Fourth Quarter Summary
----------------------
- Revenue of $2,262 million, up 9% year-over-year
- GAAP loss of ($0.27) per share compared to a loss of ($0.12) per share
last year
- Adjusted net earnings of $0.03 per share compared to $0.13 a year ago
- Q1 2007 revenue guidance of $1.7 - $1.9 billion, adjusted net loss
per share of $(0.15) - $(0.04)
(All amounts in U.S. dollars. Per share information based on diluted
shares outstanding unless noted otherwise.)
TORONTO, Jan. 30 /CNW/ - Celestica Inc. (NYSE and TSX: CLS), a world leader in electronics manufacturing services (EMS), today announced financial results for the fourth quarter and fiscal year ended December 31, 2006.
Revenue was $2,262 million, up 9% from $2,075 million in the fourth quarter of 2005. Net loss on a GAAP basis for the fourth quarter was ($60.8) million or ($0.27) per share, compared to GAAP net loss of ($28.2) million or ($0.12) per share for the same period last year. Included in GAAP net loss for the quarter are the following items: a net charge to gross profit of $30 million resulting primarily from a previously announced increase in inventory provisions at the Monterrey, Mexico facility, and a $59 million restructuring charge. For the same period in 2005, restructuring charges of $57 million were incurred.
Adjusted net earnings for the quarter were $6.5 million or $0.03 per share compared to $28.8 million or $0.13 per share for the same period last year. Adjusted net earnings is defined as net earnings before amortization of intangible assets, gains or losses on the repurchase of shares and debt, integration costs related to acquisitions, option expense, option exchange costs and other charges, net of tax and significant deferred tax write-offs (detailed GAAP financial statements and supplementary information related to adjusted net earnings appear at the end of this press release). These results compare with the company's updated guidance for the fourth quarter, announced on December 12, 2006, of revenue of $2.20 to $2.25 billion and adjusted net earnings per share of $0.00 to $0.06.
For 2006, revenue was $8,812 million, up 4%, compared to $8,471 million for 2005. Net loss on a GAAP basis was ($150.6) million or ($0.66) per share compared to net loss of ($46.8) million or ($0.21) per share for last year. Adjusted net earnings for 2006 were $93.5 million or $0.41 per share compared to adjusted net earnings of $129.1 million or $0.57 per share for 2005.
"While revenues for the fourth quarter came in above the high-end of the updated guidance, our financial results were extremely disappointing. The year to year growth in the consumer segment was offset by higher than expected demand reductions from several key customers in the telecommunications segment. This demand reduction along with the impact of the inventory provision taken in Mexico significantly impacted operating margins," said Craig Muhlhauser, President and Chief Executive Officer, Celestica. "We have implemented and will continue to implement aggressive actions to materially improve the performance of our Mexican facilities by standardizing our ERP platform, re-architecting our warehouse logistics and strengthening the local management team while driving more efficiency and cost reductions. In light of our current outlook, we are also reducing our overhead structures and costs globally. These actions will result in an additional $60 to $80 million of restructuring charges, $40 million of which has been recorded in the fourth quarter, with the remaining charges to be incurred during 2007."
Chief Financial Officer Change
------------------------------
The company also announced today that Anthony (Tony) Puppi, Executive Vice President and Chief Financial Officer (CFO) has announced his intention to retire from Celestica. Tony will continue to act in the capacity of Chief Financial Officer until the company's search for a new CFO is complete.
"Tony is one of Celestica's founding executives and he has provided strong leadership and dedication to the company over the course of his career. I am pleased that Tony will continue to provide his support for the successful transition to a new CFO and I wish him the very best in the years ahead," said Craig Muhlhauser, President and Chief Executive Officer, Celestica.
Outlook
-------
For the first quarter ending March 31, 2007, the company anticipates revenue to be in the range of $1.7 billion to $1.9 billion, and adjusted net loss per share to range from $(0.15) to $(0.04).
Supplementary Information
-------------------------
In addition to disclosing detailed results in accordance with Canadian generally accepted accounting principles (GAAP), Celestica also provides supplementary non-GAAP measures as a method to evaluate the company's operating performance.
Management uses adjusted net earnings as a measure of enterprise-wide performance. As a result of acquisitions made by the company, restructuring activities, securities repurchases and the adoption of fair value accounting for stock options, management believes adjusted net earnings is a useful measure that facilitates period-to-period operating comparisons and allows the company to compare its operating results with its competitors in the U.S. and Asia. Adjusted net earnings excludes the effects of acquisition-related charges (most significantly, amortization of intangible assets and integration costs related to acquisitions), other charges (most significantly, restructuring costs and the write-down of goodwill and long-lived assets), gains or losses on the repurchase of shares or debt, option expense and option exchange costs, and the related income tax effect of these adjustments and any significant deferred tax write-offs. Adjusted net earnings does not have any standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Adjusted net earnings is not a measure of performance under Canadian or U.S. GAAP and should not be considered in isolation or as a substitute for net earnings (loss) prepared in accordance with Canadian or U.S. GAAP. The company has provided a reconciliation of adjusted net earnings to Canadian GAAP net earnings (loss) below.
About Celestica
---------------
Celestica is a world leader in the delivery of electronics manufacturing services (EMS). Celestica operates a global manufacturing network with operations in Asia, Europe and the Americas, providing a broad range of integrated services and solutions to leading OEMs (original equipment manufacturers).
For further information on Celestica, visit its website at http://www.celestica.com. The company's security filings can also be accessed at http://www.sedar.com and http://www.sec.gov.
Safe Harbour and Fair Disclosure Statement
------------------------------------------
This news release contains forward-looking statements related to our future growth, trends in our industry and our financial and operational results and performance that are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to: variability of operating results among periods; inability to retain or grow our business due to execution problems resulting from significant headcount reductions, plant closures and product transfer associated with major restructuring activities; the effects of price competition and other business and competitive factors generally affecting the EMS industry; the challenges of effectively managing our operations during uncertain economic conditions; our dependence on a limited number of customers; our dependence on industries affected by rapid technological change; the challenge of responding to lower-than-expected customer demand; our ability to successfully manage our international operations; and delays in the delivery and/or general availability of various components used in the manufacturing process. These and other risks and uncertainties and factors are discussed in the Company's various public filings at www.sedar.com and www.sec.gov, including our Form 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission.
As of its date, this press release contains any material information associated with the company's financial results for the fourth quarter ended December 31, 2006 and revenue and adjusted net earnings guidance for the first quarter ending March 31, 2007. Earnings guidance is reviewed by the company's board of directors. It is Celestica's policy that earnings guidance is effective on the date given, and will only be updated through a public announcement.
RECONCILIATION OF
GAAP TO ADJUSTED
NET EARNINGS
(in millions of
U.S. dollars) 2005 2006
-------------------------- --------------------------
Three months ended Adjust- Adjust-
December 31 GAAP ments Adjusted GAAP ments Adjusted
-------- -------- -------- -------- -------- --------
Revenue $2,075.3 $ - $2,075.3 $2,261.8 $ - $2,261.8
Cost of sales(1) 1,956.4 (1.1) 1,955.3 2,174.7 (0.6) 2,174.1
-------- -------- -------- -------- -------- --------
Gross profit 118.9 1.1 120.0 87.1 0.6 87.7
SG&A(1) 73.6 (0.7) 72.9 64.2 (0.2) 64.0
Amortization of
intangible assets 7.4 (7.4) - 6.5 (6.5) -
Integration costs
relating to
acquisitions 0.3 (0.3) - - - -
Other charges 56.9 (56.9) - 59.9 (59.9) -
-------- -------- -------- -------- -------- --------
Operating earnings
(EBIAT) (19.3) 66.4 47.1 (43.5) 67.2 23.7
LYONs accretion - - - - - -
Interest expense,
net 13.5 - 13.5 16.2 - 16.2
-------- -------- -------- -------- -------- --------
Net earnings (loss)
before tax (32.8) 66.4 33.6 (59.7) 67.2 7.5
Income tax expense
(recovery) (4.6) 9.4 4.8 1.1 (0.1) 1.0
-------- -------- -------- -------- -------- --------
Net earnings
(loss) $ (28.2) $ 57.0 $ 28.8 $ (60.8) $ 67.3 $ 6.5
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
W.A. No. of
shares (in
millions) -
diluted 226.3 227.4 227.6 228.3
Earnings (loss)
per share -
diluted $ (0.12) $ 0.13 $ (0.27) $ 0.03
2005 2006
-------------------------- --------------------------
Year ended Adjust- Adjust-
December 31 GAAP ments Adjusted GAAP ments Adjusted
-------- -------- -------- -------- -------- --------
Revenue $8,471.0 $ - $8,471.0 $8,811.7 $ - $8,811.7
Cost of sales(1) 7,989.9 (9.0) 7,980.9 8,359.9 (3.3) 8,356.6
-------- -------- -------- -------- -------- --------
Gross profit 481.1 9.0 490.1 451.8 3.3 455.1
SG&A(1) 296.9 (6.8) 290.1 285.6 (1.8) 283.8
Amortization of
intangible assets 28.4 (28.4) - 27.0 (27.0) -
Integration costs
relating to
acquisitions 0.6 (0.6) - 0.9 (0.9) -
Other charges 130.9 (130.9) - 211.8 (211.8) -
-------- -------- -------- -------- -------- --------
Operating earnings
(EBIAT) 24.3 175.7 200.0 (73.5) 244.8 171.3
LYONs accretion 7.6 - 7.6 - - -
Interest expense,
net 42.2 - 42.2 62.6 - 62.6
-------- -------- -------- -------- -------- --------
Net earnings (loss)
before tax (25.5) 175.7 150.2 (136.1) 244.8 108.7
Income tax expense 21.3 (0.2) 21.1 14.5 0.7 15.2
-------- -------- -------- -------- -------- --------
Net earnings
(loss) $ (46.8) $ 175.9 $ 129.1 $ (150.6) $ 244.1 $ 93.5
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
W.A. No. of
shares (in
millions) -
diluted 226.2 227.9 227.2 228.0
Earnings (loss)
per share -
diluted $ (0.21) $ 0.57 $ (0.66) $ 0.41
(1) Non-cash option expense included in cost of sales and SG&A is added
back for adjusted net earnings
Q3 2005 - Cost of option exchange program included in cost of sales and
SG&A is added back for adjusted net earnings
GUIDANCE SUMMARY
Updated
4Q 06 Guidance 4Q 06 Actual 1Q 07 Guidance(2)
--------------- ------------ -----------------
Revenue $2.20B - $2.25B $2.26B $1.7B - $1.9B
Adjusted net EPS $0.00 - $0.06 $0.03 $(0.15) - $(0.04)
(2) Guidance for the first quarter is provided only on an adjusted net
earnings basis. This is due to the difficulty in forecasting the
various items impacting GAAP net earnings, such as the amount and
timing of our restructuring activities.
CELESTICA INC.
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
December 31 December 31
2005 2006
----------- -----------
Assets (unaudited)
Current assets:
Cash and short-term investments.............. $ 969.0 $ 803.7
Accounts receivable.......................... 982.6 973.2
Inventories.................................. 1,058.4 1,197.9
Prepaid and other assets..................... 124.0 111.0
Income taxes recoverable..................... 113.5 31.2
Deferred income taxes........................ 10.9 3.8
----------- -----------
3,258.4 3,120.8
Capital assets................................. 544.8 567.1
Goodwill from business combinations............ 874.5 854.8
Intangible assets.............................. 79.0 60.1
Other assets................................... 101.1 83.5
----------- -----------
$ 4,857.8 $ 4,686.3
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................. $ 1,153.3 $ 1,193.6
Accrued liabilities.......................... 492.1 487.9
Income taxes payable......................... 119.9 42.7
Deferred income taxes........................ 4.5 1.1
Current portion of long-term debt (note 4)... 0.5 0.6
----------- -----------
1,770.3 1,725.9
Long-term debt (note 4)........................ 750.9 750.2
Accrued pension and post-employment benefits... 76.8 54.9
Deferred income taxes.......................... 17.8 47.5
Other long-term liabilities.................... 27.6 13.2
----------- -----------
2,643.4 2,591.7
Shareholders' equity:
Capital stock................................ 3,562.3 3,576.6
Warrants..................................... 8.4 8.4
Contributed surplus.......................... 169.9 179.3
Deficit...................................... (1,545.6) (1,696.2)
Foreign currency translation adjustment...... 19.4 26.5
----------- -----------
2,214.4 2,094.6
----------- -----------
$ 4,857.8 $ 4,686.3
----------- -----------
----------- -----------
Guarantees and contingencies (note 12)
Subsequent event (note 12)
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements should be read
in conjunction with the 2005 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(in millions of U.S. dollars, except per share amounts)
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Revenue.................. $ 2,075.3 $ 2,261.8 $ 8,471.0 $ 8,811.7
Cost of sales............ 1,956.4 2,174.7 7,989.9 8,359.9
----------- ----------- ----------- -----------
Gross profit............. 118.9 87.1 481.1 451.8
Selling, general and
administrative expenses 73.6 64.2 296.9 285.6
Amortization of intangible
assets.................. 7.4 6.5 28.4 27.0
Integration costs related
to acquisitions......... 0.3 - 0.6 0.9
Other charges (note 6)... 56.9 59.9 130.9 211.8
Accretion of convertible
debt (note 5)........... - - 7.6 -
Interest on long-term
debt.................... 15.7 17.4 48.4 67.1
Interest income, net..... (2.2) (1.2) (6.2) (4.5)
----------- ----------- ----------- -----------
Loss before income taxes (32.8) (59.7) (25.5) (136.1)
----------- ----------- ----------- -----------
Income taxes expense
(recovery):
Current................ 12.5 (52.7) 36.9 (40.7)
Deferred............... (17.1) 53.8 (15.6) 55.2
----------- ----------- ----------- -----------
(4.6) 1.1 21.3 14.5
----------- ----------- ----------- -----------
Net loss for the period.. $ (28.2) $ (60.8) $ (46.8) $ (150.6)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Deficit, beginning of
period.................. $(1,517.4) $(1,635.4) $(1,473.6) $(1,545.6)
Loss on repurchase of
convertible debt
(note 5)................ - - (25.2) -
Net loss for the period.. (28.2) (60.8) (46.8) (150.6)
----------- ----------- ----------- -----------
Deficit, end of period... $(1,545.6) $(1,696.2) $(1,545.6) $(1,696.2)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic loss per share..... $ (0.12) $ (0.27) $ (0.21) $ (0.66)
Diluted loss per share... $ (0.12) $ (0.27) $ (0.21) $ (0.66)
Shares used in computing
per share amounts:
Basic (in millions).... 226.3 227.6 226.2 227.2
Diluted (in millions).. 226.3 227.6 226.2 227.2
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements should be read
in conjunction with the 2005 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Cash provided by (used in):
Operations:
Net loss for the period.. $ (28.2) $ (60.8) $ (46.8) $ (150.6)
Items not affecting cash:
Depreciation and
amortization.......... 32.0 36.1 152.7 134.2
Deferred income taxes.. (17.1) 53.8 (15.6) 55.2
Accretion of
convertible debt...... - - 7.6 -
Non-cash charge for
option issuances...... 1.8 0.8 9.0 5.1
Restructuring charges.. 3.4 7.1 11.0 47.9
Other charges.......... 1.6 1.4 (15.3) 34.6
Gain on settlement of
principal component of
convertible debt
(note 5).............. - - (13.9) -
Other.................... 8.1 (10.1) 14.5 1.9
Changes in non-cash
working capital items:
Accounts receivable.... (125.3) 85.6 42.0 (24.8)
Inventories............ 36.9 115.1 - (172.0)
Prepaid and other
assets................ 16.9 6.9 17.3 2.7
Income taxes
recoverable........... (29.1) 3.7 (24.4) 72.1
Accounts payable and
accrued liabilities... 171.9 (132.5) 51.2 108.0
Income taxes payable... 27.0 (59.4) 29.0 (75.1)
----------- ----------- ----------- -----------
Non-cash working capital
changes............... 98.3 19.4 115.1 (89.1)
----------- ----------- ----------- -----------
Cash provided by
operations.............. 99.9 47.7 218.3 39.2
----------- ----------- ----------- -----------
Investing:
Acquisitions, net of cash
acquired/indebtedness
assumed (note 3)...... (4.3) - (6.5) (19.1)
Purchase of capital
assets................ (46.7) (27.2) (158.5) (189.1)
Proceeds, net of cash
divested from sale of
operations or assets.. 19.8 2.7 50.9 1.0
Other.................. 1.3 (1.4) 2.2 (0.7)
----------- ----------- ----------- -----------
Cash used in investing
activities.............. (29.9) (25.9) (111.9) (207.9)
----------- ----------- ----------- -----------
Financing:
Increase in long-term
debt (note 4)......... - - 250.0 -
Long-term debt issue
costs................. - - (4.2) -
Deferred financing
costs................. (1.1) - (1.1) -
Repurchase of convertible
debt (note 5)......... - - (352.0) -
Repayment of long-term
debt.................. (0.4) (0.1) (3.4) (0.6)
Issuance of share
capital............... 2.5 3.5 8.0 5.3
Other.................. 2.5 (0.3) (3.5) (1.3)
----------- ----------- ----------- -----------
Cash provided by (used in)
financing activities.... 3.5 3.1 (106.2) 3.4
----------- ----------- ----------- -----------
Increase (decrease)
in cash................. 73.5 24.9 0.2 (165.3)
Cash, beginning of
period.................. 895.5 778.8 968.8 969.0
----------- ----------- ----------- -----------
Cash, end of period...... $ 969.0 $ 803.7 $ 969.0 $ 803.7
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash is comprised of cash and short-term investments.
Supplemental cash flow information (note 10)
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements should be read
in conjunction with the 2005 annual consolidated financial statements.
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
(unaudited)
1. Nature of business:
Our primary operations consist of providing a broad range of electronic
product solutions such as design and engineering, manufacturing and
systems integration, fulfillment and after market solutions to customers
in the computing and communications industries and, increasingly, in the
aerospace and defense, consumer and industrial end markets. We have
operations in Asia, the Americas and Europe.
We prepare our financial statements in accordance with generally accepted
accounting principles (GAAP) in Canada with a reconciliation to
accounting principles generally accepted in the United States, disclosed
in note 20 to the 2005 annual consolidated financial statements.
2. Significant accounting policies:
The disclosures contained in these unaudited interim consolidated
financial statements do not include all requirements of Canadian GAAP for
annual financial statements. These unaudited interim consolidated
financial statements should be read in conjunction with the 2005 annual
consolidated financial statements. These unaudited interim consolidated
financial statements reflect all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary to
present fairly our financial position as of December 31, 2006 and the
results of operations and cash flows for the three months and years ended
December 31, 2005 and 2006. These unaudited interim consolidated
financial statements are based upon accounting principles consistent with
those used and described in the 2005 annual consolidated financial
statements.
(i) Capital assets:
Effective October 1, 2005, we changed the estimated useful lives of
certain machinery and equipment from five years to seven years based on
our experience and the extended use of these assets. As a result of this
change in estimated useful life, depreciation expense included in cost of
sales decreased by approximately $3 in the fourth quarter of 2006 ($6 in
the fourth quarter of 2005). Depreciation expense for 2006 was lower by
approximately $10 compared to 2005 as a result of this change.
3. Acquisitions and divestitures:
As part of the acquisition of Manufacturers' Services Limited (MSL) in
2004, we recorded liabilities for consolidating some of the acquired MSL
sites. These liabilities are detailed in the chart below. We have
completed the major components of these restructuring plans except for
certain long-term lease and contractual obligations which will be paid
out over the remaining lease terms through 2010. Cash outlays are funded
from cash on hand. We record the restructuring liability in accrued
liabilities.
Details of the activity through the MSL restructuring liability are as
follows:
Lease and
Employee other Facility Total
termination contractual exit costs accrued
costs obligations and other liability
---------- ---------- ---------- ----------
Accrued on acquisition.... $ 28.0 $ 6.9 $ 1.2 $ 36.1
Cash payments............. (14.7) (0.6) (0.2) (15.5)
---------- ---------- ---------- ----------
December 31, 2004......... 13.3 6.3 1.0 20.6
Adjustments............... (0.5) (0.2) 0.7 -
Cash payments............. (2.2) (3.9) (1.3) (7.4)
---------- ---------- ---------- ----------
December 31, 2005......... 10.6 2.2 0.4 13.2
Cash payments............. (2.6) (0.2) - (2.8)
---------- ---------- ---------- ----------
March 31, 2006............ 8.0 2.0 0.4 10.4
Cash payments............. (4.5) (0.1) - (4.6)
---------- ---------- ---------- ----------
June 30, 2006............. 3.5 1.9 0.4 5.8
Adjustments............... 0.4 - (0.4) -
Cash payments............. (3.2) (0.2) - (3.4)
---------- ---------- ---------- ----------
September 30, 2006........ 0.7 1.7 - 2.4
Cash payments............. (0.7) (0.2) - (0.9)
---------- ---------- ---------- ----------
December 31, 2006......... $ - $ 1.5 $ - $ 1.5
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
2005 acquisition activities:
In the third quarter of 2005, we completed the acquisitions of CoreSim
Inc. and Ramnish Electronics Private Limited. In the fourth quarter of
2005, we completed the acquisition of Displaytronix Inc. The total
aggregate cash purchase price for these acquisitions was $6.5, including
indebtedness assumed.
2006 acquisition activity:
In March 2006, we acquired certain assets located in the Philippines from
Powerwave Technologies, Inc. for a cash purchase price of $19.1.
Amortizable intangible assets arising from this acquisition were $7.6,
primarily for customer relationships and contract intangibles.
2006 divestiture:
In June 2006, we sold our plastics business for net cash proceeds of
$18.5. We reported our plastics business as part of our Asia segment.
During the second quarter, we reported a loss on sale of $33.2 which we
recorded as other charges (see note 6). This loss included $20.0 in
goodwill allocated to the plastics business.
As part of the sale agreement, we provided routine indemnities to the
purchaser which management believes will not have a material adverse
impact on our results of operations, financial position or our liquidity.
4. Long-term debt:
December 31 December 31
2005 2006
----------- -----------
Unsecured, revolving credit facility
due 2007 (a)................................... $ - $ -
Senior Subordinated Notes due 2011 (b).......... 500.0 500.0
Senior Subordinated Notes due 2013 (c).......... 250.0 250.0
Capital lease obligations....................... 1.4 0.8
----------- -----------
751.4 750.8
Less current portion............................ 0.5 0.6
----------- -----------
$ 750.9 $ 750.2
----------- -----------
----------- -----------
(a) We have a 364-day credit facility for $600.0 which matures in
June 2007. The facility includes a $25.0 swing-line facility that
provides for short-term borrowings up to a maximum of seven days. The
credit facility permits us and certain designated subsidiaries to
borrow funds for general corporate purposes (including acquisitions).
Borrowings under the facility bear interest at LIBOR plus a margin
except that borrowings under the swing-line facility bear interest at
a base rate plus a margin. There are no borrowings outstanding under
this facility. Commitment fees for the year ended December 31, 2006
were $2.7.
The facility has restrictive covenants relating to debt incurrence
and sale of assets and also contains financial covenants that
requires us to maintain certain financial ratios. A change of control
is an event of default. Based on the required minimum financial
ratios at December 31, 2006, we are limited to approximately $60 of
available debt incurrence. The available debt incurrence under the
facility has been reduced by covenants relating to the two
subordinated note issuances and outstanding letters of credit and
guarantees. We were in compliance with all covenants at December 31,
2006.
We also have uncommitted bank overdraft facilities available for
operating requirements which total $47.5 at December 31, 2006. There
were no borrowings outstanding under these facilities.
(b) In June 2004, we issued Senior Subordinated Notes due 2011 with an
aggregate principal amount of $500.0, and a fixed interest rate of
7.875%. We incurred $12.0 in underwriting commissions and expenses
which we deferred and are amortizing over the term of the debt. The
2011 Notes are unsecured and are subordinated in right of payment to
all our senior debt. We may redeem the 2011 Notes on July 1, 2008 or
later at various premiums above face value.
In connection with the 2011 Notes offering, we entered into
agreements which swap the fixed interest rate with a variable
interest rate based on LIBOR plus a margin. The average interest rate
on the 2011 Notes was 8.4% for the fourth quarter of 2006 and 8.2%
for 2006 (7.1% - fourth quarter of 2005; 6.4% - 2005).
(c) In June 2005, we issued Senior Subordinated Notes due 2013 with an
aggregate principal amount of $250.0, and a fixed interest rate of
7.625%. We incurred $4.2 in underwriting commissions and expenses
which we deferred and are amortizing over the term of the debt. The
2013 Notes are unsecured and are subordinated in right of payment to
all our senior debt. We may redeem the 2013 Notes on July 1, 2009 or
later at various premiums above face value.
5. Convertible debt:
During the third quarter of 2005, we repurchased the remaining
outstanding LYONs and recorded gains on the principal component through
other charges and losses on the option component through deficit. After
the third quarter of 2005, we have not recorded any accretion charges
related to the LYONs.
6. Other charges:
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
--------- --------- --------- ---------
2001 to 2004
restructuring (a)......... $ 1.8 $ 1.6 $ 20.8 $ 3.6
2005 and 2006
restructuring (b)......... 53.5 56.9 139.3 174.5
--------- --------- --------- ---------
Total restructuring........ 55.3 58.5 160.1 178.1
Long-lived asset
impairment (c)............ 1.6 1.4 1.6 1.4
Loss on sale of
operations (note 3)....... - - - 33.2
Gain on repurchase of
convertible debt
(note 5).................. - - (13.9) -
Gain on sale of surplus
land and building......... - - (3.1) -
Other (d).................. - - (13.8) (0.9)
--------- --------- --------- ---------
$ 56.9 $ 59.9 $ 130.9 $ 211.8
--------- --------- --------- ---------
--------- --------- --------- ---------
(a) 2001 to 2004 restructuring:
In 2001, we announced a restructuring plan in response to the weak
end-markets in the computing and telecommunications industries. In
response to the prolonged difficult end-market conditions, we announced a
second restructuring plan in July 2002. The weak demand for our
manufacturing services resulted in an accelerated move to lower-cost
geographies and additional restructuring in the Americas and Europe. In
January 2003, we announced further reductions to our manufacturing
capacity in Europe. In January and April 2004, we announced plans to
further restructure our operations to better align capacity with
customers' requirements.
These restructuring actions were focused on consolidating facilities,
reducing the workforce, and transferring programs to lower-cost
geographies. The majority of the employees terminated were manufacturing
and plant employees. For leased facilities that were no longer used, the
lease costs included in the restructuring costs represent future lease
payments less estimated sublease recoveries. Adjustments were made to
lease and other contractual obligations to reflect incremental
cancellation fees paid for terminating certain facility leases and to
reflect higher accruals for other leases due to delays in the timing of
sublease recoveries and changes in estimated sublease rates, relating
principally to facilities in the Americas.
We have completed the major components of these restructuring plans,
except for certain long-term lease and other contractual obligations,
which will be paid out over the remaining lease terms through 2015. Cash
outlays are funded from cash on hand. The restructuring liability is
recorded in accrued liabilities.
Details of the activity through the accrued restructuring liability and
the non-cash charge are as follows:
Lease
and
other Facility
Employee contr- exit
termi- actual costs Total
nation obliga- and accrued Non-cash Total
costs tions other liability charge charge
--------- --------- --------- --------- --------- ---------
January 1,
2001........ $ - $ - $ - $ - $ - $ -
Provision
re: 2001.... 90.7 35.3 12.4 138.4 98.6 237.0
Cash payments (51.2) (1.6) (2.9) (55.7) - -
--------- --------- --------- --------- --------- ---------
December 31,
2001........ 39.5 33.7 9.5 82.7 98.6 237.0
Provision
re: 2002.... 128.8 51.7 8.5 189.0 194.5 383.5
Cash payments (77.1) (14.7) (7.5) (99.3) - -
Adjustments.. (4.1) 11.4 (2.7) 4.6 (2.7) 1.9
--------- --------- --------- --------- --------- ---------
December 31,
2002........ 87.1 82.1 7.8 177.0 290.4 622.4
Provision
re: 2003.... 61.4 0.3 1.1 62.8 8.5 71.3
Cash payments (112.0) (44.4) (8.9) (165.3) - -
Adjustments.. 7.4 24.1 2.9 34.4 (10.8) 23.6
--------- --------- --------- --------- --------- ---------
December 31,
2003........ 43.9 62.1 2.9 108.9 288.1 717.3
Provision
re: 2004.... 98.6 8.7 5.9 113.2 33.9 147.1
Cash payments (110.6) (32.0) (4.1) (146.7) - -
Adjustments.. 2.7 2.2 0.3 5.2 1.4 6.6
--------- --------- --------- --------- --------- ---------
December 31,
2004........ 34.6 41.0 5.0 80.6 323.4 871.0
Cash payments (31.9) (11.5) (4.6) (48.0) - -
Adjustments.. 8.7 6.2 0.6 15.5 5.3 20.8
--------- --------- --------- --------- --------- ---------
December 31,
2005........ $ 11.4 $ 35.7 $ 1.0 $ 48.1 $ 328.7 $ 891.8
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Details of the 2006 activity by quarter are as follows:
Lease
and
other Facility
Employee contr- exit
termi- actual costs Total
nation obliga- and accrued Non-cash 2006
costs tions other liability charge charge
--------- --------- --------- --------- --------- ---------
December 31,
2005........ $ 11.4 $ 35.7 $ 1.0 $ 48.1 $ 328.7 $ -
Cash payments (2.5) (2.2) - (4.7) - -
Adjustments.. 0.2 0.3 - 0.5 - 0.5
--------- --------- --------- --------- --------- ---------
March 31,
2006........ 9.1 33.8 1.0 43.9 328.7 0.5
Cash payments (0.4) (2.6) - (3.0) - -
Adjustments.. (0.1) 0.7 - 0.6 - 0.6
--------- --------- --------- --------- --------- ---------
June 30,
2006........ 8.6 31.9 1.0 41.5 328.7 1.1
Cash payments (0.4) (2.4) - (2.8) - -
Adjustments.. 0.2 0.7 - 0.9 - 0.9
Settlement
(see 6(b)(i)) (7.7) - - (7.7) - -
--------- --------- --------- --------- --------- ---------
September 30,
2006........ 0.7 30.2 1.0 31.9 328.7 2.0
Cash payments (0.3) (2.5) - (2.8) - -
Adjustments.. - 1.6 - 1.6 - 1.6
--------- --------- --------- --------- --------- ---------
December 31,
2006........ $ 0.4 $ 29.3 $ 1.0 $ 30.7 $ 328.7 $ 3.6
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
(b) 2005 and 2006 restructuring:
In January 2005, we announced plans to further improve capacity
utilization and accelerate margin improvements. These restructuring
actions include facility closures and a reduction in workforce, primarily
targeting our higher-cost geographies where end-market demand had not
recovered to the levels management requires to achieve sustainable
profitability. We expected to complete these restructuring actions by the
end of 2006, however, in light of our operating results and in the course
of preparing our 2007 plan in the fourth quarter of 2006, we have
identified additional restructuring actions necessary to return the
Americas and Europe to profitability. These restructuring actions include
additional downsizing of workforces to take into account the volume
volatility at certain facilities, disengaging with unprofitable or
non-strategic customers and reducing our overhead costs. We expect to
complete these restructuring actions by the end of 2007.
As of December 31, 2006, we have recorded termination costs related to
approximately 6,900 employees (an additional 2,400 employees from
September 30, 2006), primarily operations and plant employees.
Approximately 4,400 of these employees have been terminated as of
December 31, 2006 with the balance of the terminations to occur by the
end of 2007. Approximately 65% of employee terminations are in the
Americas and 35% in Europe.
Details of the activity through the accrued restructuring liability and
the non-cash charge are as follows:
Lease
and
other Facility
Employee contr- exit
termi- actual costs Total
nation obliga- and accrued Non-cash Total
costs tions other liability charge charge
--------- --------- --------- --------- --------- ---------
January 1,
2005........ $ - $ - $ - $ - $ - $ -
Provision.... 114.0 14.5 5.1 133.6 5.7 139.3
Cash payments (74.7) (1.2) (4.4) (80.3) - -
--------- --------- --------- --------- --------- ---------
December 31,
2005........ 39.3 13.3 0.7 53.3 5.7 139.3
Provision.... 13.2 1.6 1.7 16.5 - 16.5
Cash payments (33.3) (2.0) (2.0) (37.3) - -
--------- --------- --------- --------- --------- ---------
March 31,
2006........ 19.2 12.9 0.4 32.5 5.7 155.8
Provision.... 16.5 1.7 1.4 19.6 - 19.6
Cash payments (16.6) (2.5) (1.3) (20.4) - -
--------- --------- --------- --------- --------- ---------
June 30,
2006........ 19.1 12.1 0.5 31.7 5.7 175.4
Provision.... 38.0 0.4 2.3 40.7 40.8 81.5
Cash payments (18.7) (1.4) (2.0) (22.1) - -
Settlement
(see 6 (b)(i)) (15.5) - - (15.5) - -
--------- --------- --------- --------- --------- ---------
September 30,
2006........ 22.9 11.1 0.8 34.8 46.5 256.9
Provision.... 47.2 2.1 0.5 49.8 7.1 56.9
Cash payments (17.6) (1.1) (0.8) (19.5) - -
--------- --------- --------- --------- --------- ---------
December 31,
2006........ $ 52.5 $ 12.1 $ 0.5 $ 65.1 $ 53.6 $ 313.8
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
We recorded $56.9 of restructuring charges in the fourth quarter of 2006,
of which approximately $40 relates to the additional restructuring
actions initiated in the quarter. Cash outlays are and will be funded
from cash on hand. The restructuring liability is recorded in accrued
liabilities.
(i) In September 2006, we sold one of our production facilities in Europe
to a third party as part of our restructuring program. We reported a
total of $61.2 in other charges with respect to this facility,
comprised of incremental employee termination and transaction closing
costs totaling $20.9 and a non-cash loss of $40.3. The book value of
net assets sold was $42.1. We received cash proceeds of $1.8 on
closing, resulting in the non-cash loss on sale of $40.3. Included in
the net assets sold was cash of $22.0. The purchaser agreed to retain
all employees, thereby significantly reducing our contractual
severance obligations. As part of the agreement, the purchaser
assumed our liabilities which we previously recorded as accruals for
employee termination costs under the 2005 and 2006 restructuring plan
of $15.5 and under our 2001 to 2004 restructuring plans of $7.7 (see
note 6(a)).
In connection with the sale, we provided indemnities to the purchaser
which management believes will not have a material adverse impact on
our operations, financial position or our liquidity. We expect to
finalize the post-closing adjustments by the end of the first quarter
of 2007. We recorded $4.0 in prepaid and other assets representing
cash received from the purchaser which we are holding in escrow.
Restructuring summary:
We have recorded restructuring charges totaling $160.1 in 2005 and $178.1
in 2006. The restructuring charges for 2006 include approximately $40 for
the additional restructuring actions initiated in the fourth quarter of
2006. We expect to incur further charges in 2007 of between $20.0 and
$40.0 to complete these restructuring actions.
As of December 31, 2006, we have $4.9 in assets that are
available-for-sale, primarily land and buildings in all geographies as a
result of the restructuring actions we implemented. We have programs
underway to sell these assets.
(c) Long-lived asset impairment:
We conduct our annual impairment assessment in the fourth quarter of each
year. We recorded a non-cash charge of $1.4 in 2006 against capital
assets in the Americas and a non-cash charge of $1.6 in 2005 against
capital assets and customer relationship intangibles in the Americas and
Europe.
(d) Other:
In 2004, we recorded charges to reduce the net realizable value of
certain assets for one customer which subsequently ceased operations in
2005. We recorded a recovery of $13.8 during the second quarter of 2005
and a recovery of $0.9 in the third quarter of 2006 to reflect additional
amounts realized.
7. Pension and non-pension post-employment benefit plans:
We have recorded the following pension expense:
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
--------- --------- --------- ---------
Pension plans.............. $ 8.2 $ 10.3 $ 31.5 $ 35.7
Other benefit plans........ 1.6 2.4 10.5 8.9
--------- --------- --------- ---------
Total expense.............. $ 9.8 $ 12.7 $ 42.0 $ 44.6
--------- --------- --------- ---------
--------- --------- --------- ---------
8. Stock-based compensation and other stock-based payments:
We have granted stock options and performance-contingent stock options as
part of our long-term incentive plans. We have applied the fair-value
method of accounting for stock option awards granted after January 1,
2003 and, accordingly, have recorded compensation expense. For awards
granted in 2002, we have disclosed the pro forma earnings and per share
information as if we had accounted for employee stock options under the
fair-value method. We are not required to apply the pro forma impact of
awards granted prior to January 1, 2002.
The estimated fair value of options is amortized to expense over the
vesting period, on a straight-line basis, and was determined using the
Black Scholes option pricing model with the following weighted average
assumptions:
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
--------- --------- --------- ---------
Risk-free rate............. 4.4% 4.5%-4.6% 3.5%-4.4% 4.5%-5.0%
Dividend yield............. 0.0% 0.0% 0.0% 0.0%
Volatility factor of the
expected market price of
the Company's shares...... 52%-66% 34%-35% 48%-68% 34%-65%
Expected option life
(in years)................ 3.5-5.5 3.5 3.5-5.5 3.5-5.5
Weighted average fair value
of options granted........ $4.78 $2.99 $6.54 $5.55
Compensation expense for the three months and year ended December 31,
2006 was $0.8 and $5.1, respectively (three months and year ended
December 31, 2005 was $1.8 and $9.0, respectively) relating to the fair
value of options granted after January 1, 2003.
The pro forma disclosure relating to options granted in 2002 is as
follows:
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
--------- --------- --------- ---------
Net loss as reported....... $ (28.2) $ (60.8) $ (46.8) $ (150.6)
Deduct: Stock-based
compensation (fair value). (2.1) (0.2) (7.4) (4.1)
--------- --------- --------- ---------
Pro forma net loss......... $ (30.3) $ (61.0) $ (54.2) $ (154.7)
--------- --------- --------- ---------
--------- --------- --------- ---------
Loss per share:
Basic - as reported...... $ (0.12) $ (0.27) $ (0.21) $ (0.66)
Basic - pro forma........ $ (0.13) $ (0.27) $ (0.24) $ (0.68)
Diluted - as reported.... $ (0.12) $ (0.27) $ (0.21) $ (0.66)
Diluted - pro forma...... $ (0.13) $ (0.27) $ (0.24) $ (0.68)
Our stock plans are described in note 9 to the 2005 annual consolidated
financial statements.
(i) Stock option exchange program in 2005:
As part of a restructuring of our long-term incentive arrangements to
provide more effective programs and reduce market overhang, we cancelled
6.8 million options during the third quarter of 2005 for an aggregate
cost of $6.8 as part of an option exchange program. All employees, other
than certain executives, were eligible to participate. Eligible employees
forfeited certain out-of-the-money options for $1.00 in cash for each
option surrendered. We recorded compensation expense of $3.9 to cost of
sales and $2.9 to selling, general and administrative expenses in the
third quarter of 2005. Future compensation expense was not impacted as
all repurchased options were granted prior to January 1, 2003. We paid
$5.6 in cash in the third quarter of 2005. The balance was accrued and
will be paid out at the end of three years, in accordance with the plan.
9. Segmented information:
Our operations fall into one dominant industry segment, the electronics
manufacturing services industry. We manage our operations, and
accordingly determine our operating segments, on a geographic basis. The
performance of geographic operating segments is monitored based on EBIAT
(earnings before interest and accretion on convertible debt, amortization
of intangible assets, integration costs related to acquisitions, other
charges, option expense and income taxes). Inter segment transactions are
reflected at market value.
The following is a breakdown by reporting segment:
Three months ended Year ended
December 31 December 31
2005 2006 2005 2006
--------- --------- --------- ---------
Revenue
Asia....................... $ 998.3 $1,192.7 $4,048.9 $4,630.5
Americas................... 757.7 810.8 3,090.5 3,130.1
Europe..................... 366.6 296.2 1,510.2 1,237.9
Elimination of
inter-segment revenue..... (47.3) (37.9) (178.6) (186.8)
--------- --------- --------- ---------
$2,075.3 $2,261.8 $8,471.0 $8,811.7
--------- --------- --------- ---------
--------- --------- --------- ---------
Three months ended Year ended
December 31 December 31
EBIAT 2005 2006 2005 2006
--------- --------- --------- ---------
Asia....................... $ 40.3 $ 61.5 $ 159.4 $ 211.3
Americas................... 12.2 (29.1) 54.4 (13.6)
Europe..................... (5.4) (8.7) (13.8) (26.4)
--------- --------- --------- ---------
47.1 23.7 200.0 171.3
Net interest and
accretion charges......... (13.5) (16.2) (49.8) (62.6)
Amortization of
intangible assets......... (7.4) (6.5) (28.4) (27.0)
Option expense............. (1.8) (0.8) (9.0) (5.1)
Option exchange cost
(note 8 (i)).............. - - (6.8) -
Integration costs related
to acquisitions........... (0.3) - (0.6) (0.9)
Other charges.............. (56.9) (59.9) (130.9) (211.8)
--------- --------- --------- ---------
Loss before income taxes $ (32.8) $ (59.7) $ (25.5) $ (136.1)
--------- --------- --------- ---------
--------- --------- --------- ---------
As at December 31
2005 2006
--------- ---------
Total assets
Asia............................................... $2,494.7 $2,615.7
Americas........................................... 1,574.2 1,448.6
Europe............................................. 788.9 622.0
--------- ---------
$4,857.8 $4,686.3
--------- ---------
--------- ---------
Goodwill
Asia............................................... $ 874.5 $ 854.8
Americas........................................... - -
Europe............................................. - -
--------- ---------
$ 874.5 $ 854.8
--------- ---------
--------- ---------
10. Supplemental cash flow information:
Three months ended Year ended
Paid (recovered) December 31 December 31
during the period: 2005 2006 2005 2006
--------- --------- --------- ---------
Taxes (a).................. $ 7.5 $ 4.7 $ 24.8 $ (36.5)
Interest (b)............... $ 3.6 $ 4.2 $ 40.6 $ 70.5
(a) Cash taxes paid is net of income taxes recovered.
(b) This includes interest paid on the 2011 and 2013 Senior Subordinated
Notes. Interest on the Notes is payable in January and July of each
year until maturity. See notes 4 (b) and (c). The interest paid on
the 2011 Notes reflect the amounts received or paid relating to the
interest rate swap agreements.
11. Hedging transactions:
We enter into foreign currency contracts to hedge foreign currency risks
relating to cash flow. At December 31, 2006, we had forward exchange
contracts covering various currencies in an aggregate notional amount of
$432.0. The fair value of these contracts at December 31, 2006 was an
unrealized loss of $0.4 (2005 - unrealized gain of $6.9).
In connection with the issuance of our 2011 Notes in June 2004, we
entered into agreements to swap the fixed rate of interest for a variable
interest rate. The notional amount of the agreements is $500.0. The
agreements mature July 2011. See note 4(b). Payments or receipts under
the swap agreements are recorded in interest expense on long-term debt.
The fair value of the interest rate swap agreements at December 31, 2006
was an unrealized loss of $9.9 (December 31, 2005 - unrealized loss of
$3.1).
12. Guarantees and contingencies:
We have contingent liabilities in the form of letters of credit, letters
of guarantee, and surety and performance bonds which we provided to
various third parties. These guarantees cover various payments, including
customs and excise taxes, utility commitments and certain bank
guarantees. At December 31, 2006, these contingent liabilities amounted
to $84.9 (December 31, 2005 - $80.0).
In addition to the above guarantees, we have also provided routine
indemnifications, whose terms range in duration and often are not
explicitly defined. These may include indemnifications against adverse
impacts due to changes in tax laws and patent infringements by third
parties. We have also provided indemnifications in connection with the
sale of certain businesses and real property. The maximum potential
liability from these indemnifications cannot be reasonably estimated. In
some cases, we have recourse against other parties to mitigate our risk
of loss from these indemnifications. Historically, we have not made
significant payments relating to these types of indemnifications.
In the normal course of our operations, we are subject to litigation and
claims from time to time. We may also 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 in the accounts where required. Although it
is not possible to estimate the extent of potential costs, if any,
management believes that the ultimate resolution of such contingencies
will not have a material adverse impact on our results of operations,
financial position or our liquidity.
On January 12, 2007, a purported class action complaint was commenced
against the company in the United States District Court of the Southern
District of New York by Russell Henning on behalf of himself and
purchasers of our shares during the period July 27, 2006 through
December 12, 2006. A second such purported class action complaint was
commenced against us in the same court on January 24, 2007 by Sherry
Saylor on behalf of herself and purchasers of our shares during the same
period. The two lawsuits make similar allegations and also name our
former chief executive officer and our current chief financial officer as
defendants. The two complaints assert violations of the United States
federal securities laws and seek an unspecified amount of damages. The
complaints allege that during the purported class period the company made
statements concerning its actual and anticipated future financial results
that allegedly failed to disclose certain purportedly adverse information
with respect to demand and inventory in our Mexican operations and our
information technology and communications divisions. We believe that the
complaints are without merit and we intend to defend the cases
vigorously. However, there can be no assurance that the outcome of the
complaints will be favorable to us or will not have a material adverse
impact on our financial position or our liquidity. In addition, we may
incur substantial litigation expenses in defending these actions.
Income taxes:
We are subject to tax audits by local taxing authorities. International
taxation authorities could challenge the validity of our inter-company
financing and transfer pricing policies which generally involve
subjective areas of taxation and a significant degree of judgment. If any
of these taxation authorities is successful in challenging our financing
or transfer pricing policies, our income tax expense may be adversely
affected and we could also be subjected to interest and penalty charges.
In connection with ongoing tax audits in the United States, taxing
authorities have asserted that our United States subsidiaries owe
significant amounts of tax, interest and penalties arising from
inter-company transactions. A significant portion of these asserted
deficiencies were resolved in favour of the company in the fourth quarter
of 2006. We believe we have substantial defenses to the remaining
asserted deficiencies and have adequately accrued for any likely
potential losses. However, there can be no assurance as to the final
resolution of these remaining asserted deficiencies and any resulting
proceedings and if these remaining asserted deficiencies and proceedings
are determined adversely to us, the amounts we may be required to pay may
be material.
In addition, net deferred income tax liabilities with respect to net
unrealized foreign exchange gains in Canada have been accrued during the
fourth quarter of 2006. It was determined during the fourth quarter of
2006 that certain foreign exchange losses accrued on Canadian assets may
not be available to offset the unrealized foreign exchange gains accrued
on Canadian liabilities. This is due to the potential timing of
realization of foreign exchange gains and losses and/or potential
challenges that, more likely than not, would result in a lack of
availability of the unrealized foreign exchange losses to offset the
unrealized foreign exchange gains.
%SEDAR: 00010284E