(All amounts in U.S. dollars.
Per share information based on diluted
shares outstanding unless noted otherwise.)
Fourth Quarter Summary
----------------------
- Revenue of $1,935 million, compared to $2,211 million for the same
period last year
- GAAP loss of ($822.2) million or ($3.58) per share, including an
($850.5) million or ($3.71) per share charge resulting from the
write-off of all goodwill, compared to a loss of ($11.7) million or
($0.05) per share last year
- Adjusted net earnings of $0.26 per share including a $0.07 per share
benefit resulting from a lower adjusted tax rate, compared to
adjusted net earnings of $0.16 per share last year
- Operating margin of 3.2% compared to 2.7% last year
- Gross margin of 7.3% compared to 6.0% last year
- First quarter of 2009 revenue guidance of $1.4 billion -
$1.6 billion, adjusted net earnings per share of $0.07 - $0.13
TORONTO, Jan. 28 /CNW/ - Celestica Inc. (NYSE, TSX: CLS), a global leader in the delivery of end-to-end product lifecycle solutions, today announced financial results for the fourth quarter and fiscal year ended December 31, 2008.
Revenue was $1,935 million compared to $2,211 million in the fourth quarter of 2007. Net loss on a GAAP basis for the fourth quarter was ($822.2) million or ($3.58) per share, compared to a GAAP net loss of ($11.7) million or ($0.05) per share for the same period last year. The GAAP loss in the fourth quarter of 2008 was primarily a result of the write-off of the company's remaining goodwill.
During the fourth quarter of 2008, the company performed its annual goodwill impairment test which resulted in the decision to write off the $850.5 million of goodwill on the company's balance sheet. The goodwill write-off is non-cash in nature and does not affect liquidity, cash flows from operating activities, or compliance with debt covenants. The goodwill write-off is not deductible for income tax purposes and, therefore, the company has not recorded a corresponding tax benefit in 2008. (Additional detail on the impairment can be found in note 5(b) of the financial statements attached to this release).
Adjusted net earnings for the quarter were $59.1 million or $0.26 per share, including a $15.5 million or $0.07 per share benefit associated with a lower adjusted tax rate. These results compared to adjusted net earnings of $37.2 million or $0.16 per share for the same period last year. Adjusted net earnings is defined as net earnings before other charges, amortization of intangible assets, integration costs related to acquisitions, option expense, and gains or losses on the repurchase of shares and debt, net of tax and significant deferred tax write-offs or recovery (detailed GAAP financial statements and supplementary information related to adjusted net earnings appear at the end of this press release).
These revenue and adjusted net earnings results compare with the company's guidance for the fourth quarter, announced on October 23, 2008, of revenue of $1.75 billion to $2.0 billion and adjusted net earnings per share of $0.16 to $0.24.
For 2008, revenue was $7,678 million compared to $8,070 million for 2007. Net loss on a GAAP basis was ($720.5) million or ($3.14) per share compared to GAAP net loss of ($13.7) million or ($0.06) per share last year. Adjusted net earnings for 2008 were $187.7 million or $0.82 per share compared to adjusted net earnings of $62.3 million or $0.27 per share in 2007.
"Despite the significant turmoil in the global economic environment, Celestica delivered strong operating results in the fourth quarter and throughout the year," said Craig Muhlhauser, President and Chief Executive Officer, Celestica. "We had four positive quarters and generated full year gross margins of 7% and had operating margins of 3%. During the year, we generated free cash flow of $127 million and finished 2008 with a very strong balance sheet.
"While our operations performed very well in 2008, the current uncertain economic backdrop, combined with end-market weakness which accelerated in the fourth quarter, resulted in our decision to write-off our remaining goodwill. While end-market volatility is expected to continue throughout 2009, Celestica will remain focused on pursuing profitable revenue opportunities, while continuing to improve working capital efficiency, operating margins and free cash flow."
First Quarter Outlook --------------------- For the first quarter ending March 31, 2009, the company anticipates revenue to be in the range of $1.4 billion to $1.6 billion, and adjusted net earnings per share to range from $0.07 to $0.13. First Quarter Webcast --------------------- Management will host its quarterly results conference call today at 4:15 p.m. Eastern. The webcast can be accessed at www.celestica.com. 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 restructuring activities, acquisitions made by the company, fair value accounting for stock options and securities repurchases, management believes adjusted net earnings are a useful measure for the company as well as its investors to facilitate period-to-period operating comparisons and allow the comparison of operating results with its competitors in the U.S. and Asia. Excluded from adjusted net earnings are the effects of other charges, most significantly the write-down of goodwill and long-lived assets, gains or losses on the repurchase of shares or debt and the related income tax effect of these adjustments, and any significant deferred tax write-offs or recovery. The company also excludes some recurring charges such as restructuring costs, option expense, the amortization of intangible assets, and the related income tax effect of these adjustments. The term 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 are 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 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 dedicated to delivering end-to-end product lifecycle solutions to drive our customers' success. Through our simplified global operations network and information technology platform, we are solid partners who deliver informed, flexible solutions that enable our customers to succeed in the markets they serve. Committed to providing a truly differentiated customer experience, our agile and adaptive employees share a proud history of demonstrated expertise and creativity that provides our customers with the ability to overcome any challenge.
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, our financial and or operational results, and our financial or operational performance. Such forward-looking statements are predictive in nature and may be based on current expectations, forecasts or assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially from the forward-looking statements themselves. Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as "believes", "expects", "anticipates", "estimates", "intends", "plans", or similar expressions, or may employ such future or conditional verbs as "may", "will", "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, and in any applicable Canadian securities legislation. Forward-looking statements are not guarantees of future performance. You should understand that the following important factors could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements: the effects of price competition and other business and competitive factors generally affecting the EMS industry, including changes in the trend for outsourcing; our dependence on a limited number of customers; the challenges of effectively managing our operations during uncertain economic conditions, including significant changes in demand from our largest customers as a result of the impact of the global economic crisis and capital market weakness; variability of operating results among periods; the challenge of managing our financial exposures to foreign currency fluctuations; the challenge of managing volatile energy prices; the challenge of responding to lower-than-expected customer demand; our inability to retain or grow our business due to execution problems resulting from significant headcount reductions, plant closures and product transfers associated with major restructuring activities; our dependence on industries affected by rapid technological change; our ability to successfully manage our international operations; and the delays in the delivery and/or general availability of various components used in our manufacturing process. These and other risks and uncertainties, as well as other information related to the company, are discussed in the Company's various public filings at www.sedar.com and www.sec.gov, including our Annual Report on Form 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission and our Annual Information Form filed with the Canadian Securities Commissions. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes.
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, 2008 and revenue and adjusted net earnings guidance for the first quarter ending March 31, 2009. Revenue and earnings guidance is reviewed by the company's board of directors. Our revenue and earnings guidance is based on various assumptions which management believes are reasonable under the current circumstances, but may prove to be inaccurate, and many of which involve factors that are beyond the control of the Company. The material assumptions may include assumptions regarding the following: forecasts from our customers, which range from 30 to 90 days; timing and investments associated with ramping new business; general economic and market conditions; currency exchange rates; pricing and competition; anticipated customer demand; supplier performance and pricing; commodity, labor, energy and transportation costs; operational and financial matters; technological developments; and the timing and execution of our restructuring plan. These assumptions are based on management's current views with respect to current plans and events, and are and will be subject to the risks and uncertainties referred to above. It is Celestica's policy that revenue and 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)
2007 2008
----------------------------- ------------------------------
Three months
ended Adjust- Adjust-
December 31 GAAP ments Adjusted GAAP ments Adjusted
--------- --------- --------- --------- --------- ----------
Revenue $ 2,210.5 $ - $ 2,210.5 $ 1,935.4 $ - $ 1,935.4
Cost of
sales(1) 2,078.5 (1.7) 2,076.8 1,794.8 (0.6) 1,794.2
--------- --------- --------- --------- --------- ----------
Gross profit 132.0 1.7 133.7 140.6 0.6 141.2
SG&A(1) 75.6 (1.0) 74.6 80.0 (1.0) 79.0
Amortization
of
intangible
assets 5.1 (5.1) - 3.3 (3.3) -
Other
charges 39.2 (39.2) - 861.9 (861.9) -
--------- --------- --------- --------- --------- ----------
Operating
earnings
(loss) -
EBIAT 12.1 47.0 59.1 (804.6) 866.8 62.2
Interest
expense,
net 9.5 - 9.5 13.7 - 13.7
--------- --------- --------- --------- --------- ----------
Net earnings
(loss)
before tax 2.6 47.0 49.6 (818.3) 866.8 48.5
Income tax
expense
(recovery) 14.3 (1.9) 12.4 3.9 (14.5) (10.6)
--------- --------- --------- --------- --------- ----------
Net earnings
(loss) $(11.7) $48.9 $37.2 $(822.2) $881.3 $59.1
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
W.A. No.
of shares
(in
millions)
- diluted 229.1 229.2 229.4 229.4
Earnings
(loss) per
share -
diluted $(0.05) $0.16 $(3.58) $0.26
2007 2008
----------------------------- ------------------------------
Year ended Adjust- Adjust-
December 31 GAAP ments Adjusted GAAP ments Adjusted
--------- --------- --------- --------- --------- ----------
Revenue $8,070.4 $ - $ 8,070.4 $ 7,678.2 $ - $ 7,678.2
Cost of
sales(1) 7,648.0 (4.6) 7,643.4 7,147.1 (2.9) 7,144.2
--------- --------- --------- --------- --------- ----------
Gross profit 422.4 4.6 427.0 531.1 2.9 534.0
SG&A(1) 295.1 (2.4) 292.7 303.8 (3.7) 300.1
Amortization
of
intangible
assets 21.3 (21.3) - 15.1 (15.1) -
Integration
costs
relating to
acquisitions 0.1 (0.1) - - - -
Other charges 47.6 (47.6) - 885.2 (885.2) -
--------- --------- --------- --------- --------- ----------
Operating
earnings
(loss) -
EBIAT 58.3 76.0 134.3 (673.0) 906.9 233.9
Interest
expense, net 51.2 - 51.2 42.5 - 42.5
--------- --------- --------- --------- --------- ----------
Net earnings
(loss) before
tax 7.1 76.0 83.1 (715.5) 906.9 191.4
Income tax
expense 20.8 - 20.8 5.0 (1.3) 3.7
--------- --------- --------- --------- --------- ----------
Net earnings
(loss) $(13.7) $76.0 $62.3 $(720.5) $908.2 $187.7
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
W.A. No. of
shares (in
millions) -
diluted 228.9 229.0 229.3 229.6
Earnings
(loss) per
share -
diluted $(0.06) $0.27 $(3.14) $0.82
(1) Non - cash option expense included in cost of sales and SG&A is
added back for adjusted net earnings
GUIDANCE SUMMARY
4Q 08 4Q 08 1Q 09
Guidance Actual Guidance(2)
-------------- -------------- --------------
Revenue $1.75B - $2.0B $1.9B $1.4B - $1.6B
Adjusted net
EPS $0.16 - $0.24 $0.26 $0.07 - $0.13
(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
2007 2008
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents (note 9).......... $ 1,116.7 $ 1,201.0
Accounts receivable (note 13(c))............ 941.2 1,074.0
Inventories (note 2(i))..................... 791.9 787.4
Prepaid and other assets (note 10(i))....... 126.2 87.1
Income taxes recoverable.................... 19.8 14.1
Deferred income taxes....................... 3.8 8.2
------------ ------------
2,999.6 3,171.8
Property, plant and equipment (note 2(b))..... 466.0 467.5
Goodwill from business combinations
(note 5(b)).................................. 850.5 -
Intangible assets............................. 35.2 20.1
Other long-term assets (note 10(ii)).......... 119.2 126.8
------------ ------------
$ 4,470.5 $ 3,786.2
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................ $ 1,029.8 $ 1,090.6
Accrued liabilities (notes 5 and 10(i))..... 402.6 463.1
Income taxes payable........................ 14.0 13.5
Deferred income taxes....................... - 0.2
Current portion of long-term debt
(note 3)................................... 0.2 1.0
------------ ------------
1,446.6 1,568.4
Long-term debt (note 3)....................... 758.3 732.1
Accrued pension and post-employment
benefits..................................... 70.4 63.2
Deferred income taxes......................... 63.3 47.2
Other long-term liabilities................... 13.7 9.8
------------ ------------
2,352.3 2,420.7
Shareholders' equity (note 11):
Capital stock............................... 3,585.2 3,588.5
Warrants.................................... 3.1 -
Contributed surplus......................... 190.3 204.4
Deficit..................................... (1,716.3) (2,436.8)
Accumulated other comprehensive income...... 55.9 9.4
------------ ------------
2,118.2 1,365.5
------------ ------------
$ 4,470.5 $ 3,786.2
------------ ------------
------------ ------------
Guarantees and contingencies (note 12)
See accompanying notes to unaudited consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2007 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars, except per share amounts)
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Revenue.................. $ 2,210.5 $ 1,935.4 $ 8,070.4 $ 7,678.2
Cost of sales............ 2,078.5 1,794.8 7,648.0 7,147.1
----------- ----------- ----------- -----------
Gross profit............. 132.0 140.6 422.4 531.1
Selling, general and
administrative expenses
(note 4)................ 75.6 80.0 295.1 303.8
Amortization of
intangible assets....... 5.1 3.3 21.3 15.1
Integration costs related
to acquisitions......... - - 0.1 -
Other charges (note 5)... 39.2 861.9 47.6 885.2
Interest on long-term
debt.................... 16.6 15.5 66.4 57.8
Interest income, net of
interest expense........ (7.1) (1.8) (15.2) (15.3)
----------- ----------- ----------- -----------
Earnings (loss) before
income taxes............ 2.6 (818.3) 7.1 (715.5)
Income tax expense
(recovery):
Current................ 23.4 13.3 14.4 18.4
Deferred............... (9.1) (9.4) 6.4 (13.4)
----------- ----------- ----------- -----------
14.3 3.9 20.8 5.0
----------- ----------- ----------- -----------
Net loss for the
period.................. $ (11.7) $ (822.2) $ (13.7) $ (720.5)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic loss per share..... $ (0.05) $ (3.58) $ (0.06) $ (3.14)
Diluted loss per share... $ (0.05) $ (3.58) $ (0.06) $ (3.14)
Shares used in computing
per share amounts:
Basic (in millions)... 229.1 229.4 228.9 229.3
Diluted (in
millions)............ 229.1 229.4 228.9 229.3
See accompanying notes to unaudited consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2007 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions of U.S. dollars)
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Net loss for the
period.................. $ (11.7) $ (822.2) $ (13.7) $ (720.5)
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation gain...... 3.6 8.7 8.7 11.5
Net gain (loss) on
derivatives designated
as cash flow
hedges................ 9.2 (44.1) 37.5 (53.1)
Reclass net loss (gain)
on derivatives
designated as cash flow
hedges to
operations............ (9.5) 16.6 (16.3) (4.9)
----------- ----------- ----------- -----------
Comprehensive income
(loss).................. $ (8.4) $ (841.0) $ 16.2 $ (767.0)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2007 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
2007 2008 2007 2008
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Cash provided by (used in):
Operations:
Net loss for the
period $ (11.7) $ (822.2) $ (13.7) $ (720.5)
Items not affecting cash:
Depreciation and
amortization 33.7 27.7 130.8 109.2
Deferred income taxes (9.1) (9.4) 6.4 (13.4)
Non-cash charge for
option issuances 2.7 1.6 7.0 6.6
Restructuring
charges 6.1 0.6 5.1 1.1
Other charges
(note 5) 15.1 850.3 14.0 850.3
Other (3.2) (2.9) 18.0 16.6
Changes in non-cash
working capital items:
Accounts receivable 22.4 (33.9) 32.0 (132.8)
Inventories 135.0 55.9 406.0 4.5
Prepaid and other
assets 2.2 (2.5) (6.8) 22.5
Income taxes
recoverable 18.1 20.3 11.4 5.7
Accounts payable and
accrued liabilities (32.2) (73.9) (237.6) 58.9
Income taxes payable - (6.8) (21.2) (0.5)
----------- ----------- ----------- -----------
Non-cash working
capital changes 145.5 (40.9) 183.8 (41.7)
----------- ----------- ----------- -----------
Cash provided by
operations 179.1 4.8 351.4 208.2
----------- ----------- ----------- -----------
Investing:
Purchase of property,
plant and equipment (15.0) (25.6) (63.7) (88.8)
Proceeds from sale
of assets 3.0 3.5 27.0 7.7
Other (0.1) 0.4 (0.2) 0.3
----------- ----------- ----------- -----------
Cash used in investing
activities (12.1) (21.7) (36.9) (80.8)
----------- ----------- ----------- -----------
Financing:
Repurchase of Notes
(note 3(d)) - (30.4) - (30.4)
Financing costs (0.5) (0.5) (1.4) (0.5)
Repayment of long-term
debt (0.1) (0.2) (0.6) (0.4)
Issuance of share
capital - - 3.5 2.1
Other (2.8) (9.2) (3.0) (13.9)
----------- ----------- ----------- -----------
Cash used in financing
activities (3.4) (40.3) (1.5) (43.1)
----------- ----------- ----------- -----------
Increase (decrease) in
cash 163.6 (57.2) 313.0 84.3
Cash, beginning of
period 953.1 1,258.2 803.7 1,116.7
----------- ----------- ----------- -----------
Cash, end of period $ 1,116.7 $ 1,201.0 $ 1,116.7 $ 1,201.0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental cash flow information (note 9)
See accompanying notes to unaudited consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2007 annual consolidated financial statements.
CELESTICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
(unaudited)
1. Basis of presentation:
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 2007 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 2007 annual
consolidated financial statements. These unaudited interim consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary to present fairly our financial position as at
December 31, 2008 and the results of operations and cash flows for the
three months and years ended December 31, 2007 and 2008.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and related disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. We
applied significant estimates and assumptions to our valuations against
accounts receivable, inventory and income taxes, to the amount and timing
of restructuring charges or recoveries, to the fair values used in
testing goodwill and long-lived assets, and to valuing our financial
instruments and pension costs. Actual results could differ materially
from those estimates and assumptions, especially in light of the current
economic environment and uncertainties.
These unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in the
2007 annual consolidated financial statements, except for the following:
Changes in accounting policies:
(i) Inventories:
Effective January 1, 2008, we adopted CICA Handbook Section 3031,
"Inventories," which requires inventory to be measured at the lower of
cost and net realizable value. This standard provides additional guidance
on the types of costs that can be capitalized and requires the reversal
and disclosure of previous inventory write-downs if economic
circumstances have changed to support higher inventory values. The
adoption of this standard did not have a material impact on our
consolidated financial statements.
During the fourth quarter of 2008, we recorded a net inventory provision
through cost of sales of $8.1 (year ended December 31, 2008 - $19.6) to
write-down the value of our inventory to net realizable value.
(ii) Financial instruments:
(ii)(a) Effective January 1, 2008, we adopted CICA Handbook Section 3862,
"Financial instruments - disclosures," and Section 3863, "Financial
instruments - presentation." These standards provide additional guidance
on disclosing risks related to recognized and unrecognized financial
instruments and how those risks are managed. The adoption of these
standards did not have a material impact on our consolidated financial
statements.
Section 3862 requires us to disclose the classifications of our financial
instruments into the following specific categories:
- financial assets held-for-trading - loans and receivables
- held-to-maturity investments - available-for-sale financial
- financial liabilities assets
held-for-trading - financial liabilities measured
at amortized cost
The classification of our financial instruments is as follows:
Our cash and cash equivalents are comprised of cash and short-term
investments. See note 9. The majority of our short-term investments are
held-to-maturity, except for investments in highly-liquid mutual funds
which are held-for-trading. We classify accounts receivable under loans
and receivables. Our derivative assets are included in prepaid and other
assets and other long-term assets. Our derivative liabilities are
included in accrued liabilities. The majority of our derivative assets
and liabilities arise from foreign currency forward contracts and
interest rate swap agreements. Our foreign currency forward contracts are
recorded at fair value and the majority of our foreign currency forward
contracts are designated as cash flow hedges. Our interest rate swap
agreements related to our Senior Subordinated Notes due 2011 (2011 Notes)
are recorded at fair value and are designated as fair value hedges. See
note 10. Accounts payable and the majority of our accrued liabilities,
excluding derivative liabilities, are classified as financial liabilities
which are recorded at amortized cost. Our Senior Subordinated Notes
(Notes), which are recorded in long-term debt, are classified as
financial liabilities. See note 3. The carrying values of our Notes are
comprised of elements recorded at fair value and amortized cost. See note
15 to the 2007 annual consolidated financial statements. We do not
currently have any financial assets designated as available-for-sale.
We are exposed to a variety of financial risks that we face in the normal
course of business. Our financial risk management objectives are
described in note 15 to the 2007 annual consolidated financial
statements. The disclosures required by Section 3862 are included in
note 13.
(ii)(b) Effective January 1, 2007, we adopted CICA Handbook Section 1530,
"Comprehensive income," Section 3855, "Financial instruments -
recognition and measurement," Section 3861, "Financial instruments -
disclosure and presentation," and Section 3865, "Hedges." These
disclosures are included in notes 2(s), 7, 10 and 15 to the 2007 annual
consolidated financial statements. On January 1, 2007, we made certain
transitional adjustments to our consolidated balance sheet which included
an adjustment to opening deficit of $6.4.
As required by these standards, we have marked-to-market the bifurcated
embedded prepayment options in our debt instruments and have applied the
fair value hedge accounting to our interest rate swaps and our hedged
debt obligation (2011 Notes). The changes in the fair values each period
are recorded in interest expense on long-term debt. The mark-to-market
adjustment fluctuates each period as it is dependent on market
conditions, including future interest rates, implied volatility and
credit spreads. The impact of these adjustments on our results of
operations is as follows:
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
--------- -------- -------- ---------
Increase (decrease)
in interest expense
on long-term debt....... $ 0.1 $ 0.8 $ (0.6) $ 1.0
(iii) Capital disclosures:
Effective January 1, 2008, we adopted CICA Handbook Section 1535,
"Capital disclosures," which provides guidance for disclosing information
about an entity's capital and how it manages its capital. This standard
requires the disclosure of the entity's capital management objectives,
policies and processes. See note 14. The adoption of this standard did
not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements:
(a) International financial reporting standards (IFRS):
In February 2008, the Canadian Accounting Standards Board announced the
adoption of International Financial Reporting Standards for publicly
accountable enterprises. IFRS will replace Canadian GAAP effective
January 1, 2011. IFRS is effective for our first quarter of 2011 and will
require that we restate our 2010 comparative numbers. We have started an
IFRS conversion project to evaluate the impact of implementing the new
standards. We cannot at this time reasonably estimate the impact of
adopting IFRS on our consolidated financial statements.
(b) Goodwill and intangible assets:
On January 1, 2009, we adopted CICA Handbook Section 3064, "Goodwill and
intangible assets." This revised standard establishes guidance for the
recognition, measurement and disclosure of goodwill and intangible
assets, including internally generated intangible assets. This standard,
which is effective for our first quarter of 2009, requires us to
retroactively reclassify our computer software assets on our consolidated
balance sheet from property, plant and equipment to intangible assets.
In addition, the amortization of computer software will be reclassified
from depreciation expense, included in selling, general and
administrative expenses to amortization of intangible assets.
(c) Business combinations:
In January 2009, the CICA issued Handbook Section 1582,
"Business combinations," which replaces the existing standards. This
section establishes the standards for the accounting of business
combinations, and states that all assets and liabilities of an acquired
business will be recorded at fair value. Obligations for contingent
considerations and contingencies will also be recorded at fair value at
the acquisition date. The standard also states that acquisition-related
costs will be expensed as incurred and that restructuring charges will be
expensed in the periods after the acquisition date. This standard is
equivalent to the International Financial Reporting Standards on business
combinations. This standard is applied prospectively to business
combinations with acquisition dates on or after January 1, 2011. Earlier
adoption is permitted. We are currently evaluating the impact of adopting
this standard on our consolidated financial statements.
(d) Non-controlling interests:
In January 2009, the CICA issued Handbook Section 1602,
"Non-controlling interests," which establishes standards for the
accounting of non-controlling interests of a subsidiary in the
preparation of consolidated financial statements subsequent to a business
combination. This standard is equivalent to the International Financial
Reporting Standards on consolidated and separate financial statements.
This standard is effective for 2011. Earlier adoption is permitted. We
are currently evaluating the impact of adopting this standard on our
consolidated financial statements.
(e) Consolidated financial statements:
In January 2009, the CICA issued Handbook Section 1601, "Consolidated
financial statements," which replaces the existing standards. This
section establishes the standards for preparing consolidated financial
statements and is effective for 2011. Earlier adoption is permitted. We
are currently evaluating the impact of adopting this standard on our
consolidated financial statements.
3. Long-term debt:
December 31 December 31
2007 2008
---------- ----------
Secured, revolving credit facility due
2009 (a)............................. $ - $ -
Senior Subordinated Notes due 2011
(2011 Notes) (b)(c)(d)............... 500.0 489.4
Senior Subordinated Notes due 2013
(2013 Notes) (b)(d)................... 250.0 223.1
Embedded prepayment option at fair
value (e)........................... (6.5) (19.2)
Basis adjustments on debt
obligation (e)...................... 6.5 4.9
Unamortized debt issue costs......... (9.6) (7.0)
Fair value adjustment of 2011
Notes attributable to interest
rate risks (e)...................... 17.9 40.9
---------- ----------
758.3 732.1
Capital lease obligations.............. 0.2 1.0
---------- ----------
758.5 733.1
Less current portion................... 0.2 1.0
---------- ----------
$ 758.3 $ 732.1
---------- ----------
---------- ----------
(a) We have a revolving credit facility for $300.0 which matures in
April 2009 and have initiated preliminary discussions to extend the
term of this facility. There were no borrowings outstanding under
this facility at December 31, 2008. Commitment fees for 2008 were
$1.9. The facility has restrictive covenants relating to debt
incurrence and the sale of assets and also contains financial
covenants that require us to maintain certain financial ratios. We
were in compliance with all covenants at December 31, 2008. Based on
the required financial ratios at December 31, 2008, we have full
access to the $300.0 available under this facility.
We also have uncommitted bank overdraft facilities available for
operating requirements which total $68.0 at December 31, 2008. There
were no borrowings outstanding under these facilities at
December 31, 2008.
(b) In June 2004, we issued the 2011 Notes with an aggregate principal
amount of $500.0 and a fixed interest rate of 7.875%. We are entitled
to redeem the 2011 Notes at various premiums above face value.
In June 2005, we issued the 2013 Notes with an aggregate principal
amount of $250.0 and a fixed interest rate of 7.625%. We will be
entitled to redeem the 2013 Notes on or after July 1, 2009 at various
premiums above face value.
The 2011 and 2013 Notes (Notes) are unsecured and are subordinated in
right of payment to all our senior debt. The Notes have restrictive
covenants that limit our ability to pay dividends, repurchase our own
stock or repay debt that is subordinated to these Notes. These
covenants also place limitations on the sale of assets and our
ability to incur additional debt. We were in compliance with all
covenants at December 31, 2008.
(c) In connection with the 2011 Notes, we entered into agreements to 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 6.9%
and 6.5%, respectively, for the fourth quarter of 2008 and year ended
December 31, 2008 (8.2% and 8.3%, respectively, for the fourth
quarter of 2007 and year ended December 31, 2007). The fair value of
the interest rate swap agreements is disclosed in note 10(ii).
(d) During the fourth quarter of 2008, we paid $30.4, excluding accrued
interest, to repurchase 2011 Notes with principal amounts at maturity
of $10.6 and to repurchase 2013 Notes with principal amounts at
maturity of $26.9. We recognized a gain of $7.6 on the repurchase of
the Notes which we recorded in other charges. See note 5. The gain on
the repurchase was measured based on the carrying values of the
repurchased portion of the Notes on the dates of repurchase.
(e) The prepayment options in the Notes qualify as embedded derivatives
which must be bifurcated for reporting under the financial
instruments standards. As of December 31, 2008, the fair value of the
embedded derivative asset is $19.2 and is recorded against long-term
debt. The increase in the fair value of the embedded derivative asset
of $13.1 for 2008 is recorded as a reduction of interest expense on
long-term debt. As a result of bifurcating the prepayment option from
these Notes, a basis adjustment is added to the cost of the long-term
debt. This basis adjustment is amortized over the term of the debt
using the effective interest rate method. The amortization of the
basis adjustment of $1.1 for 2008 is recorded as a reduction of
interest expense on long-term debt. The change in the fair value of
the debt obligation attributable to movement in the benchmark
interest rates resulted in a loss of $23.8 for 2008, which increased
interest expense on long-term debt. Also see note 2(ii)(b) which
summarizes the impact of our mark-to-market adjustments and our fair
value hedge accounting.
4. Foreign exchange:
The majority of our subsidiaries are foreign integrated operations and
have a U.S. dollar functional currency. For such subsidiaries, we
translate monetary assets and liabilities denominated in foreign
currencies into U.S. dollars at the exchange rate in effect on the
balance sheet date. We translate non-monetary assets and liabilities
denominated in foreign currencies at historic rates, and we translate
revenue and expenses at the average exchange rates prevailing during the
month of the transaction. Exchange gains or losses also arise on the
settlement of foreign currency denominated transactions. We record these
exchange gains or losses in our statement of operations.
We have recorded the following foreign exchange gains or losses in
selling, general and administrative expenses:
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
--------- -------- -------- ---------
Foreign exchange
loss (gain)............. $ (4.0) $ 12.6 $ (2.9) $ 16.4
5. Other charges:
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
--------- -------- -------- ---------
Restructuring (a)......... $ 24.1 $ 11.6 $ 37.3 $ 35.3
Goodwill impairment (b)... - 850.5 - 850.5
Long-lived asset
impairment (c)........... 15.1 8.8 15.1 8.8
Gain on repurchase
of Notes (see 3(d))...... - (7.6) - (7.6)
Other..................... - (1.4) (4.8) (1.8)
--------- -------- -------- ---------
$ 39.2 $ 861.9 $ 47.6 $ 885.2
--------- -------- -------- ---------
--------- -------- -------- ---------
(a) Restructuring:
Between 2001 and 2004, we announced global restructuring plans as a
result of end market weakness and the shifting of manufacturing capacity
from higher-cost regions in North America and Europe to lower-cost
regions in Asia. During 2005 and 2006, we announced further plans to
improve capacity utilization and accelerate margin improvements,
primarily in our North America and Europe regions as end-market demand
and profitability had not recovered to sustainable levels. In January
2008, we estimated an additional restructuring charge of between $50 to
$75 which would be recorded throughout 2008 and 2009. As we finalized our
2009 plan in the fourth quarter of 2008, we estimated that our
restructuring costs would reach the high end of our previously announced
range. We will continue to evaluate our operations and may propose
additional restructuring actions as a result of the uncertain
environment. During 2008, we recorded $35.3 in restructuring charges. We
expect to complete the remainder of our restructuring actions by the end
of 2009. As we complete these restructuring actions, our overall
utilization and operating efficiency should improve. As we finalize the
detailed plans of these restructuring actions, we will recognize the
related charges.
Our restructuring actions included consolidating facilities and reducing
our workforce. The majority of the employees terminated were
manufacturing and plant employees. Approximately 32,900 employees have
been terminated since 2001. Approximately 70% of these employee
terminations have been in the Americas, 25% in Europe and 5% in Asia.
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 are 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 expect our long-term lease and other contractual obligations
to be paid out over the remaining lease terms through 2015. Our
restructuring liability is recorded in accrued liabilities.
Details of the 2008 activity are as follows:
Lease
and
other Facility
Employee cont- exit Total
termi- ractual costs accrued 2008
nation oblig- and liab- non-cash 2008
costs ations other ility charge charge
-------- -------- -------- -------- -------- --------
December 31, 2007.. $ 9.0 $ 36.5 $ 0.6 $ 46.1 $ - $ -
Cash payments...... (7.1) (2.8) (0.8) (10.7) - -
Provisions......... 2.4 0.3 0.4 3.1 0.2 3.3
-------- -------- -------- -------- -------- --------
March 31, 2008..... 4.3 34.0 0.2 38.5 0.2 3.3
Cash payments...... (2.8) (2.8) (0.3) (5.9) - -
Provisions......... 3.2 (0.1) 0.4 3.5 0.1 3.6
-------- -------- -------- -------- -------- --------
June 30, 2008...... 4.7 31.1 0.3 36.1 0.3 6.9
Cash payments...... (9.3) (2.9) (0.1) (12.3) - -
Provisions......... 15.7 0.8 0.1 16.6 0.2 16.8
-------- -------- -------- -------- -------- --------
September 30,
2008.............. 11.1 29.0 0.3 40.4 0.5 23.7
Cash payments...... (3.0) (2.7) (0.1) (5.8) - -
Provisions......... 10.6 0.4 - 11.0 0.6 11.6
-------- -------- -------- -------- -------- --------
December 31,
2008.............. $ 18.7 $ 26.7 $ 0.2 $ 45.6 $ 1.1 $ 35.3
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
As of December 31, 2008, we have $22.0 in assets that are
available-for-sale, primarily land and buildings, as a result of the
restructuring actions we have implemented. We have programs underway to
sell these assets.
(b) Goodwill impairment:
We are required to evaluate goodwill annually or whenever events or
changes in circumstances indicate that we may not recover the carrying
amount. Absent any triggering events during the year, we conduct our
goodwill assessment in the fourth quarter of the year to correspond with
our planning cycle. We test impairment, using the two-step method, at the
reporting unit level by comparing the reporting unit's carrying amount to
its fair value. To the extent a reporting unit's carrying amount exceeds
its fair value, we may have an impairment of goodwill. All of our
goodwill is allocated to our Asia reporting unit.
During the fourth quarter of 2008, we performed our annual goodwill
impairment assessment. Our goodwill balance prior to the impairment
charge was $850.5 and was established primarily as a result of an
acquisition in 2001. We completed our step one analysis using a
combination of valuation approaches including a market capitalization
approach, multiples approach and discounted cash flow. The market
capitalization approach uses our publicly traded stock price to determine
fair value. The multiples approach uses comparable market multiples to
arrive at a fair value and the discounted cash flow method uses revenue
and expense projections and risk-adjusted discount rates. The process of
determining fair value is subjective and requires management to exercise
a significant amount of judgment in determining future growth rates,
discount and tax rates and other factors. The current economic
environment has impacted our ability to forecast future demand and has in
turn resulted in our use of higher discount rates, reflecting the risk
and uncertainty in current markets. The results of our step one analysis
indicated potential impairment in our Asia reporting unit, which was
corroborated by a combination of factors including a significant and
sustained decline in our market capitalization, which is significantly
below our book value, and the deteriorating macro environment, which has
resulted in a decline in expected future demand. We therefore performed
the second step of the goodwill impairment assessment to quantify the
amount of impairment. This involved calculating the implied fair value of
goodwill, determined in a manner similar to a purchase price allocation,
and comparing the residual amount to the carrying amount of goodwill.
Based on our analysis incorporating the declining market capitalization
in 2008, as well as the significant end market deterioration and economic
uncertainties impacting expected future demand, we concluded that the
entire goodwill balance of $850.5 was impaired. The goodwill impairment
charge is non-cash in nature and does not affect our liquidity, cash
flows from operating activities, or our compliance with debt covenants.
The goodwill impairment charge is not deductible for income tax purposes
and, therefore, we have not recorded a corresponding tax benefit in 2008.
During the fourth quarter of 2007, we performed our annual goodwill
assessment and determined there was no impairment for 2007 as the
reporting unit's fair value exceeded carrying value.
(c) Long-lived asset impairment:
We conduct our annual impairment assessment of long-lived assets in the
fourth quarter of each year. We recorded a non-cash charge of $8.8 in
2008 against property, plant and equipment in the Americas and Europe and
a non-cash charge of $15.1 in 2007 primarily against property, plant and
equipment in Europe.
6. Pension and non-pension post-employment benefit plans:
We have recorded the following pension expense:
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
--------- -------- -------- ---------
Pension plans............. $ 6.4 $ 3.9 $ 21.5 $ 18.0
Other benefit plans....... 1.5 1.1 6.6 6.5
--------- -------- -------- ---------
Total expense............. $ 7.9 $ 5.0 $ 28.1 $ 24.5
--------- -------- -------- ---------
--------- -------- -------- ---------
7. Stock-based compensation and other stock-based payments:
We have granted stock options as part of our long-term incentive plans.
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
2007 2008 2007 2008
---------- ----------- ---------- ----------
Risk-free rate.......... 3.6%-3.9% 1.0%-2.5% 3.6%-4.8% 1.0%-3.3%
Dividend yield.......... 0.0% 0.0% 0.0% 0.0%
Volatility factor of
the expected market
price of our shares.... 36%-46% 40%-41% 35%-52% 38%-59%
Expected option
life
(in years)............. 4.0-5.5 4.0-5.5 4.0-5.5 4.0-5.5
Weighted average fair
value of options
granted................ $2.56 $2.06 $2.57 $3.12
Compensation expense relating to the fair value of options granted for
the three months and year ended December 31, 2008 was $1.6 and $6.6,
respectively (three months and year ended December 31, 2007 was $2.7 and
$7.0, respectively).
Our stock-based compensation plans are described in note 9 to the 2007
annual consolidated financial statements.
8. Segment information:
The accounting standards establish the criteria for the disclosure of
certain information in the interim and annual financial statements
regarding operating segments, products and services and major customers.
Operating segments are defined as components of an enterprise for which
separate financial information is available that is regularly evaluated
by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Our operating segment is comprised of our electronics manufacturing
services business. Our chief operating decision maker is our Chief
Executive Officer.
(i) The following table indicates revenue by end market as a percentage
of total revenue. Our revenue fluctuates from period to period
depending on numerous factors, including but not limited to:
seasonality of business; the level of business from new, existing and
disengaging customers; the level of program wins or losses; the
phasing in or out of programs; and changes in customer demand.
Three months ended Year ended
December 31 December 31
2007 2008 2007 2008
---- ---- ---- ----
Consumer................ 26% 30% 22% 26%
Enterprise
communications......... 24% 22% 28% 25%
Servers................. 20% 13% 19% 16%
Telecommunications...... 13% 17% 14% 15%
Storage................. 11% 9% 10% 10%
Industrial, aerospace
and defense............ 6% 9% 7% 8%
(ii) For the fourth quarter of 2008, one customer, Research In Motion
(RIM), represented more than 10% of total revenue (fourth quarter of
2007 - one customer, IBM). For the year ended December 31, 2008, no
customer represented more than 10% of total revenue (2007 - two
customers, Cisco Systems and Sun Microsystems).
9. Supplemental cash flow information:
Three months ended Year ended
December 31 December 31
Paid during the period: 2007 2008 2007 2008
--------- --------- --------- ---------
Interest (a)............... $ 2.3 $ 1.3 $ 76.6 $ 65.4
Taxes (b).................. $ 4.5 $ 2.9 $ 23.2 $ 17.0
(a) This includes interest paid on the Notes. Interest on these Notes is
payable in January and July of each year until maturity. See notes
3 (b) and (c). The interest paid on the 2011 Notes reflect the
amounts received or paid relating to the interest rate swap
agreements.
(b) Cash taxes paid is net of any income taxes recovered.
December 31 December 31
Cash is comprised of the following: 2007 2008
----------- -----------
Cash (i)........................................ $ 328.7 $ 406.2
Short-term investments (i)...................... 788.0 794.8
----------- -----------
$1,116.7 $1,201.0
----------- -----------
----------- -----------
(i) Our current portfolio consists of certificates of deposit and
certain money market funds that are secured exclusively by U.S.
government securities. The majority of our cash and short-term
investments are held with financial institutions each of which has
at December 31, 2008 a Standard and Poor's rating of A-2 or above.
10. Derivative financial instruments:
(i) We enter into foreign currency contracts to hedge foreign currency
risks primarily relating to cash flows. At December 31, 2008, we had
forward exchange contracts covering various currencies in an
aggregate notional amount of $587.1. All derivative financial
instruments are recorded at fair value on our consolidated balance
sheet. The fair value of our foreign currency contracts at
December 31, 2008 was a net unrealized loss of $38.9 (December 31,
2007 - net unrealized gain of $20.0). This is comprised of $4.1 of
derivative assets recorded in prepaid and other assets and $43.0 of
derivative liabilities recorded in accrued liabilities. The decrease
in the fair value of these forward exchange contracts for 2008 is
due primarily to unrealized losses from the fluctuations in foreign
exchange rates in the second half of 2008 and the settlement of
certain foreign currency forwards with significant gains during the
first half of 2008. The unrealized losses are a result of
fluctuations in foreign exchange rates between the time the currency
forward contracts were entered into and the valuation date at period
end.
(ii) 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 in July 2011. See note 3(c). 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, 2008 was an unrealized gain of $17.3,
which is recorded in other long-term assets (December 31, 2007 -
unrealized gain of $8.7). The increase in the fair value of the swap
agreements of $8.6 for 2008 is recorded as a reduction of interest
expense on long-term debt. Also see note 2(ii)(b) which summarizes
the impact of our mark-to-market adjustments and our fair value
hedge accounting.
Fair value hedge ineffectiveness arises when the change in the fair
values of our swap agreements, our hedged debt obligation and its
embedded derivatives, and the amortization of the related basis
adjustments, do not offset each other during a reporting period. The
fair value hedge ineffectiveness for our 2011 Notes is recorded in
interest expense on long-term debt and amounted to a loss of $0.9
for 2008. This fair value hedge ineffectiveness is driven primarily
by the difference in the credit risk used to value our hedged debt
obligation as compared to the credit risk used to value our interest
rate swaps. During the fourth quarter of 2008, we repurchased a
portion of our 2011 Notes. See note 3(d). Since the portion of the
2011 Notes that we repurchased in 2008 is considered insignificant,
our fair value hedge relationship remained effective as of
December 31, 2008 and we continued to apply fair value hedge
accounting to our 2011 Notes.
11. Shareholders' equity:
Capital Contributed
stock Warrants surplus Deficit
----------- ----------- ----------- -----------
Balance - December 31,
2006.................... $ 3,576.6 $ 8.4 $ 179.3 $(1,696.2)
Change in accounting
policy (note 2(ii)(b)).. - - - (6.4)
Shares issued............ 8.6 - - -
Warrants cancelled....... - (5.3) 5.3 -
Stock-based compensation
costs................... - - 5.1 -
Other.................... - - 0.6 -
Net loss for 2007........ - - - (13.7)
----------- ----------- ----------- -----------
Balance - December 31,
2007 ................... 3,585.2 3.1 190.3 (1,716.3)
Shares issued............ 3.3 - - -
Warrants cancelled....... - (3.1) 3.1 -
Stock-based compensation
costs................... - - 10.0 -
Other.................... - - 1.0 -
Net loss for 2008........ - - - (720.5)
----------- ----------- ----------- -----------
Balance - December 31,
2008.................... $ 3,588.5 $ - $ 204.4 $(2,436.8)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accumulated other comprehensive income, Year ended December 31
net of tax: 2007 2008
----------- -----------
Opening balance of foreign currency translation
account......................................... $ - $ 35.2
Transitional adjustment - January 1, 2007........ 26.5 -
Foreign currency translation gain................ 8.7 11.5
----------- -----------
Closing balance.................................. 35.2 46.7
Opening balance of unrealized net gain on cash
flow hedges..................................... $ - $ 20.7
Transitional adjustment - January 1, 2007........ (0.5) -
Net gain (loss) on cash flow hedges (1).......... 37.5 (53.1)
Net gain on cash flow hedges reclassified to
operations (2).................................. (16.3) (4.9)
----------- -----------
Closing balance(3)............................... 20.7 (37.3)
----------- -----------
Accumulated other comprehensive income........... $ 55.9 $ 9.4
----------- -----------
----------- -----------
(1) Net of income tax benefit of $0.6 and $0.8, respectively, for the
three months and year ended December 31, 2008 ($0.2 income tax
expense for 2007).
(2) Net of income tax expense of $1.0 and $0.2, respectively, for the
three months and year ended December 31, 2008 (no income tax for
2007).
(3) Net of income tax benefit of $0.4 as of December 31, 2008
($0.2 income tax expense as of December 31, 2007).
We expect that the majority of the losses on cash flow hedges reported in
accumulated other comprehensive income at December 31, 2008 will be
reclassified to operations during the next 12 months.
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 have provided to
various third parties. These guarantees cover various payments, including
customs and excise taxes, utility commitments and certain bank
guarantees. At December 31, 2008, these contingent liabilities amounted
to $55.4 (December 31, 2007 - $74.4).
In addition to the above guarantees, we have also provided routine
indemnifications, the terms of which 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.
Litigation:
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 liquidity.
In 2007, securities class action lawsuits were commenced against us and
our former Chief Executive and Chief Financial Officers, in the United
States District Court of the Southern District of New York by certain
individuals, on behalf of themselves and other unnamed purchasers of our
stock, claiming that they were purchasers of our stock during the period
January 27, 2005 through January 30, 2007. The plaintiffs allege
violations of United States federal securities laws and seek unspecified
damages. They allege that during the purported class period we made
statements concerning our actual and anticipated future financial results
that failed to disclose certain purportedly material adverse information
with respect to demand and inventory in our Mexican operations and our
information technology and communications divisions. In an amended
complaint, the plaintiffs have added one of our directors and Onex
Corporation as defendants. All defendants have filed motions to dismiss
the amended complaint. These motions are pending. A parallel class
proceeding has also been issued against us and our former Chief Executive
and Chief Financial Officers in the Ontario Superior Court of Justice,
but neither leave nor certification of the action has been granted by
that court. We believe that the allegations in these claims are without
merit and we intend to defend against them vigorously. However, there can
be no assurance that the outcome of the litigation will be favorable to
us or will not have a material adverse impact on our financial position
or liquidity. In addition, we may incur substantial litigation expenses
in defending these claims. We have liability insurance coverage that may
cover some of our litigation expenses, potential judgments or settlement
costs.
Income taxes:
We are subject to tax audits by local tax authorities. Tax authorities
could challenge the validity of our inter-company transactions, including
financing and transfer pricing policies which generally involve
subjective areas of taxation and a significant degree of judgment. If any
of these tax authorities are successful in challenging our inter-company
transactions, our income tax expense may be adversely affected and we
could also be subject to interest and penalty charges.
In connection with ongoing tax audits in Canada, tax authorities have
taken the position that income reported by one of our Canadian
subsidiaries in 2001 and 2002 should have been materially higher as a
result of certain inter-company transactions. The successful pursuit of
that assertion could result in that subsidiary owing significant amounts
of tax, interest and possibly penalties. We believe we have substantial
defenses to the asserted position and have adequately accrued for any
probable potential adverse tax impact. However, there can be no assurance
as to the final resolution of this claim and any resulting proceedings,
and if this claim and any ensuing proceedings are determined adversely to
us, the amounts we may be required to pay could be material.
13. Financial instruments - financial risks:
We have exposures to the following financial risks arising from financial
instruments: market risk, credit risk and liquidity risk. Market risk is
the risk that results in changes to market prices, such as foreign
exchange rates and interest rates, that could affect our operations or
the value of our financial instruments.
(a) Currency risk: Due to the nature of our international operations, we
are exposed to exchange rate fluctuations on our financial instruments
denominated in various foreign currencies. Our major currency exposures,
as of December 31, 2008, are summarized in U.S. dollar equivalents in the
following table. For purposes of this table, we have excluded items such
as pension, post-employment benefits and income taxes, in accordance with
the financial instruments standards. The local currency amounts have been
converted to U.S. dollar equivalents using the spot rates as of December
31, 2008.
Chinese Brazilian Canadian Thai Malaysian
renminbi real dollar baht ringgit
--------- --------- --------- --------- ---------
Cash and cash
equivalents........... $ 23.7 $ 1.8 $ 40.0 $ 0.7 $ 5.7
Accounts receivable.... 42.8 13.6 0.1 - 0.1
Other financial assets. 2.6 7.0 - 1.4 0.4
Accounts payable and
accrued liabilities... (23.1) (1.7) (55.7) (16.9) (18.5)
Other financial
liabilities........... (5.7) (2.6) - - -
--------- --------- --------- --------- ---------
Net financial assets
(liabilities)......... $ 40.3 $ 18.1 $(15.6) $(14.8) $(12.3)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
At December 31, 2008, a one-percentage point strengthening or weakening
of the following currencies against the U.S. dollar for our financial
instruments denominated in non-functional currencies has the following
impact:
Chinese Brazilian Canadian Thai Malaysian
renminbi real dollar baht ringgit
--------- --------- --------- --------- ---------
Increase (decrease)
1% Strengthening
Net earnings....... $ 0.4 $ 0.1 $ (0.2) $ (0.1) $ (0.1)
Other comprehensive
income............ - - 2.0 0.7 0.6
1% Weakening
Net earnings....... (0.4) (0.1) 0.2 0.1 0.1
Other comprehensive
income............ - - (1.9) (0.7) (0.6)
See note 15(a) to the 2007 annual consolidated financial statements.
(b) Interest rate risk: We have entered into interest rate swaps to hedge
the fair value of our 2011 Notes by swapping the fixed rate of interest
for a variable interest rate. We are exposed to interest rate risks due
to fluctuations in the LIBOR rate. A one-percentage point increase in the
LIBOR rate would increase interest expense by approximately $5.0
annually. See note 15(b) to the 2007 annual consolidated financial
statements.
(c) Credit risk: Credit risk refers to the risk that a counterparty may
default on its contractual obligations resulting in a financial loss to
us. To mitigate the risk of financial loss from defaults, we have entered
into foreign currency forward contracts and interest rate swap agreements
with financial institutions each of which has at December 31, 2008 a
Standard and Poor's rating of A or above. See notes 2(e), 15(c) and 18 to
the 2007 annual consolidated financial statements.
We also provide credit to our customers in the normal course of business.
The carrying amount of financial assets recorded in the financial
statements, net of any allowances or reserves for losses, represents our
estimate of maximum exposure to this credit risk. As of December 31,
2008, less than 1% of our gross accounts receivable are over 90 days past
due. Accounts receivable are net of an allowance for doubtful accounts of
$13.7 at December 31, 2008 (December 31, 2007 - $21.5).
(d) 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 and
accrued liabilities are due within 90 days. The repayment schedule of our
long-term debt obligations is included in note 7 to the 2007 annual
consolidated financial statements. Management believes that cash flow
from operations, together with cash on hand and borrowings available
under our credit facility will be sufficient to support our financial
obligations. See note 15(d) to the 2007 annual consolidated financial
statements.
14. Capital management:
Our main objectives in managing our capital resources are to ensure
liquidity and to have funds available for working capital or other
investments required to grow our business. Our capital resources consist
of cash, short-term investments, access to credit facilities, senior
subordinated notes and share capital.
We manage our capitalization levels and make adjustments, as available,
for changes in economic conditions. We have full access to a $300.0
credit facility and we can sell up to $250.0, on a committed basis, under
an accounts receivable sales program to provide short-term liquidity. Our
credit facility has restrictive covenants relating to debt incurrence and
the sale of assets. The facility also contains financial covenants that
may limit the amount of debt that can be incurred under the facility. We
closely monitor our business performance to evaluate compliance with our
covenants. Our Notes also have restrictions on financing activities. We
continue to monitor and review the most cost-effective methods for
raising capital, taking into account these restrictions and covenants.
There were no significant changes to our capital structure during the
period. We have not distributed, nor do we have any current plans to
distribute, any dividends to our shareholders.
Our strategy on capital risk management has not changed from the prior
year. Other than the restrictive covenants associated with our debt
obligations noted above, we are not subject to any contractual or
regulatorily imposed capital requirements. While some of our
international operations are subject to government restrictions on the
flow of capital into and out of their jurisdictions, these restrictions
have not had a material impact on our operations.
15. Comparative information:
We have reclassified certain prior period information to conform to the
current periods' presentation.
%SEDAR: 00010284E