Celestica Announces Third Quarter 2021 Financial Results
Celestica Inc. reported Q3 2021 revenue of $1.47 billion, a 5% decline from Q3 2020. However, their non-Cisco business grew by 6%. The non-IFRS operating margin improved to 4.2%, marking a record high. The company anticipates Q4 2021 revenue between $1.425 billion and $1.575 billion, with an adjusted EPS guidance of $0.35 to $0.41. Celestica expects 2022 growth, projecting revenue to reach at least $6.3 billion and adjusted EPS to rise by 20% compared to 2021, driven by strong operational performance and market dynamics.
- Non-IFRS operating margin reached a record 4.2%, up from 3.9% in Q3 2020.
- Non-Cisco revenue saw a 6% increase compared to Q3 2020.
- Anticipated revenue growth in Q4 2021, returning to top-line growth.
- 2022 projected adjusted EPS growth of at least 20% compared to 2021.
- Overall revenue decreased by 5% compared to Q3 2020.
- CCS segment revenue dropped 14% from Q3 2020.
(All amounts in U.S. dollars.
Per share information based on diluted
shares outstanding unless otherwise noted.)
TORONTO, Oct. 25, 2021 (GLOBE NEWSWIRE) -- Celestica Inc. (TSX: CLS) (NYSE: CLS), a leader in design, manufacturing and supply chain solutions for the world’s most innovative companies, today announced financial results for the quarter ended September 30, 2021 (Q3 2021)†.
“Celestica’s strong third quarter performance reflects our consistent execution and the resiliency of our business, as we continue to successfully navigate challenges related to the pandemic and the global supply chain. Our non-IFRS operating margin* of
“The fourth quarter of 2021 serves as an important inflection point in our business, as our focus now turns squarely to growth and maintaining the momentum we’ve built in recent quarters. We remain on track to complete our acquisition of PCI in November. Achievement of our revenue guidance for the fourth quarter of 2021 will represent a return to top-line growth, and achievement of our non-IFRS operating margin* mid-point guidance of
Q3 2021 Highlights
- Revenue:
$1.47 billion , decreased5% compared to$1.55 billion for the third quarter of 2020 (Q3 2020); - Revenue of our non-Cisco business** increased
6% compared to Q3 2020. - Operating margin (non-IFRS)*:
4.2% , compared to3.9% for Q3 2020. - ATS segment revenue: increased
12% compared to Q3 2020; ATS segment margin was4.3% , compared to3.7% for Q3 2020. - CCS segment revenue: decreased
14% compared to Q3 2020; CCS segment margin was4.1% , compared to4.0% for Q3 2020; - Non-Cisco CCS revenue*** increased
2% compared to Q3 2020. - Lifecycle Solutions portfolio revenue (combined ATS segment and HPS revenue): increased
15% compared to Q3 2020, and represented60% of total revenue, compared to50% of total revenue for Q3 2020. - IFRS earnings per share (EPS):
$0.28 , compared to$0.24 per share for Q3 2020. - Adjusted EPS (non-IFRS)*:
$0.35 , compared to$0.32 for Q3 2020. - Adjusted return on invested capital (non-IFRS)*:
15.2% , flat compared to Q3 2020. - Free cash flow (non-IFRS)*:
$27.1 million , compared to$15.8 million for Q3 2020. - Repurchased and cancelled 2.1 million subordinate voting shares for
$17.2 million under our normal course issuer bid (NCIB).
Q4 2021 Guidance
Our fourth quarter of 2021 (Q4 2021) guidance assumes consummation of the acquisition of PCI Private Limited (PCI) (described below) in November 2021, and incorporates our estimated impact of supply chain constraints.
- IFRS revenue:
$1.42 5 billion to$1.57 5 billion - Operating margin (non-IFRS)*:
4.5% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges - Adjusted SG&A (non-IFRS)*:
$62 million to$64 million - Adjusted EPS (non-IFRS)*:
$0.35 t o$0.41
For Q4 2021, we expect a negative
Full-Year 2021 Commentary
We believe that 2021 is on track to be a successful year for Celestica, and one where we make meaningful progress towards the achievement of our long-term strategic objectives. Achievement of the mid-point of our guidance ranges for Q4 2021 (see above), would represent the following financial accomplishments for 2021:
- Adjusted EPS (non-IFRS)* of
$1.24 , compared to$0.98 for 2020, a growth rate of27% - Operating margin (non-IFRS)* of
4.0% , compared to3.5% for 2020, an improvement of 50 basis points - Non-Cisco business revenue** growth of
7% compared to 2020 - Lifecycle Solutions portfolio revenue concentration of approximately
60% , compared to51% for 2020
The foregoing commentary represents operating measures that would result if the mid-point of our Q4 2021 guidance ranges are achieved, and are not intended to be projections or forecasts of future performance. Our future performance is subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially those described in this section.
2022 Outlook
As we look to 2022, we expect the markets to remain dynamic. However, we believe that secular tailwinds in several of our end markets, strong operational performance and the ramping of new programs bode well for Celestica. Assuming the severity of supply chain constraints expected for the remainder of 2021 do not significantly worsen, and consummation of the PCI acquisition (see below) in November 2021, we anticipate the following for 2022:
- IFRS revenue to grow to at least
$6.3 billion - Operating margin (non-IFRS)* in the range of
4.0% to5.0% - Adjusted EPS (non-IFRS)* to increase by at least
20% compared to 2021
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. See Schedule 1 for the definitions of the foregoing non-IFRS financial measures, and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures. Also see “Non-IFRS Supplementary Information” below.
† Celestica has two operating and reportable segments - Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). 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 (semiconductor, display, and power & signal distribution equipment) businesses. Our CCS segment consists of our Communications and Enterprise (servers and storage) end markets. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 26 to our 2020 audited consolidated financial statements, included in our Annual Report on Form 20-F for the year ended December 31, 2020 (2020 20-F), available at www.sec.gov and www.sedar.com, for further detail.
* Non-International Financial Reporting Standards (IFRS) financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar financial measures presented by other public companies that use IFRS or U.S. generally accepted accounting principles (GAAP). See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS financial measures, and Schedule 1 for, among other items, non-IFRS financial measures included in this press release, as well as their definitions, uses, and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures. We do not provide reconciliations for forward-looking non-IFRS financial measures, as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. See the paragraph after “2022 Outlook.”
** total revenue from programs with customers other than Cisco Systems, Inc. (Cisco).
*** aggregate CCS segment revenue from programs with customers other than Cisco.
Summary of Selected Q3 2021 Results
For information on the impact of coronavirus disease 2019 and related mutations (COVID-19) on our business in Q3 2021, see “Segment Updates” below and footnote (1) to the following table. Also see the “Recent Developments” section of each of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) for Q3 2021, to be filed at www.sedar.com and www.sec.gov, and in Item 5 of our 2020 20-F.
| Q3 2021 Actual (1) | Q3 2021 Guidance (2) | ||
| IFRS revenue (in billions) | |||
| IFRS EPS (1) | N/A | ||
| IFRS earnings before income taxes as a % of revenue | N/A | ||
| Non-IFRS operating margin | revenue and non-IFRS adjusted EPS guidance ranges | ||
| IFRS SG&A (in millions) | N/A | ||
| Non-IFRS adjusted SG&A (in millions) | |||
| Non-IFRS adjusted EPS |
(1) IFRS EPS of
IFRS EPS for Q3 2021 included a
IFRS EPS of
See Schedule 1 for the exclusions used to determine non-IFRS adjusted EPS for Q3 2021, Q3 2020, YTD 2021 and YTD 2020. COVID-19 Costs consist of both direct and indirect costs, including manufacturing inefficiencies related to lost revenue due to our inability to secure materials, idled labor costs, and incremental costs for labor, expedite fees and freight premiums, cleaning supplies, personal protective equipment, and/or IT-related services to support our work-from-home arrangements.
(2) For Q3 2021, our revenue was at the mid-point of our guidance range, our non-IFRS adjusted EPS was towards the high end of our guidance range, and our non-IFRS operating margin exceeded the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges. Non-IFRS adjusted SG&A for Q3 2021 was within our guidance range and our non-IFRS adjusted effective tax rate for Q3 2021 was
See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS financial measures, and Schedule 1 for, among other items, non-IFRS financial measures included in this press release, as well as their definitions, uses, and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures.
Segment Updates
ATS Segment:
ATS segment revenue increased
ATS segment margin increased to
Revenue from our semiconductor Capital Equipment customers increased in Q3 2021 compared to Q3 2020. The growth was driven by continued strong end market demand, in combination with new program wins and market share gains. We expect continued strength in our Capital Equipment business in Q4 2021 and into 2022, and anticipate that revenue from our Capital Equipment business for 2021 will exceed
While A&D revenue in Q3 2021 was lower than in Q3 2020, primarily due to soft demand driven by the ongoing impact of COVID-19, headwinds have stabilized, resulting in modest sequential growth. Although we do not expect our commercial aerospace business to return to pre-COVID-19 levels in the near term, we expect modest sequential growth to continue in Q4 2021 and into 2022, supported by new program wins.
During Q3 2021, revenue from our Industrial business increased compared to Q3 2020. Demand in our Industrial business continues to recover after being significantly impacted by COVID-19 in 2020. We expect year-over-year revenue and sequential growth in Q4 2021 supported by strong bookings and a general recovery in demand, as well as the addition of PCI assuming consummation of the acquisition in November 2021 as anticipated (see “PCI Acquisition” below). We expect PCI’s portfolio, as well as our existing Industrial business, to achieve solid organic growth in 2022.
HealthTech revenue increased in Q3 2021 compared to Q3 2020. While we expect to see some moderation in revenue growth in Q4 2021 due to softening demand in our COVID-19-related programs, we continue to expect our overall HealthTech business to grow in 2022, supported by the ramping of new non-COVID-related programs.
CCS Segment:
CCS segment revenue decreased in Q3 2021 compared to Q3 2020, primarily due to our disengagement from programs with Cisco Systems, Inc. (Cisco Disengagement), completed in the fourth quarter of 2020, as well as program-specific demand softness from certain server customers in our Enterprise end market. Also see “Supply Chain and Workforce Constraints” below for a description of the estimated adverse impact of such matters on CCS segment revenue in Q3 2021 and the prior year period. These decreases were partially offset by strong demand from service provider customers, including in our HPS business, as well as strength in demand from certain storage customers in our Enterprise end market. We expect that year-to-year Enterprise revenue declines will begin to stabilize in Q4 2021.
Our HPS business recorded strong revenue growth in Q3 2021, increasing
Despite lower revenue levels, CCS segment margin improved to
Supply Chain and Workforce Constraints:
Global supply chain constraints, including as a result of COVID-19, continued to impact both of our segments in Q3 2021, resulting in extended lead times for certain components, and impacting the availability of materials required to support customer programs. However, our advanced planning processes, supply chain management, and collaboration with our customers and suppliers helped to partially mitigate the impact of these constraints on our revenue. We expect this pressure to persist in Q4 2021 and throughout 2022, particularly in our CCS segment. While we have incorporated these dynamics into our Q4 2021 guidance and 2022 annual outlook to the best of our ability, their adverse impact (in terms of duration and severity) cannot be estimated with certainty, and may be materially in excess of our expectations.
As a result of recent resurgences of COVID-19 outbreaks, the governments of various jurisdictions have mandated periodic lockdowns or workforce constraints. However, because Celestica’s operations have been considered an essential service by relevant local government authorities to date, our manufacturing sites have generally continued to operate in impacted countries (including Malaysia, Mexico, Thailand and Laos in Q3 2021), albeit at reduced capacities (due to reduced attendance, shift reductions or temporary shutdowns). Although these lockdowns and workforce constraints present a challenge to our business performance when in force, due to effective resource management and planning, we have been able to largely mitigate the impact of these actions to date on our manufacturing capacity and our revenues.
We estimate that we had an aggregate adverse revenue impact of approximately
PCI Acquisition
On September 21, 2021, we entered into a definitive agreement to acquire PCI, a fully-integrated design, engineering and manufacturing solutions provider with five manufacturing and design facilities across Asia. The purchase price is estimated to be approximately
We intend to use borrowings under our revolver to finance this portion of the PCI acquisition at closing. However, we are currently pursuing the addition of a new term loan under our credit facility with the Administrative Agent thereunder, which if obtained, will be used to repay the amounts borrowed under the revolver for the acquisition. Although we believe that such term loan will be provided on acceptable terms, there can be no assurance that this will be the case.
Intention to Launch New NCIB
We intend to file a notice of intention with the Toronto Stock Exchange (TSX) to commence a new NCIB in Q4 2021, after our current NCIB expires in November 2021. If this notice is accepted by the TSX, we expect to be permitted to repurchase for cancellation, at our discretion during the 12 months following such acceptance, up to
Q3 2021 Webcast
Management will host its Q3 2021 results conference call on October 26, 2021 at 8:00 a.m. Eastern Daylight Time (EDT). The webcast can be accessed at www.celestica.com.
Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS, Celestica provides supplementary non-IFRS financial measures to consider in evaluating the company’s operating performance. Management uses adjusted net earnings and other non-IFRS financial measures to assess operating performance and the effective use and allocation of resources; to provide more meaningful period-to-period comparisons of operating results; to enhance investors’ understanding of the core operating results of Celestica’s business; and to set management incentive targets. We believe investors use both IFRS and non-IFRS financial measures to assess management’s past, current and future decisions associated with our priorities and our allocation of capital, as well as to analyze how our business operates in, or responds to, swings in economic cycles or to other events that impact our core operations. See Schedule 1 below.
About Celestica
Celestica enables the world’s best brands. Through our recognized customer-centric approach, we partner with leading companies in Aerospace and Defense, Communications, Enterprise, HealthTech, Industrial, Capital Equipment, and Energy to deliver solutions for their most complex challenges. As a leader in design, manufacturing, hardware platform and supply chain solutions, Celestica brings global expertise and insight at every stage of product development - from the drawing board to full-scale production and after-market services. With talented teams across North America, Europe and Asia, we imagine, develop and deliver a better future with our customers. For more information on Celestica, visit www.celestica.com. Our securities filings can 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 the impact of the COVID-19 pandemic on our business; our priorities, goals and strategies; trends in the electronics manufacturing services (EMS) industry and our segments (and/or constituent businesses), and their anticipated impact; the anticipated impact of current market conditions on each of our segments (and/or constituent businesses) and near term expectations (positive and negative); our anticipated financial and/or operational results and outlook, including our anticipated Q4 2021 non-IFRS adjusted effective tax rate; our anticipated acquisition of PCI, the expected timing, cost, and funding thereof, and the expected impact of such acquisition, if consummated, on our Q4 2021 and 2022 financial results; our intention to launch a new NCIB and anticipated terms; our pursuit of a new term loan under our credit facility; materials, components and supply chain constraints; our credit risk; our liquidity; anticipated charges and expenses, including restructuring charges; the potential impact of tax and litigation outcomes; mandatory prepayments under our credit facility; interest rates; and our financial statement estimates and assumptions. 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,” “target,” “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: customer and segment concentration; challenges of replacing revenue from completed, lost or non-renewed programs or customer disengagements; our customers’ ability to compete and succeed using our products and services; price, margin pressures, and other competitive factors and adverse market conditions affecting, and the highly competitive nature of, the EMS industry in general and our segments in particular (including the risk that anticipated market improvements do not materialize); changes in our mix of customers and/or the types of products or services we provide, including negative impacts of higher concentrations of lower margin programs; the cyclical and volatile nature of our semiconductor business; delays in the delivery and availability of components, services and/or materials; managing changes in customer demand; rapidly evolving and changing technologies, and changes in our customers’ business or outsourcing strategies; the expansion or consolidation of our operations; volatility in the commercial aerospace industry; the inability to maintain adequate utilization of our workforce; the nature of the display market; defects or deficiencies in our products, services or designs; integrating and achieving the anticipated benefits from acquisitions and “operate-in-place” arrangements; compliance with customer-driven policies and standards, and third-party certification requirements; challenges associated with new customers or programs, or the provision of new services; the impact of our restructuring actions, divestitures and/or productivity initiatives, including a failure to achieve anticipated benefits therefrom; the incurrence of future restructuring charges, impairment charges, other write-downs of assets or operating losses; managing our business during uncertain market, political and economic conditions, including among others, geopolitical and other risks associated with our international operations, including military actions, protectionism and reactive countermeasures, economic or other sanctions or trade barriers; disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of events outside of our control, including, among others: policies or legislation instituted by the former or current administration in the U.S., U.S. and global tax reform, the potential impact of significant tariffs on items imported into the U.S. and related countermeasures, and/or the impact of (in addition to COVID-19) other widespread illness or disease; the scope, duration and impact of the COVID-19 pandemic, including its continuing adverse impact on the commercial aerospace industry; changes to our operating model; changing commodity, materials and component costs as well as labor costs and conditions; execution and/or quality issues (including our ability to successfully resolve these challenges); non-performance by counterparties; maintaining sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities; negative impacts on our business resulting from current outstanding third-party indebtedness; negative impacts on our business resulting from any significant uses of cash, securities issuances, and/or additional increases in third-party indebtedness (including increased third-party indebtedness for the acquisition of PCI, and/or as a result of an inability to sell desired amounts under our uncommitted accounts receivable sales program); the failure to obtain an additional term loan in connection with our acquisition of PCI on acceptable terms, in a timely manner, or at all, and if obtained, that such term loan includes additional restrictive financial or operational covenants, significantly increased interest rates and/or additional significant fees; the failure to satisfy the closing conditions required for our purchase of PCI; a material adverse change at PCI; operational impacts that may affect PCI’s ability to achieve anticipated financial results; the purchase price for PCI varying from the expected amount; the inability to use cash on hand and/or borrowings under our credit facility to fund the acquisition as anticipated; the failure to consummate the purchase of PCI when anticipated, in a timely manner, or at all, and if the acquisition is consummated, a failure to successfully integrate the acquisition, further develop our capabilities and/or customer base in expected markets or otherwise expand our portfolio of solutions, and/or achieve the other expected synergies and benefits from the acquisition; foreign currency volatility; our global operations and supply chain; competitive bid selection processes; customer relationships with emerging companies; recruiting or retaining skilled talent; our dependence on industries affected by rapid technological change; our ability to adequately protect intellectual property and confidential information; increasing taxes, tax audits, and challenges of defending our tax positions; obtaining, renewing or meeting the conditions of tax incentives and credits; computer viruses, malware, ransomware, hacking attempts or outages that may disrupt our operations; the inability to prevent or detect all errors or fraud; the variability of revenue and operating results; unanticipated disruptions to our cash flows; compliance with applicable laws, regulations, and government subsidies, grants or credits; the management of our information technology systems; our pension and other benefit plan obligations; changes in accounting judgments, estimates and assumptions; our ability to maintain compliance with applicable (or any new) credit facility covenants; interest rate fluctuations and changes to LIBOR; deterioration in financial markets or the macro-economic environment; our credit rating; the interest of our controlling shareholder; current or future litigation, governmental actions, and/or changes in legislation or accounting standards; negative publicity; that the TSX will not accept a new NCIB; that we will not be permitted to, or do not, repurchase subordinate voting shares (SVS) under any NCIB; and our ability to achieve our environmental, social and governance (ESG) initiative goals, including with respect to climate change. The foregoing and other material risks and uncertainties are discussed in our public filings at www.sedar.com and www.sec.gov, including in our most recent MD&A, our 2020 Annual Report on Form 20-F filed with, and subsequent reports on Form 6-K furnished to, the U.S. Securities and Exchange Commission, and as applicable, the Canadian Securities Administrators.
The forward-looking statements contained in this press release are based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions include those related to the following: the scope and duration of materials constraints and the COVID-19 pandemic and its impact on our sites, customers and suppliers; 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 success of our customers’ products; our ability to retain programs and customers; the stability of general economic and market conditions and currency exchange rates; supplier performance, pricing and terms; compliance by third parties with their contractual obligations; the costs and availability of components, materials, services, equipment, labor, energy and transportation; that our customers will retain liability for product/component 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; the components of our leverage ratio (as defined in our credit facility); our ability to successfully diversify our customer base and develop new capabilities; the availability of cash resources for, and the permissibility under our credit facility of, repurchases of outstanding SVS under NCIBs, acceptance of a new NCIB and compliance with applicable laws and regulations pertaining to NCIBs; receipt of an additional term loan under our credit facility on acceptable terms and in a timely manner; that we will maintain compliance with applicable (or any new) credit facility covenants; anticipated demand strength in certain of our businesses; anticipated demand weakness in, and/or the impact of anticipated adverse market conditions on, certain of our businesses; and that: the closing conditions to our purchase of PCI will be satisfied in a timely manner; no material adverse change will have occurred at PCI; anticipated financial results by PCI will be achieved; our purchase of PCI will be consummated in a timely manner and on anticipated terms; our ability to use available cash on hand and incur further indebtedness under our credit facility will be as expected in order to finance the PCI acquisition as anticipated; once acquired, we are able to successfully integrate PCI, further develop our ATS segment business, and achieve the other expected synergies and benefits from the acquisition; all financial information provided by PCI is accurate and complete, and all forecasts of PCI’s operating results are reasonable and were provided to Celestica in good faith; and we will continue to have sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities. 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 Financial Measures
The non-IFRS financial measures included in this press release are: adjusted gross profit, adjusted gross margin (adjusted gross profit as a percentage of revenue), adjusted selling, general and administrative expenses (SG&A), adjusted SG&A as a percentage of revenue, operating earnings (or adjusted EBIAT), operating margin (operating earnings or adjusted EBIAT as a percentage of revenue), adjusted net earnings, adjusted EPS, adjusted return on invested capital (adjusted ROIC), free cash flow, adjusted tax expense and adjusted effective tax rate. Adjusted EBIAT, adjusted ROIC, free cash flow, adjusted tax expense and adjusted effective tax rate are further described in the tables below. In calculating our non-IFRS financial measures, management excludes the following items where indicated in the table below: employee stock-based compensation (SBC) expense, amortization of intangible assets (excluding computer software), Other Charges, net of recoveries (defined below), Finance Costs (defined below), and acquisition inventory fair value adjustments, all net of the associated tax adjustments (quantified in the table below), and non-core tax impacts (tax adjustments related to acquisitions, and certain other tax costs or recoveries related to restructuring actions or restructured sites).
We believe the non-IFRS financial measures we present herein are useful to investors, as they enable investors to evaluate and compare our results from operations in a more consistent manner (by excluding specific items that we do not consider to be reflective of our core operations), to evaluate cash resources that we generate from our business each period, and to provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of a non-IFRS adjusted tax expense and a non-IFRS adjusted effective tax rate provide improved insight into the tax effects of our core operations, and are useful to management and investors for historical comparisons and forecasting. These non-IFRS financial measures result largely from management’s determination that the facts and circumstances surrounding the excluded charges or recoveries are not indicative of our core operations.
Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies that report under IFRS, or who report under U.S. GAAP and use non-GAAP financial measures to describe similar financial metrics. Non-IFRS financial measures are not measures of performance under IFRS and should not be considered in isolation or as a substitute for any IFRS financial measure.
The most significant limitation to management’s use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS financial measures are nonetheless recognized under IFRS and have an economic impact on us. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of our performance, and reconciling non-IFRS financial measures back to the most directly comparable IFRS financial measures.
The economic substance of the exclusions described above (where applicable to the periods presented) and management’s rationale for excluding them from non-IFRS financial measures is provided below:
Employee SBC expense, which represents the estimated fair value of stock options, restricted share units and performance share units granted to employees, is excluded because grant activities vary significantly from quarter-to-quarter in both quantity and fair value. In addition, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude employee SBC expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do.
Amortization charges (excluding computer software) consist of non-cash charges against intangible assets that are impacted by the timing and magnitude of acquired businesses. Amortization of intangible assets varies among our competitors, and we believe that excluding these charges permits a better comparison of core operating results with those of our competitors who also generally exclude amortization charges in assessing operating performance.
Other Charges, net of recoveries, consist of, when applicable: Restructuring Charges, net of recoveries (defined below); Transition Costs (defined below); net Impairment charges (defined below); consulting, transaction and integration costs related to potential and completed acquisitions, and charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with our acquisition of Impakt Holdings, LLC (such releases were first recorded in the first quarter of 2021) (collectively, Acquisition Costs (Recoveries)); legal settlements (recoveries); credit facility-related charges; and post-employment benefit plan losses. We exclude these charges, net of recoveries, because we believe that they are not directly related to ongoing operating results and do not reflect expected future operating expenses after completion of these activities or incurrence of the relevant costs. Our competitors may record similar charges at different times, and we believe these exclusions permit a better comparison of our core operating results with those of our competitors who also generally exclude these types of charges, net of recoveries, in assessing operating performance.
Restructuring Charges, net of recoveries, consist of costs relating to: employee severance, lease terminations, site closings and consolidations; write-downs of owned property and equipment which are no longer used and are available for sale; and reductions in infrastructure.
Transition Costs consist of: (i) costs recorded in connection with the relocation of our Toronto manufacturing operations, and the move of our corporate headquarters into and out of a temporary location during, and upon completion, of the construction of space in a new office building at our former location (all in connection with the 2019 sale of our Toronto real property) and (ii) costs recorded in connection with the transfer of manufacturing lines from closed sites to other sites within our global network. Transition Costs consist of direct relocation and duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition periods, as well as cease-use costs incurred in connection with idle or vacated portions of the relevant premises that we would not have incurred but for these relocations and transfers. We believe that excluding these costs permits a better comparison of our core operating results from period-to-period, as these costs will not reflect our ongoing operations once these relocations and manufacturing line transfers are complete.
Impairment charges, which consist of non-cash charges against goodwill, intangible assets, property, plant and equipment, and right-of-use (ROU) assets, result primarily when the carrying value of these assets exceeds their recoverable amount.
Finance Costs consist of interest expense and fees related to our credit facility (including debt issuance and related amortization costs), our interest rate swap agreements, our accounts receivable sales program and customers’ supplier financing programs, and interest expense on our lease obligations, net of interest income earned. We believe that excluding these costs provides useful insight for assessing the performance of our core operations.
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 financial measures discussed above, and a reconciliation of non-IFRS financial measures to the most directly comparable IFRS financial measures (in millions, except percentages and per share amounts):
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||||
| IFRS revenue | $ | 1,550.5 | $ | 1,467.4 | $ | 4,361.5 | $ | 4,122.6 | |||||||||||||||
| IFRS gross profit | $ | 124.2 | 8.0 | % | $ | 125.4 | 8.5 | % | $ | 323.8 | 7.4 | % | $ | 344.9 | 8.4 | % | |||||||
| Employee SBC expense | 1.1 | 3.1 | 8.9 | 9.4 | |||||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 125.3 | 8.1 | % | $ | 128.5 | 8.8 | % | $ | 332.7 | 7.6 | % | $ | 354.3 | 8.6 | % | |||||||
| IFRS SG&A | $ | 56.9 | 3.7 | % | $ | 62.0 | 4.2 | % | $ | 171.3 | 3.9 | % | $ | 179.6 | 4.4 | % | |||||||
| Employee SBC expense | (0.6 | ) | (5.5 | ) | (11.8 | ) | (14.8 | ) | |||||||||||||||
| Non-IFRS adjusted SG&A | $ | 56.3 | 3.6 | % | $ | 56.5 | 3.9 | % | $ | 159.5 | 3.7 | % | $ | 164.8 | 4.0 | % | |||||||
| IFRS earnings before income taxes | $ | 40.3 | 2.6 | % | $ | 43.9 | 3.0 | % | $ | 63.8 | 1.5 | % | $ | 94.4 | 2.3 | % | |||||||
| Finance Costs | 8.9 | 7.8 | 28.6 | 23.4 | |||||||||||||||||||
| Employee SBC expense | 1.7 | 8.6 | 20.7 | 24.2 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.5 | 4.9 | 16.9 | 14.7 | |||||||||||||||||||
| Other Charges (recoveries) | 3.7 | (3.9 | ) | 19.0 | 2.9 | ||||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) (1) | $ | 60.1 | 3.9 | % | $ | 61.3 | 4.2 | % | $ | 149.0 | 3.4 | % | $ | 159.6 | 3.9 | % | |||||||
| IFRS net earnings | $ | 30.4 | 2.0 | % | $ | 35.2 | 2.4 | % | $ | 40.5 | 0.9 | % | $ | 72.0 | 1.7 | % | |||||||
| Employee SBC expense | 1.7 | 8.6 | 20.7 | 24.2 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.5 | 4.9 | 16.9 | 14.7 | |||||||||||||||||||
| Other Charges (recoveries) | 3.7 | (3.9 | ) | 19.0 | 2.9 | ||||||||||||||||||
| Adjustments for taxes (2) | (0.4 | ) | (1.4 | ) | (3.8 | ) | (4.7 | ) | |||||||||||||||
| Non-IFRS adjusted net earnings | $ | 40.9 | $ | 43.4 | $ | 93.3 | $ | 109.1 | |||||||||||||||
| Diluted EPS | |||||||||||||||||||||||
| Weighted average # of shares (in millions) | 129.1 | 125.5 | 129.1 | 127.3 | |||||||||||||||||||
| IFRS earnings per share | $ | 0.24 | $ | 0.28 | $ | 0.31 | $ | 0.57 | |||||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.32 | $ | 0.35 | $ | 0.72 | $ | 0.86 | |||||||||||||||
| # of shares outstanding at period end (in millions) | 129.1 | 124.7 | 129.1 | 124.7 | |||||||||||||||||||
| IFRS cash provided by operations | $ | 42.0 | $ | 55.7 | $ | 189.9 | $ | 161.0 | |||||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (9.9 | ) | (13.2 | ) | (32.2 | ) | (35.3 | ) | |||||||||||||||
| Lease payments (3) | (9.9 | ) | (10.0 | ) | (27.9 | ) | (30.0 | ) | |||||||||||||||
| Finance Costs paid (excluding debt issuance costs paid) (3) | (6.4 | ) | (5.4 | ) | (22.3 | ) | (16.5 | ) | |||||||||||||||
| Non-IFRS free cash flow (3) | $ | 15.8 | $ | 27.1 | $ | 107.5 | $ | 79.2 | |||||||||||||||
| IFRS ROIC % (4) | 10.2 | % | 10.9 | % | 5.3 | % | 7.8 | % | |||||||||||||||
| Non-IFRS adjusted ROIC % (4) | 15.2 | % | 15.2 | % | 12.5 | % | 13.2 | % | |||||||||||||||
(1) Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess performance related to our core operations. Non-IFRS adjusted EBIAT is defined as earnings (loss) before income taxes, Finance Costs (defined above), employee SBC expense, amortization of intangible assets (excluding computer software), Other Charges (recoveries) (defined above), and in applicable periods, acquisition inventory fair value adjustments. See note 8 to our Q3 2021 Interim Financial Statements for separate quantification and discussion of the components of Other Charges (recoveries).
(2) The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments and non-core tax impacts (see below).
The following table sets forth a reconciliation of our IFRS tax expense and IFRS effective tax rate to our non-IFRS adjusted tax expense and our non-IFRS adjusted effective tax rate for the periods indicated, in each case determined by excluding the tax benefits or costs associated with the listed items (in millions, except percentages) from our IFRS tax expense for such periods:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2020 | Effective tax rate | 2021 | Effective tax rate | 2020 | Effective tax rate | 2021 | Effective tax rate | ||||||||||||||||
| IFRS tax expense and IFRS effective tax rate | $ | 9.9 | 25 | % | $ | 8.7 | 20 | % | $ | 23.3 | 37 | % | $ | 22.4 | 24 | % | |||||||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||||||||||||||||
| Employee SBC expense | 0.2 | 1.4 | 1.2 | 2.9 | |||||||||||||||||||
| Other Charges (recoveries) | 0.2 | — | 2.2 | 0.7 | |||||||||||||||||||
| Non-core tax impacts related to tax uncertainties* | — | — | 0.4 | — | |||||||||||||||||||
| Non-core tax impact related to restructured sites** | — | — | — | 1.1 | |||||||||||||||||||
| Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 10.3 | 20 | % | $ | 10.1 | 19 | % | $ | 27.1 | 23 | % | $ | 27.1 | 20 | % | |||||||
* Consists of the reversal of certain tax uncertainties related to a prior acquisition that became statute-barred in the first quarter of 2020.
** Consists of the reversals of tax uncertainties related to one of our Asian subsidiaries that completed its liquidation and dissolution during the first quarter of 2021.
(3) Management uses non-IFRS free cash flow as a measure, in addition to IFRS cash provided by (used in) operations, to assess our operational cash flow performance. We believe non-IFRS free cash flow provides another level of transparency to our liquidity. Non-IFRS free cash flow is defined as cash provided by (used in) operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), lease payments and Finance Costs paid (excluding any debt issuance costs and when applicable, waiver fees related to our credit facility). We do not consider debt issuance costs (nil paid in Q3 2021 and YTD 2021;
(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, accounts payable, accrued and other current liabilities, provisions, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter 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 (loss) 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.
The following table sets forth, for the periods indicated, our calculation of IFRS ROIC % and non-IFRS adjusted ROIC % (in millions, except IFRS ROIC % and non-IFRS adjusted ROIC %).
| Three months ended | Nine months ended | ||||||||||||||
| September 30 | September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| IFRS earnings before income taxes | $ | 40.3 | $ | 43.9 | $ | 63.8 | $ | 94.4 | |||||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | |||||||||||
| Annualized IFRS earnings before income taxes | $ | 161.2 | $ | 175.6 | $ | 85.0 | $ | 125.8 | |||||||
| Average net invested capital for the period | $ | 1,586.4 | $ | 1,617.3 | $ | 1,594.9 | $ | 1,613.5 | |||||||
| IFRS ROIC % (1) | 10.2 | % | 10.9 | % | 5.3 | % | 7.8 | % | |||||||
| Three months ended | Nine months ended | ||||||||||||||
| September 30 | September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 60.1 | $ | 61.3 | $ | 149.0 | $ | 159.6 | |||||||
| Multiplier to annualize earnings | 4 | 4 | 1.333 | 1.333 | |||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 240.4 | $ | 245.2 | $ | 198.6 | $ | 212.7 | |||||||
| Average net invested capital for the period | $ | 1,586.4 | $ | 1,617.3 | $ | 1,594.9 | $ | 1,613.5 | |||||||
| Non-IFRS adjusted ROIC % (1) | 15.2 | % | 15.2 | % | 12.5 | % | 13.2 | % | |||||||
| December 31 2020 | March 31 2021 | June 30 2021 | September 30 2021 | ||||||||||||
| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 3,664.1 | $ | 3,553.4 | $ | 3,745.4 | $ | 4,026.1 | |||||||
| Less: cash | 463.8 | 449.4 | 467.2 | 477.2 | |||||||||||
| Less: ROU assets | 101.0 | 98.4 | 100.5 | 115.4 | |||||||||||
| Less: accounts payable, accrued and other current | |||||||||||||||
| liabilities, provisions and income taxes payable | 1,478.4 | 1,407.0 | 1,575.8 | 1,800.8 | |||||||||||
| Net invested capital at period end (1) | $ | 1,620.9 | $ | 1,598.6 | $ | 1,601.9 | $ | 1,632.7 | |||||||
| December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | ||||||||||||
| Net invested capital consists of: | |||||||||||||||
| Total assets | $ | 3,560.7 | $ | 3,537.8 | $ | 3,788.1 | $ | 3,789.3 | |||||||
| Less: cash | 479.5 | 472.1 | 435.9 | 451.4 | |||||||||||
| Less: ROU assets | 104.1 | 96.9 | 94.4 | 101.2 | |||||||||||
| Less: accounts payable, accrued and other current | |||||||||||||||
| liabilities, provisions and income taxes payable | 1,341.7 | 1,397.5 | 1,684.1 | 1,637.6 | |||||||||||
| Net invested capital at period end (1) | $ | 1,635.4 | $ | 1,571.3 | $ | 1,573.7 | $ | 1,599.1 | |||||||
(1) See footnote 4 of the previous table.
CELESTICA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars)
(unaudited)
| Note | December 31 2020 | September 30 2021 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 463.8 | $ | 477.2 | ||||
| Accounts receivable | 4 | 1,093.4 | 1,148.1 | |||||
| Inventories | 5 | 1,091.5 | 1,405.9 | |||||
| Income taxes receivable | 6.8 | 8.5 | ||||||
| Other current assets | 81.7 | 63.5 | ||||||
| Total current assets | 2,737.2 | 3,103.2 | ||||||
| Property, plant and equipment | 332.5 | 319.7 | ||||||
| Right-of-use assets | 101.0 | 115.4 | ||||||
| Goodwill | 198.6 | 198.2 | ||||||
| Intangible assets | 229.4 | 216.4 | ||||||
| Deferred income taxes | 39.9 | 51.1 | ||||||
| Other non-current assets | 25.5 | 22.1 | ||||||
| Total assets | $ | 3,664.1 | $ | 4,026.1 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility and lease obligations | 6 | $ | 99.8 | $ | 55.7 | |||
| Accounts payable | 854.5 | 1,095.4 | ||||||
| Accrued and other current liabilities | 5 | 553.1 | 633.8 | |||||
| Income taxes payable | 51.8 | 54.5 | ||||||
| Current portion of provisions | 19.0 | 17.1 | ||||||
| Total current liabilities | 1,578.2 | 1,856.5 | ||||||
| Long-term portion of borrowings under credit facility and lease obligations | 6 | 486.1 | 516.1 | |||||
| Pension and non-pension post-employment benefit obligations | 117.3 | 114.5 | ||||||
| Provisions and other non-current liabilities | 41.2 | 41.0 | ||||||
| Deferred income taxes | 32.3 | 28.7 | ||||||
| Total liabilities | 2,255.1 | 2,556.8 | ||||||
| Equity: | ||||||||
| Capital stock | 7 | 1,834.2 | 1,764.5 | |||||
| Treasury stock | 7 | (15.7 | ) | (2.3 | ) | |||
| Contributed surplus | 974.5 | 1,035.4 | ||||||
| Deficit | (1,368.8 | ) | (1,296.8 | ) | ||||
| Accumulated other comprehensive loss | (15.2 | ) | (31.5 | ) | ||||
| Total equity | 1,409.0 | 1,469.3 | ||||||
| Total liabilities and equity | $ | 3,664.1 | $ | 4,026.1 | ||||
Commitments and Contingencies (note 12).
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 | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Note | 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Revenue | 3 | $ | 1,550.5 | $ | 1,467.4 | $ | 4,361.5 | $ | 4,122.6 | |||||||
| Cost of sales | 5 | 1,426.3 | 1,342.0 | 4,037.7 | 3,777.7 | |||||||||||
| Gross profit | 124.2 | 125.4 | 323.8 | 344.9 | ||||||||||||
| Selling, general and administrative expenses (SG&A) | 56.9 | 62.0 | 171.3 | 179.6 | ||||||||||||
| Research and development | 8.1 | 10.0 | 21.5 | 27.8 | ||||||||||||
| Amortization of intangible assets | 6.3 | 5.6 | 19.6 | 16.8 | ||||||||||||
| Other charges (recoveries) | 8 | 3.7 | (3.9 | ) | 19.0 | 2.9 | ||||||||||
| Earnings from operations | 49.2 | 51.7 | 92.4 | 117.8 | ||||||||||||
| Finance costs | 6 | 8.9 | 7.8 | 28.6 | 23.4 | |||||||||||
| Earnings before income taxes | 40.3 | 43.9 | 63.8 | 94.4 | ||||||||||||
| Income tax expense (recovery) | 9 | |||||||||||||||
| Current | 9.7 | 17.0 | 29.2 | 36.5 | ||||||||||||
| Deferred | 0.2 | (8.3 | ) | (5.9 | ) | (14.1 | ) | |||||||||
| 9.9 | 8.7 | 23.3 | 22.4 | |||||||||||||
| Net earnings for the period | $ | 30.4 | $ | 35.2 | $ | 40.5 | $ | 72.0 | ||||||||
| Basic earnings per share | $ | 0.24 | $ | 0.28 | $ | 0.31 | $ | 0.57 | ||||||||
| Diluted earnings per share | $ | 0.24 | $ | 0.28 | $ | 0.31 | $ | 0.57 | ||||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||||||
| Basic | 129.1 | 125.4 | 129.1 | 127.3 | ||||||||||||
| Diluted | 129.1 | 125.5 | 129.1 | 127.3 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of U.S. dollars)
(unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Net earnings for the period | $ | 30.4 | $ | 35.2 | $ | 40.5 | $ | 72.0 | ||||||||
| 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 | (0.2 | ) | — | (0.2 | ) | — | ||||||||||
| Items that may be reclassified to net earnings: | ||||||||||||||||
| Currency translation differences for foreign operations | 2.0 | (1.5 | ) | 1.2 | (6.1 | ) | ||||||||||
| Changes from currency forward derivatives designated as hedges | 2.3 | (5.1 | ) | 0.8 | (16.6 | ) | ||||||||||
| Changes from interest rate swap derivatives designated as hedges | 1.7 | 1.6 | (6.7 | ) | 6.4 | |||||||||||
| Total comprehensive income for the period | $ | 36.2 | $ | 30.2 | $ | 35.6 | $ | 55.7 | ||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in millions of U.S. dollars)
(unaudited)
| Note | Capital stock (note 7 ) | Treasury stock (note 7) | Contributed surplus | Deficit | Accumulated other comprehensive loss (a) | Total equity | ||||||||||||||||||
| Balance – January 1, 2020 | $ | 1,832.1 | $ | (14.8 | ) | $ | 982.6 | $ | (1,420.1 | ) | $ | (23.6 | ) | $ | 1,356.2 | |||||||||
| Capital transactions | 7 | |||||||||||||||||||||||
| Issuance of capital stock | 2.2 | — | (2.2 | ) | — | — | — | |||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (13.1 | ) | — | — | — | (13.1 | ) | ||||||||||||||||
| Equity-settled stock-based compensation (SBC) | — | 14.0 | 7.8 | — | — | 21.8 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 40.5 | — | 40.5 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | — | — | — | (0.2 | ) | — | (0.2 | ) | ||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | 1.2 | 1.2 | ||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | 0.8 | 0.8 | ||||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | — | — | — | — | (6.7 | ) | (6.7 | ) | ||||||||||||||||
| Balance – September 30, 2020 | $ | 1,834.3 | $ | (13.9 | ) | $ | 988.2 | $ | (1,379.8 | ) | $ | (28.3 | ) | $ | 1,400.5 | |||||||||
| Balance – January 1, 2021 | $ | 1,834.2 | $ | (15.7 | ) | $ | 974.5 | $ | (1,368.8 | ) | $ | (15.2 | ) | $ | 1,409.0 | |||||||||
| Capital transactions | 7 | |||||||||||||||||||||||
| Issuance of capital stock | 0.3 | — | (0.2 | ) | — | — | 0.1 | |||||||||||||||||
| Repurchase of capital stock for cancellation(b) | (70.0 | ) | — | 49.1 | — | — | (20.9 | ) | ||||||||||||||||
| Equity-settled SBC | — | 13.4 | 12.0 | — | — | 25.4 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 72.0 | — | 72.0 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (6.1 | ) | (6.1 | ) | ||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | (16.6 | ) | (16.6 | ) | ||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | — | — | — | — | 6.4 | 6.4 | ||||||||||||||||||
| Balance – September 30, 2021 | $ | 1,764.5 | $ | (2.3 | ) | $ | 1,035.4 | $ | (1,296.8 | ) | $ | (31.5 | ) | $ | 1,469.3 | |||||||||
(a) Accumulated other comprehensive loss is net of tax.
(b) We paid
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of U.S. dollars)
(unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Note | 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating activities: | ||||||||||||||||
| Net earnings for the period | $ | 30.4 | $ | 35.2 | $ | 40.5 | $ | 72.0 | ||||||||
| Adjustments to net earnings for items not affecting cash: | ||||||||||||||||
| Depreciation and amortization | 31.2 | 30.6 | 93.9 | 91.5 | ||||||||||||
| Equity-settled employee SBC expense | 7 | 1.7 | 8.6 | 20.7 | 24.2 | |||||||||||
| Other charges (recoveries) | 8 | 0.7 | (0.8 | ) | 2.4 | (1.4 | ) | |||||||||
| Finance costs | 8.9 | 7.8 | 28.6 | 23.4 | ||||||||||||
| Income tax expense | 9.9 | 8.7 | 23.3 | 22.4 | ||||||||||||
| Other | 10.4 | 5.2 | 9.5 | 19.5 | ||||||||||||
| Changes in non-cash working capital items: | ||||||||||||||||
| Accounts receivable | 10.4 | (61.2 | ) | (72.3 | ) | (54.7 | ) | |||||||||
| Inventories | 0.9 | (181.0 | ) | (213.0 | ) | (314.4 | ) | |||||||||
| Other current assets | (4.9 | ) | (10.9 | ) | (7.1 | ) | (7.1 | ) | ||||||||
| Accounts payable, accrued and other current liabilities and provisions | (48.1 | ) | 226.5 | 287.7 | 320.7 | |||||||||||
| Non-cash working capital changes | (41.7 | ) | (26.6 | ) | (4.7 | ) | (55.5 | ) | ||||||||
| Net income tax paid | (9.5 | ) | (13.0 | ) | (24.3 | ) | (35.1 | ) | ||||||||
| Net cash provided by operating activities | 42.0 | 55.7 | 189.9 | 161.0 | ||||||||||||
| Investing activities: | ||||||||||||||||
| Purchase of computer software and property, plant and equipment | (10.1 | ) | (15.7 | ) | (33.6 | ) | (37.8 | ) | ||||||||
| Proceeds related to the sale of assets | 0.2 | 2.5 | 1.4 | 2.5 | ||||||||||||
| Net cash used in investing activities | (9.9 | ) | (13.2 | ) | (32.2 | ) | (35.3 | ) | ||||||||
| Financing activities: | ||||||||||||||||
| Repayments under credit facility | 6 | — | — | (121.9 | ) | (30.0 | ) | |||||||||
| Payment of lease obligations | (9.9 | ) | (10.0 | ) | (27.9 | ) | (30.0 | ) | ||||||||
| Issuance of capital stock | — | 0.1 | — | 0.1 | ||||||||||||
| Repurchase of capital stock for cancellation | 7 | — | (17.2 | ) | — | (35.9 | ) | |||||||||
| Purchase of treasury stock for stock-based plans | 7 | — | — | (13.1 | ) | — | ||||||||||
| Finance costs paid | 6 | (6.7 | ) | (5.4 | ) | (22.9 | ) | (16.5 | ) | |||||||
| Net cash used in financing activities | (16.6 | ) | (32.5 | ) | (185.8 | ) | (112.3 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | 15.5 | 10.0 | (28.1 | ) | 13.4 | |||||||||||
| Cash and cash equivalents, beginning of period | 435.9 | 467.2 | 479.5 | 463.8 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 451.4 | $ | 477.2 | $ | 451.4 | $ | 477.2 | ||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
1. REPORTING ENTITY
Celestica Inc. (Celestica) is incorporated in Ontario with its corporate headquarters located in Toronto, Ontario, Canada. Celestica’s subordinate voting shares (SVS) are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated financial statements for the period ended September 30, 2021 (Q3 2021 Interim Financial Statements) have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and the accounting policies we have adopted in accordance with International Financial Reporting Standards (IFRS), in each case as issued by the International Accounting Standards Board (IASB), and reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at September 30, 2021 and our financial performance, comprehensive income and cash flows for the three and nine months ended September 30, 2021 (referred to herein as Q3 2021 and YTD 2021, respectively). The Q3 2021 Interim Financial Statements should be read in conjunction with our 2020 annual audited consolidated financial statements (2020 AFS), which are included in our Annual Report on Form 20-F for the year ended December 31, 2020. The Q3 2021 Interim Financial Statements are presented in United States (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).
The Q3 2021 Interim Financial Statements were authorized for issuance by our board of directors on October 25, 2021.
Use of estimates and judgments:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses, and related disclosures with respect to contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts, 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. Our assessment of these factors forms the basis for our judgments on the carrying values of our assets and liabilities, and the accrual of our costs and expenses. Actual results could differ materially from our estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. Revisions are recognized in the period in which the estimates are revised and may also impact future periods.
Our review of the estimates, judgments and assumptions used in the preparation of our financial statements for each of the first three quarters of 2021 and 2020 included consideration of actual and potential impacts of coronavirus disease 2019 and related mutations (COVID-19), including with respect to, among other things: the determination of whether indicators of impairment existed for our assets and cash generating units (CGUs1), our estimated inventory provisions and expected credit losses, customer creditworthiness, and our eligibility for COVID-19-related government subsidies, grants and/or credits (COVID Subsidies) recognized during such periods (see note 11). Any revisions to estimates, judgments or assumptions (due to COVID-19 or otherwise) may result in, among other things, write-downs or impairments to our assets or CGUs, and/or adjustments to the carrying amount of our accounts receivable (A/R) and/or inventories, any of which could have a material impact on our financial performance and financial condition. However, we determined that no significant revisions to our estimates, judgments or assumptions were required during any of the first three quarters of 2021 as a result of COVID-19 (or otherwise). While we continue to believe the COVID-19 pandemic to be temporary, the situation remains dynamic and the impact of COVID-19 on our financial performance and financial condition, including its impact on overall customer demand, cannot be reasonably estimated at this time. However, we continue to believe that our long-term estimates and assumptions are appropriate.
Accounting policies:
The Q3 2021 Interim Financial Statements are based on accounting policies consistent with those described in note 2 to our 2020 AFS, and the recently adopted accounting standard discussed below.
Recently adopted accounting standard:
Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9 (Financial Instruments), IAS 39 (Financial Instruments: Recognition and Measurement), IFRS 7 (Financial Instruments: Disclosures), IFRS 4 (Insurance Contracts) and IFRS 16 (Leases)):
In August 2020, the IASB issued Interest Rate Benchmark Reform - Phase 2, which amends IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments complement those issued in September 2019 and focus on the effects on financial statements when a company replaces a previous interest rate benchmark with an alternative benchmark rate as a result of Interbank Offered Rates (IBOR) reform. We adopted the Phase 2 amendments as of January 1, 2021. As of September 30, 2021, applicable interest rate benchmarks in the Company’s agreements have not been replaced. As a result, the adoption of the Phase 2 amendments had no impact on the Q3 2021 Interim Financial Statements. We will continue to monitor relevant developments and will evaluate the impact of the Phase 2 amendments on our consolidated financial statements as IBOR reform progresses.
3. SEGMENT AND CUSTOMER REPORTING
Segments:
Celestica delivers innovative supply chain solutions globally to customers in two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 26 to our 2020 AFS for a description of the businesses that comprise our segments, and how segment revenue, segment income and segment margin are determined.
Information regarding the performance of our reportable segments is set forth below:
| Revenue by segment: | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||||||||||||
| % of total | % of total | % of total | % of total | |||||||||||||||||||||||
| ATS | $ | 525.8 | $ | 588.4 | $ | 1,573.1 | $ | 1,682.3 | ||||||||||||||||||
| CCS | 1,024.7 | 879.0 | 2,788.4 | 2,440.3 | ||||||||||||||||||||||
| Communications end market revenue as a % of total revenue | ||||||||||||||||||||||||||
| Enterprise end market revenue as a % of total revenue | ||||||||||||||||||||||||||
| Total | $ | 1,550.5 | $ | 1,467.4 | $ | 4,361.5 | $ | 4,122.6 | ||||||||||||||||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| Note | 2020 | 2021 | 2020 | 2021 | ||||||||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | Segment Margin | |||||||||||||||||||||
| ATS segment income and margin | $ | 19.5 | 3.7 | % | $ | 25.1 | 4.3 | % | $ | 49.7 | 3.2 | % | $ | 69.6 | 4.1 | % | ||||||||
| CCS segment income and margin | 40.6 | 4.0 | % | 36.2 | 4.1 | % | 99.3 | 3.6 | % | 90.0 | 3.7 | % | ||||||||||||
| Total segment income | 60.1 | 61.3 | 149.0 | 159.6 | ||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||
| Finance costs | 6 | 8.9 | 7.8 | 28.6 | 23.4 | |||||||||||||||||||
| Employee stock-based compensation (SBC) expense | 1.7 | 8.6 | 20.7 | 24.2 | ||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.5 | 4.9 | 16.9 | 14.7 | ||||||||||||||||||||
| Other charges (recoveries) | 8 | 3.7 | (3.9 | ) | 19.0 | 2.9 | ||||||||||||||||||
| IFRS earnings before income taxes | $ | 40.3 | $ | 43.9 | $ | 63.8 | $ | 94.4 | ||||||||||||||||
Customers:
In Q3 2021, we had one customer, a CCS segment customer, that individually represented
Seasonality:
From time to time, we experience some level of seasonality in our quarterly revenue patterns across certain of our businesses. Recently, revenue from our Enterprise end market has decreased in the first quarter of the year compared to the previous quarter, and then increased in the second quarter, reflecting an increase in customer demand. We also typically experience our lowest overall revenue levels during the first quarter of each year. There can be no assurance that these patterns will continue. The addition of new customers has also introduced different demand cycles from our existing customers, creating more volatility and unpredictability in our revenue patterns. These and other factors make it difficult to isolate the impact of seasonality on our business.
4. ACCOUNTS RECEIVABLE
Accounts receivable (A/R) sales program and supplier financing programs (SFPs):
We entered into an agreement in March 2020 with a third-party bank to sell up to
In addition, we participate in two SFPs (one with a CCS segment customer and one with an ATS segment customer), pursuant to which we sell A/R from the relevant customer to third-party banks on an uncommitted basis. The SFPs have an indefinite term and may be terminated at any time by the customer or by us upon specified prior notice. We utilize the SFPs to substantially offset the effect of extended payment terms required by these customers on our working capital for the period. Under our SFPs, the third-party banks collect the relevant receivables directly from these customers.
At September 30, 2021, we sold
The A/R sold under each of these programs are de-recognized from our A/R balance, 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 A/R to the banks. A/R are sold net of discount charges, which are recorded as finance costs in our consolidated statement of operations.
Contract assets:
At September 30, 2021, our A/R balance included
5. INVENTORIES
We record inventory provisions, net of valuation recoveries, in cost of sales. Inventory provisions reflect write-downs in the value of our inventory to net realizable value, and valuation recoveries primarily reflect gains on the disposition of previously written-down inventory. We recorded net inventory provisions of
Certain of our contracts provide for customer cash deposits to cover our risk of excess or obsolete inventory and/or for working capital requirements. Such deposits as of September 30, 2021 totaled
6. CREDIT FACILITIES AND LEASE OBLIGATIONS
We are party to a credit agreement (Credit Facility) with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which provided a term loan in the original principal amount of
The Term Loans required aggregate quarterly principal repayments of
In the first quarter of 2021 (Q1 2021), we repaid an aggregate of
At September 30, 2021, we were in compliance with all restrictive and financial covenants under the Credit Facility (December 31, 2020 — in compliance).
The following tables set forth, at the dates shown: outstanding borrowings under the Credit Facility, excluding ordinary course letters of credit (L/Cs); outstanding lease obligations; and information regarding outstanding L/Cs, surety bonds and overdraft facilities:
| Outstanding borrowings | Notional amounts under interest rate swaps (note 10) | ||||||||||||||
| December 31 2020 | September 30 2021 | December 31 2020 | September 30 2021 | ||||||||||||
| Borrowings under the Revolver | $ | — | $ | — | $ | — | $ | — | |||||||
| Borrowings under the Term Loans: | |||||||||||||||
| Initial Term Loan | $ | 295.4 | $ | 295.4 | $ | 175.0 | $ | 100.0 | |||||||
| Incremental Term Loan | 175.0 | 145.0 | 100.0 | 100.0 | |||||||||||
| Total | $ | 470.4 | $ | 440.4 | $ | 275.0 | $ | 200.0 | |||||||
| Total borrowings under Credit Facility | $ | 470.4 | $ | 440.4 | |||||||||||
| Unamortized debt issuance costs related to our Term Loans | (7.2 | ) | (5.7 | ) | |||||||||||
| Lease obligations | 122.7 | 137.1 | |||||||||||||
| $ | 585.9 | $ | 571.8 | ||||||||||||
| Current and long-term portion of Credit Facility and lease obligations: | |||||||||||||||
| Current portion | $ | 99.8 | $ | 55.7 | |||||||||||
| Long-term portion | 486.1 | 516.1 | |||||||||||||
| $ | 585.9 | $ | 571.8 | ||||||||||||
| L/Cs, surety bonds and overdraft facilities: | |||||||||||||||
| Outstanding L/Cs under the Revolver | $ | 21.3 | $ | 21.0 | |||||||||||
| Outstanding L/Cs and surety bonds outside the Revolver | 20.2 | 19.3 | |||||||||||||
| Total | $ | 41.5 | $ | 40.3 | |||||||||||
| Available uncommitted bank overdraft facilities | $ | 162.7 | $ | 198.5 | |||||||||||
| Amounts outstanding under available uncommitted bank overdraft facilities | $ | — | $ | — | |||||||||||
Finance costs consist of interest expense and fees related to our Credit Facility (including debt issuance and related amortization costs), our interest rate swap agreements, our A/R sales program and our SFPs, and interest expense on our lease obligations, net of interest income earned. We paid no debt issuance costs in Q3 2021 and YTD 2021 (
7. CAPITAL STOCK
SVS Repurchase Plans:
On November 19, 2020, the TSX accepted our notice to launch a normal course issuer bid (2020 NCIB), which allows us to repurchase, at our discretion, from November 24, 2020 until the earlier of November 23, 2021 or the completion of purchases thereunder, up to approximately 9.0 million SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. The maximum number of SVS we are permitted to repurchase for cancellation under the 2020 NCIB is reduced by the number of SVS purchased in the open market during the term of the 2020 NCIB to satisfy delivery obligations under our stock-based compensation (SBC) plans. As part of the 2020 NCIB process, we from time to time enter into Automatic Share Purchase Plans (ASPPs) with a broker, that allow the broker to purchase our SVS in the open market on our behalf (for cancellation under the 2020 NCIB), including during any applicable trading blackout periods (ASPP Purchases), up to specified daily quantities at specified prices through the term of each ASPP. In each of December 2020, March 2021, and June 2021 we had entered into such ASPPs, each of which have since expired. No repurchases were made under the December 2020 ASPP prior to its expiration in January 2021. See below for details with respect to SVS repurchases during Q3 2021, Q3 2020, YTD 2021 and YTD 2020. As of September 30, 2021, up to approximately 4.6 million SVS remain available for repurchase under the 2020 NCIB either for cancellation or SBC delivery purposes. At December 31, 2020, we had accrued
SVS repurchases:
Information regarding SVS repurchase activities for the periods indicated is set forth below:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Aggregate cost(1) of SVS repurchased for cancellation (2) | $ | — | $ | 17.2 | $ | — | $ | 35.9 | |||||||
| Number of SVS repurchased for cancellation (in millions)(2) | — | 2.1 | — | 4.37 | |||||||||||
| Weighted average price per share for repurchases | $ | — | $ | 8.10 | $ | — | $ | 8.20 | |||||||
| Aggregate cost(1) of SVS repurchased for delivery under SBC plans (see below) | $ | — | $ | — | $ | 13.1 | $ | — | |||||||
| Number of SVS repurchased for delivery under SBC plans (in millions) | — | — | 2.0 | — | |||||||||||
(1) Includes transaction fees.
(2) Includes 1.2 million and 1.7 million ASPP Purchases of SVS in Q3 2021 and YTD 2021.
SBC:
From time to time, we pay cash to a broker to purchase SVS in the open market to satisfy delivery requirements under our SBC plans. At September 30, 2021, the broker held 0.4 million SVS with a value of
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 outstanding PSUs that will actually vest will vary from
Information regarding RSU, PSU and DSU grants to employees and directors, as applicable, for the periods indicated is set forth below:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| RSUs Granted: | |||||||||||||||
| Number of awards (in millions) | 0.1 | 0.1 | 2.3 | 2.7 | |||||||||||
| Weighted average grant date fair value per unit | $ | 8.00 | $ | 8.91 | $ | 8.68 | $ | 8.16 | |||||||
| PSUs Granted: | |||||||||||||||
| Number of awards (in millions, representing | — | — | 1.7 | 1.9 | |||||||||||
| Weighted average grant date fair value per unit | $ | — | $ | — | $ | 9.88 | $ | 8.82 | |||||||
| DSUs Granted: | |||||||||||||||
| Number of awards (in millions) | 0.05 | 0.03 | 0.20 | 0.09 | |||||||||||
| Weighted average grant date fair value per unit | $ | 6.90 | $ | 8.88 | $ | 5.14 | $ | 8.35 | |||||||
Information regarding employee and director SBC expense for the periods indicated is set forth below:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Employee SBC expense in cost of sales | $ | 1.1 | $ | 3.1 | $ | 8.9 | $ | 9.4 | |||||||
| Employee SBC expense in SG&A | 0.6 | 5.5 | 11.8 | 14.8 | |||||||||||
| Total | $ | 1.7 | $ | 8.6 | $ | 20.7 | $ | 24.2 | |||||||
| Director SBC expense in SG&A (1) | $ | 0.5 | $ | 0.5 | $ | 1.5 | $ | 1.5 | |||||||
(1) Expense consists of the director compensation to be settled with SVS, or SVS and cash, as elected by each director.
8. OTHER CHARGES (RECOVERIES)
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||
| Restructuring (a) | $ | 3.7 | $ | (0.7 | ) | $ | 19.0 | $ | 8.1 | ||||||
| Transition Costs (b) | — | 0.2 | — | 0.3 | |||||||||||
| Acquisition Costs (Recoveries) and Other (c) | — | (3.4 | ) | — | (5.5 | ) | |||||||||
| $ | 3.7 | $ | (3.9 | ) | $ | 19.0 | $ | 2.9 | |||||||
(a) Restructuring:
During Q3 2021, we recorded net restructuring recoveries of
In Q3 2021, we recorded cash restructuring charges of
(b) Transition Costs:
We incurred Transition Costs (defined in note 16(c) to the 2020 AFS) of
(c) Acquisition Costs (Recoveries) and Other:
We incur consulting, transaction and integration costs relating to potential and completed acquisitions. We also incur charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with our acquisition of Impakt Holdings, LLC (Impakt). Collectively, these costs, charges and releases are referred to as Acquisition Costs (Recoveries). Acquisition Costs of
9. INCOME TAXES
Our income tax expense or recovery for each quarter is determined by multiplying the earnings or losses before tax for such quarter by management’s best estimate of the weighted-average annual income tax rate expected for the full year, taking into account the tax effect of certain items recognized in the interim period. As a result, the effective income tax rates used in our interim financial statements may differ from management’s estimate of the annual effective tax rate for the annual financial statements. Our estimated annual effective income tax rate varies as the quarters progress, for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the 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 believes it is not probable that future taxable profit will be available against which tax losses and deductible temporary differences could be utilized. Our annual effective income tax rate can also vary due to the impact of restructuring charges, foreign exchange fluctuations, operating losses, cash repatriations, tax incentives, deferred tax asset recognition and changes in our provisions related to tax uncertainties.
Our Q3 2021 net income tax expense of
For Q3 2020, our net income tax expense of
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Our financial assets are comprised primarily of cash and cash equivalents, A/R, and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of accounts payable, certain accrued and other liabilities, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives.
Interest rate risk:
Borrowings under the Credit Facility expose us to interest rate risk due to the potential variability of market interest rates. In order to partially hedge against our exposure to interest rate variability on our Term Loans, we have entered into various agreements with third-party banks to swap the variable interest rate (based on LIBOR plus a margin) with a fixed rate of interest for a portion of the borrowings under our Term Loans. At September 30, 2021, we had: (i) interest rate swaps hedging the interest rate risk associated with
At September 30, 2021, the interest rate risk related to
At September 30, 2021, the fair value of our interest rate swap agreements was a net unrealized loss of
Global reform of major interest rate benchmarks is currently underway, including the anticipated replacement of some Interbank Offered Rates (including LIBOR) with alternative nearly risk-free rates. See note 2, “Recently issued accounting standards and amendments” of the 2020 AFS. There remains uncertainty over the timing and methods of transition to such alternate rates.
We have obligations under our Credit Facility, lease arrangements, derivative instruments, and financing and discounting programs that are indexed to LIBOR (LIBOR Agreements). The interest rates under these agreements are subject to change when and if LIBOR ceases to exist. Our Credit Facility provides that when the administrative agent, the majority of lenders or we determine that LIBOR is unavailable or being replaced, then we and the administrative agent may amend the underlying credit agreement to reflect a successor rate. Once LIBOR becomes unavailable, if no successor rate has been established, applicable loans under the Credit Facility will convert to Base Rate loans. Certain of our other LIBOR Agreements also specify a successor rate once LIBOR ceases to exist, while the remaining LIBOR Agreements will require amendment. While we expect that reasonable alternatives to LIBOR will be implemented in advance of its cessation date, we cannot assure that this will be the case. If LIBOR is no longer available and the alternative reference rate is higher, interest rates under the affected LIBOR Agreements would increase, which would adversely impact our interest expense, A/R discount charges, and our financial performance and cash flows. In addition, hedge ineffectiveness could result due to the cessation of LIBOR, in particular where our interest rate swap agreements transition under the International Swaps and Derivative Association (ISDA) protocols using a different spread adjustment as compared to the underlying hedged debt. We will continue to monitor developments with respect to the cessation of LIBOR, and will evaluate potential impacts on our LIBOR Agreements, processes, systems, risk management methodology and valuations, financial reporting, taxes, and financial results. However, we are currently unable to predict when the publication of LIBOR will cease, nor what the future replacement rate or consequences on our operations or financial results will be.
Currency risk:
The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. We cannot predict changes in currency exchange rates, the impact of exchange rate changes on our operating results, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Such changes, including negative impacts on currency exchange rates related to the COVID-19 pandemic, could have a material effect on our business, financial performance and financial condition.
Our major currency exposures at September 30, 2021 are summarized in U.S. dollar equivalents in the following table. The local currency amounts have been converted to U.S. dollar equivalents using spot rates at September 30, 2021.
| Canadian dollar | Euro | Thai baht | Chinese renminbi | ||||||||||||
| Cash and cash equivalents | $ | 5.1 | $ | 13.7 | $ | 0.9 | $ | 8.1 | |||||||
| Accounts receivable | 7.7 | 38.7 | — | 7.3 | |||||||||||
| Income taxes and value-added taxes receivable | 13.3 | 0.6 | 4.9 | 2.7 | |||||||||||
| Other financial assets | 1.5 | 6.3 | 1.4 | 0.4 | |||||||||||
| Pension and non-pension post-employment liabilities | (84.1 | ) | (0.5 | ) | (18.9 | ) | (0.8 | ) | |||||||
| Income taxes and value-added taxes payable | — | (0.3 | ) | (2.7 | ) | (5.2 | ) | ||||||||
| Accounts payable and certain accrued and other liabilities and provisions | (66.8 | ) | (33.6 | ) | (31.9 | ) | (28.3 | ) | |||||||
| Net financial assets (liabilities) | $ | (123.3 | ) | $ | 24.9 | $ | (46.3 | ) | $ | (15.8 | ) | ||||
We enter into foreign currency forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge our balance sheet exposures. 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 September 30, 2021, we had foreign currency 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 | $ | 206.6 | $ | 0.79 | 12 | $ | (3.3 | ) | |||||
| Thai baht | 114.6 | 0.03 | 12 | (6.5 | ) | ||||||||
| Malaysian ringgit | 38.9 | 0.24 | 12 | (0.3 | ) | ||||||||
| Mexican peso | 24.2 | 0.05 | 12 | — | |||||||||
| Chinese renminbi | 58.4 | 0.15 | 12 | 0.5 | |||||||||
| Euro | 31.6 | 1.17 | 4 | 0.8 | |||||||||
| Romanian leu | 33.7 | 0.24 | 12 | (1.0 | ) | ||||||||
| Singapore dollar | 17.8 | 0.75 | 10 | (0.3 | ) | ||||||||
| Japanese yen | 14.8 | 0.0090 | 4 | 0.1 | |||||||||
| Korean won | 5.8 | 0.0009 | 4 | 0.3 | |||||||||
| Total | $ | 546.4 | $ | (9.7 | ) | ||||||||
As of September 30, 2021, approximately two-thirds of the fair values of our outstanding foreign currency forward and swap contracts related to effective cash flow hedges where we applied hedge accounting, and the remainder were related to economic hedges where we recorded the changes in the fair values of such contracts through our consolidated statement of operations. At September 30, 2021, the aggregate fair value of our outstanding contracts was a net unrealized loss of
Credit risk:
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our credit risk of counterparty non-performance continues to be relatively low, notwithstanding the impact of COVID-19. We are in regular contact with our customers, suppliers and logistics providers, and have not experienced significant counterparty credit-related non-performance in 2020 or YTD 2021. However, if a key supplier (or any company within such supplier’s supply chain) or customer fails to comply with their contractual obligations, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign currency exchange contracts and swaps, interest rate swaps, or annuities for our pension plans defaults on their contractual obligations. With respect to our financial market activities, we have adopted a policy of dealing only with counterparties we deem to be creditworthy. In light of COVID-19, we enhanced the monitoring of, and/or developed plans in early 2020 intended to mitigate any identified exposures from our customers, which enhancements and plans remain in effect. No significant adjustments were made to our allowance for doubtful accounts during Q3 2021, YTD 2021 or the respective prior year periods in connection with our ongoing assessments and monitoring initiatives.
Liquidity risk:
Liquidity risk is the risk that we may not have cash available to satisfy our financial obligations as they come due. The majority of our financial liabilities recorded in accounts payable, accrued and other current liabilities and provisions are due within 90 days. We manage liquidity risk through maintenance of cash on hand and access to the various financing arrangements described in notes 4 and 6. We believe that cash flow from operating activities, together with cash on hand, cash from permitted sales of A/R (although there can be no assurance that any participant bank will purchase any of the A/R that we wish to sell), and borrowings available under the Revolver and potentially available under uncommitted intraday and overnight bank overdraft facilities are sufficient to fund our currently anticipated financial obligations, and will remain available in the current environment.
11. COVID-19 GOVERNMENT SUBSIDIES
For Q3 2021 and YTD 2021, we determined that we qualified for an estimated aggregate of approximately
12. COMMITMENTS AND CONTINGENCIES
Litigation and Other Matters:
In the normal course of our operations, we may be subject to lawsuits, investigations and other claims, including environmental, labor, product, customer disputes, and other matters. Management believes that adequate provisions have been recorded where required. Although it is not always possible to estimate the extent of potential costs, if any, we believe that the ultimate resolution of all such pending matters will not have a material adverse impact on our financial performance, financial position or liquidity.
In 2017, the Brazilian Ministry of Science, Technology, Innovation and Communications (MCTIC) issued assessments seeking to disqualify certain research and development expenses for the years 2006 to 2009, which entitled our Brazilian subsidiary (which ceased operations in 2009) to charge reduced sales tax levies to its customers. Although we received lower re-assessments for 2007 and 2008 during Q1 2020 in response to our initial appeal, we intend to continue to appeal the original assessments and the re-assessments for all years from 2006 to 2009. See note 25 to the 2020 AFS for further details. The assessments and re-assessments, including interest and penalties, have been revised by the MCTIC, and as of September 30, 2021, total approximately 24 million Brazilian real (approximately
In Q3 2021, the Romanian tax authorities issued a final assessment in the aggregate amount of approximately 31 million Romanian leu (approximately
The successful pursuit of assertions made by any government authority, including tax authorities, could result in our owing significant amounts of tax or other reimbursements, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and in excess of amounts accrued.
Acquisition Agreement:
In September 2021, we entered into a definitive agreement to acquire PCI Private Limited, a fully integrated design, engineering and manufacturing solutions provider with five manufacturing and design facilities across Asia. The purchase price is estimated to be approximately
1 CGUs are the smallest identifiable group of assets that cannot be tested individually and generate cash inflows that are largely independent of those of other assets or groups of assets, and can be comprised of a single site, a group of sites, or a line of business.
FAQ
What are Celestica's Q3 2021 financial results?
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