 30, 2017, there was $200.0 outstanding under the Term Loan and there were no amounts outstanding under the Revolving Facility.

 

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

 

June 30
2017

 

Borrowings under the Revolving Facility

 

$

15.0

 

$

—

 

Term Loan

 

212.5

 

200.0

 

Total borrowings under credit facility

 

227.5

 

200.0

 

Less: unamortized debt issuance costs

 

(1.2

)

(1.0

)

Finance lease obligations (1)

 

18.4

 

20.7

 

 

 

$

244.7

 

$

219.7

 

Comprised of:

 

 

 

 

 

Current portion of borrowings under credit facility and finance lease obligations (1)

 

$

56.0

 

$

40.0

 

Long-term portion of borrowings under credit facility and finance lease obligations

 

188.7

 

179.7

 

 

 

$

244.7

 

$

219.7

 

 

(1) At June 30, 2017, $13.2 (December 31, 2016 — $15.3) of our finance lease obligations relate to manufacturing equipment for our 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 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 $6.25, and a lump sum repayment of the remainder outstanding at maturity. Prepayments under our credit facility are required under specified circumstances. See note 12 of our 2016 annual audited consolidated financial statements.

 

At June 30, 2017, we were in compliance with all restrictive and financial covenants under our credit facility. Commitment fees paid in the second quarter and first half of 2017 were $0.3 and $0.7, respectively (second quarter and first half of 2016 — $0.3 and $0.6, respectively). At June 30, 2017, we had $22.7 (December 31, 2016 — $25.8) outstanding in letters of credit under this facility.

 

We also have a total of $73.5 (December 31, 2016 — $70.0) in uncommitted bank overdraft facilities available for intraday and overnight operating requirements. There were no amounts outstanding under these overdraft facilities at June 30, 2017 or December 31, 2016.

 

10


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

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 February 2016, we launched an NCIB (2016 NCIB), which allowed us to repurchase, at our discretion, up to approximately 10.5 million subordinate voting shares in the open market. During the first quarter of 2016, we paid $34.3 (including transaction fees) to repurchase and cancel 3.2 million subordinate voting shares under the 2016 NCIB at a weighted average price of $10.69 per share, including 2.8 million subordinate voting shares repurchased under a $30.0 program share repurchase (PSR) we funded in March 2016 (and completed in May 2016) at a weighted average price of $10.69 per share. We did not repurchase any additional shares for cancellation during the second quarter of 2016 or the first half of 2017. The 2016 NCIB expired in February 2017. Prior to its expiry, we repurchased an aggregate of 1.6 million subordinate voting shares under the 2016 NCIB to satisfy obligations under our stock-based compensation plans (see below).

 

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 second quarter and first half of 2017, we paid $5.2 and $6.5, respectively, (including transaction fees) for a broker’s purchase of 0.37 million and 0.46 million subordinate voting shares in the open market for awards under our stock-based compensation plans. We did not repurchase any shares in the open market for our stock-based compensation plans during the first half of 2016. At June 30, 2017, the broker held 0.4 million subordinate voting shares with a value of $4.9 (December 31, 2016 — 1.4 million subordinate voting shares with a value of $15.3).

 

The following table outlines the activities for stock-based awards granted to employees (activities for deferred share units (DSUs) issued to directors are excluded) for the six months ended June 30, 2017:

 

Number of awards (in millions)

 

Options

 

RSUs (i)

 

PSUs (i)

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

2.1

 

3.8

 

6.1

 

Granted (i)

 

—

 

1.5

 

1.8

 

Exercised or settled (ii)

 

(1.7

)

(1.7

)

(0.8

)

Forfeited and canceled

 

—

 

—

 

(1.3

)

Outstanding at June 30, 2017

 

0.4

 

3.6

 

5.8

 

 

 

 

 

 

 

 

 

Weighted-average grant date fair value of options and share units granted

 

$

—

 

$

13.68

 

$

17.18

 

 

(i)                                     During the second quarter and first half of 2017, we granted 0.1 million and 1.5 million, respectively (second quarter and first half of 2016 — 0.1 million and 2.1 million, respectively) restricted share units (RSUs), 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 second quarter of 2017, we did not grant any

 

11


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

performance share units (PSUs) (second quarter of 2016 — nil). During the first quarter of 2017, we granted 1.8 million (first quarter of 2016 — 2.5 million) PSUs, 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 grant — 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 June 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 second quarter and first half of 2017, we received cash proceeds of $3.4 and $13.2, respectively (second quarter and first half of 2016 — $1.5 and $3.0, respectively) relating to the exercise of vested employee stock options.

 

At June 30, 2017, 1.5 million (December 31, 2016 — 1.5 million) DSUs were outstanding.

 

For the second quarter and first half of 2017, we recorded aggregate employee stock-based compensation expense (excluding DSU expense) through cost of sales and SG&A of $5.7 and $16.7, respectively (second quarter and first half of 2016 — $6.8 and $16.2, respectively), and DSU expense (recorded through SG&A) of $0.6 and $1.2, respectively (second quarter and first half of 2016 — $0.5 and $1.0, respectively). Employee stock-based compensation expense varies from period-to-period.

 

11.                               OTHER CHARGES (RECOVERIES)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2016

 

2017

 

2016

 

2017

 

Restructuring (a)

 

$

4.5

 

$

5.8

 

$

6.5

 

$

11.6

 

Loss on pension annuity purchase (see note 8)

 

—

 

1.9

 

—

 

1.9

 

Other (b)

 

(7.5

)

0.3

 

(7.8

)

2.1

 

 

 

$

(3.0

)

$

8.0

 

$

(1.3

)

$

15.6

 

 

(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 $5.8 and $11.6 during the second quarter and first half of 2017, respectively, consisting primarily of cash charges of $0.6 and $6.4, respectively, for employee termination costs resulting from our Organizational Design and Global Business Services initiatives, and non-cash charges of $5.2 for the second quarter and first half of 2017, to further write down the carrying value of our solar panel manufacturing equipment (see below). We recorded restructuring charges of $4.5 and $6.5 during the second quarter and first half of 2016, respectively, consisting of cash charges of $2.3 and $4.3, respectively, primarily for employee termination costs and contractual lease obligations related to exited operations, and non-cash charges of $2.2 for the second quarter and first half of 2016, primarily to write down certain plant assets and equipment to recoverable amounts. Our restructuring provision at June 30, 2017 was $3.2 (December 31, 2016 — $6.6).

 

12


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

During the fourth quarter of 2016, we made a 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 and remaining solar panel inventory, and in the recovery of amounts owed by customers, including a former solar supplier (see note 4).  As a result of recent broker estimates, we recorded impairment charges of $5.2 during the second quarter of 2017, to further write down the carrying value of our solar panel manufacturing equipment to its estimated fair value (at period end) less costs to sell. A substantial portion of our solar panel equipment is subject to finance leases, pursuant to which we had outstanding obligations of $13.2 as of June 30, 2017.  We currently intend to terminate and settle these lease obligations in 2017. We had reclassified our solar panel manufacturing equipment as assets held for sale during the first quarter of 2017.  See note 7.

 

(b)                                 Other:

 

During the second quarter and first half of 2017, we recorded $0.3 and $0.9, respectively, in integration and transaction costs related to an acquisition we completed in the fourth quarter of 2016. In the first quarter of 2017, we also recorded costs related to a prior legal matter.

 

In the second quarter of 2016, we recorded recoveries of damages of $12.0 in connection with the settlement of class action lawsuits in which we were a plaintiff, related to certain purchases we made in prior periods. We also recorded a provision in the second quarter of 2016 with respect to the settlement of an unrelated legal matter.

 

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 Americas, Europe and Asia, in jurisdictions with tax holidays and tax incentives, and in jurisdictions for which no net deferred income tax assets have been recognized because management believed it was not probable that future taxable profit would be available against which tax losses and deductible temporary differences could be utilized.  Our effective income tax rate can also vary due to the impact of restructuring charges, foreign exchange fluctuations, operating losses, cash repatriations, and changes in our provisions related to tax uncertainties.

 

Our income tax expense for the second quarter of 2017 was favorably impacted by the recognition of a $5.0 deferred income tax benefit related to the write-downs and impairments of our solar assets recorded in the current and prior quarters. In connection with our exit from the solar panel manufacturing business, we withdrew one of our tax incentives in Thailand (which related solely to such operations) 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 in Thailand, resulting in the recognition of the deferred income tax benefit.

 

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.

 

13


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

As a result of the resolution of certain previously disputed tax matters, we received $6 million Canadian dollars (approximately $4 at settlement date exchange rates) in January 2017, representing the return of all remaining deposits and related refund interest with respect to such matters. See note 24 to our 2016 annual audited consolidated financial statements.

 

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, outstanding cash advances 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, 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 December 31, 2016.

 

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 June 30, 2017 are summarized in U.S. dollar equivalents in the following table. In the table below, in addition to our financial instruments, we have included certain monetary assets and liabilities, including pension and non-pension post-employment benefits and income taxes that were denominated in non-functional currencies, in order to better reflect our currency exposures. The local currency amounts have been converted to U.S. dollar equivalents using spot rates at June 30, 2017.

 

 

 

Canadian
dollar

 

British
pound
sterling

 

Euro

 

Thai
baht

 

Cash and cash equivalents

 

$

17.6

 

$

0.3

 

$

14.2

 

$

1.9

 

Accounts receivable

 

0.4

 

—

 

28.8

 

2.0

 

Pension and non-pension post-employment assets

 

—

 

52.4

 

—

 

—

 

Income taxes and value-added taxes receivable

 

19.8

 

—

 

5.6

 

1.1

 

Other financial assets

 

6.4

 

—

 

7.2

 

0.1

 

Pension and non-pension post-employment liabilities

 

(70.8

)

—

 

(0.4

)

(13.1

)

Income taxes and value-added taxes payable

 

(3.7

)

—

 

(1.0

)

(0.8

)

Accounts payable and certain accrued and other liabilities and provisions

 

(41.2

)

(0.8

)

(26.4

)

(17.7

)

Net financial assets (liabilities)

 

$

(71.5

)

$

51.9

 

$

28.0

 

$

(26.5

)

 

14


 

CELESTICA INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in millions of U.S. dollars, except percentages and per share amounts)

(unaudited)

 

We enter into foreign exchange forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge our balance sheet exposures. At June 30, 2017, we had foreign exchange forwards and swaps to trade U.S. dollars in exchange for the following currencies:

 

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

 

$

210.5

 

$

0.76

 

12

 

$

3.7

 

Thai baht

 

80.3

 

0.03

 

12

 

1.8

 

Malaysian ringgit

 

48.4

 

0.23

 

12

 

0.6

 

Mexican peso

 

25.0

 

0.05

 

12

 

2.0

 

British pound

 

52.5

 

1.28

 

4

 

(2.2

)

Chinese renminbi

 

72.6

 

0.15

 

12

 

0.1

 

Euro

 

46.9

 

1.11

 

10

 

(0.4

)

Romanian leu

 

26.4

 

0.24

 

12

 

1.0

 

Singapore dollar

 

22.5

 

0.71

 

12

 

0.4

 

Other

 

5.1

 

 

 

 

 

—

 

Total

 

$

590.2

 

 

 

 

 

$

7.0

 

 

At June 30, 2017, the fair value of our outstanding contracts was a net unrealized gain of $7.0 (December 31, 2016 — net unrealized loss of $9.6). At June 30, 2017, we recorded $11.9 of derivative assets in other current assets, and $4.9 of derivative liabilities in accrued and other current liabilities (December 31, 2016 — $5.9 of derivative assets in other current assets and $15.5 of derivative liabilities in accrued and other current, and other non-current, liabilities). The unrealized gains or losses are a result of fluctuations in foreign exchange rates between the date the currency forward or swap contracts were entered into and the valuation date at period end.

 

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 Ontario Superior Court of Justice. The proceedings were dismissed on January 16, 2017 with no payments by the defendants.

 

15