Third Quarter Summary
---------------------
- Revenue of $2,081 million, up 7% sequentially and down 13%
year-over-year
- GAAP earnings per share of $0.22 compared to a loss of ($0.19) per
share last year
- Adjusted net earnings per share of $0.13 compared to $0.18 per share a
year ago
- Operating margin of 2.3%, up 120 basis points from the second quarter
of 2007
- Inventory turns of 8.3x compared to 7.3x in the second quarter of 2007
- Free cash flow of $206 million, cash balance up $206 million
sequentially to $953 million
- Q4 revenue guidance of $2.0 - $2.15 billion, adjusted net earnings per
share of $0.10 - $0.16
(All amounts in U.S. dollars. Per share information based on diluted
shares outstanding unless noted otherwise.)
TORONTO, Oct. 25 /CNW/ - Celestica Inc. (NYSE, TSX: CLS), a global provider of innovative electronics manufacturing services (EMS), today announced financial results for the third quarter ended September 30, 2007.
Revenue was $2,081 million, down 13% from $2,392 million in the third quarter of 2006. Net earnings on a GAAP basis for the third quarter were $51.5 million or $0.22 per share, compared to GAAP net loss of ($42.1) million or ($0.19) per share for the same period last year. Included in the third quarter 2007 earnings are restructuring charges of $2.7 million compared to restructuring charges of $82.4 million in the third quarter last year.
Adjusted net earnings for the quarter were $29.3 million or $0.13 per share compared to adjusted net earnings of $40.5 million or $0.18 per share for the same period last year. The term 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 or recovery (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 guidance for the third quarter, announced on July 26, 2007, of revenue in the range of $2.0 billion to $2.2 billion and adjusted net earnings per share in the range of $0.04 to $0.12.
For the nine months ended September 30, 2007, revenue was $5,860 million compared to $6,550 million for the same period in 2006. Net loss on a GAAP basis was ($2.0) million or ($0.01) per share compared to net loss of ($89.8) million or ($0.40) per share last year. Adjusted net earnings for the first nine months of 2007 were $25.1 million or $0.11 per share compared to adjusted net earnings of $87.0 million or $0.38 per share for the same period in 2006.
"Our third quarter results reflect the significant progress we are making with respect to the turnaround plans we put in place at the beginning of this year," said Craig Muhlhauser, President and Chief Executive Officer, Celestica.
"On a sequential basis, revenue grew 7%, operating margins almost doubled, inventory turns improved to 8.3x and we generated more than $200 million in free cash flow. We are encouraged by our progress to date and believe that significant opportunity remains throughout the business. Although we continue to manage through nearer-term volatility as we complete our turnaround plans, our entire team remains confident in our ability to drive further improvements as we strive to build a solid foundation for Celestica's future growth and profitability."
Outlook
-------
For the fourth quarter ending December 31, 2007, the company expects revenue to be in the range of $2.0 billion to $2.15 billion, and adjusted net earnings per share to range from $0.10 to $0.16.
Third Quarter Results Webcasts
------------------------------
Management will host its quarterly results conference call today at 4:30 p.m. Eastern Time which 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 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 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. 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 or recovery. 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 (loss) to Canadian GAAP net earnings (loss) below.
About Celestica
---------------
Celestica is dedicated to providing innovative electronics manufacturing services that accelerate our customers' success. Through our efficient global manufacturing and supply chain network, we deliver competitive advantage to companies in the computing, communications, consumer, industrial, and aerospace and defense end markets. Our employees share a proud history of proven expertise and creativity that provides our customers with the flexibility 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. The risks and uncertainties referred to above include, but are not limited to: the effects of price competition and other business and competitive factors generally affecting the EMS industry; our dependence on a limited number of customers; the challenges of effectively managing our operations during uncertain economic conditions; variability of operating results among periods; the challenge of responding to lower-than-expected customer demand; 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 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.
RECONCILIATION OF GAAP TO
ADJUSTED NET EARNINGS
(in millions of
U.S. dollars) 2006 2007
--------------------------- ----------------------------
Three months
ended GAAP Adjust- Adjusted GAAP Adjust- Adjusted
September 30 ments ments
-------- ------ -------- -------- -------- --------
Revenue $2,392.4 $ - $2,392.4 $2,080.6 $ - $2,080.6
Cost of
sales(1) 2,258.2 (0.8) 2,257.4 1,959.4 (1.0) 1,958.4
-------- ------ -------- -------- -------- --------
Gross profit 134.2 0.8 135.0 121.2 1.0 122.2
SG&A(1) 71.0 (0.4) 70.6 74.1 (0.3) 73.8
Amortization of
intangible
assets 6.8 (6.8) - 5.1 (5.1) -
Integration costs
relating to
acquisitions 0.2 (0.2) - - - -
Other charges 81.5 (81.5) - 2.2 (2.2) -
-------- ------ -------- -------- -------- --------
Operating
earnings (loss)
- EBIAT (25.3) 89.7 64.4 39.8 8.6 48.4
Interest expense,
net 17.3 - 17.3 10.0 - 10.0
-------- ------ -------- -------- -------- --------
Net earnings
(loss) before
tax (42.6) 89.7 47.1 29.8 8.6 38.4
Income tax
expense
(recovery) (0.5) 7.1 6.6 (21.7) 30.8 9.1
-------- ------ -------- -------- -------- --------
Net earnings
(loss) $ (42.1) $ 82.6 $ 40.5 $ 51.5 $ (22.2) $ 29.3
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
W.A. No. of
shares
(in millions)
- diluted 227.2 227.9 229.1 229.1
Earnings (loss)
per share
- diluted $ (0.19) $ 0.18 $ 0.22 $ 0.13
2006 2007
--------------------------- ----------------------------
Nine months
ended GAAP Adjust- Adjusted GAAP Adjust- Adjusted
September 30 ments ments
-------- ------ -------- -------- -------- --------
Revenue $6,549.9 $ - $6,549.9 $5,859.9 $ - $5,859.9
Cost of
sales(1) 6,185.2 (2.7) 6,182.5 5,569.5 (2.9) 5,566.6
-------- ------ -------- -------- -------- --------
Gross profit 364.7 2.7 367.4 290.4 2.9 293.3
SG&A(1) 221.4 (1.6) 219.8 219.5 (1.4) 218.1
Amortization of
intangible
assets 20.5 (20.5) - 16.2 (16.2) -
Integration costs
relating to
acquisitions 0.9 (0.9) - 0.1 (0.1) -
Other charges 151.9 (151.9) - 8.4 (8.4) -
-------- ------ -------- -------- -------- --------
Operating
earnings (loss)
- EBIAT (30.0) 177.6 147.6 46.2 29.0 75.2
Interest expense,
net 46.4 - 46.4 41.7 - 41.7
-------- ------ -------- -------- -------- --------
Net earnings
(loss) before
tax (76.4) 177.6 101.2 4.5 29.0 33.5
Income tax
expense 13.4 0.8 14.2 6.5 1.9 8.4
-------- ------ -------- -------- -------- --------
Net earnings
(loss) $ (89.8) $176.8 $ 87.0 $ (2.0) $ 27.1 $ 25.1
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
W.A. No. of shares
(in millions)
- diluted 227.0 227.9 228.8 229.0
Earnings (loss)
per share
- diluted $ (0.40) $ 0.38 $ (0.01) $ 0.11
(1) Non-cash option expense included in cost of sales and SG&A is added
back for adjusted net earnings
GUIDANCE SUMMARY
3Q 07 Guidance 3Q 07 Actual 4Q 07 Guidance (2)
-------------- ------------ ------------------
Revenue $2.0B - $2.2B $2.08B $2.0B - $2.15B
Adjusted net EPS $0.04 - $0.12 $0.13 $0.10 - $0.16
(2) Guidance for the fourth 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 September 30
2006 2007
------------- -------------
Assets (unaudited)
Current assets:
Cash and short-term investments.......... $ 803.7 $ 953.1
Accounts receivable...................... 973.2 963.6
Inventories.............................. 1,197.9 926.9
Prepaid and other assets................. 111.0 129.2
Income taxes recoverable................. 31.2 37.9
Deferred income taxes.................... 3.8 3.2
------------- -------------
3,120.8 3,013.9
Capital assets............................ 567.1 513.0
Goodwill from business combinations....... 854.8 854.8
Intangible assets......................... 60.1 43.9
Other assets.............................. 83.5 83.7
------------- -------------
$ 4,686.3 $ 4,509.3
------------- -------------
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable........................ $ 1,193.6 $ 1,097.2
Accrued liabilities..................... 487.9 367.4
Income taxes payable.................... 42.7 21.5
Deferred income taxes................... 1.1 1.6
Current portion of long-term debt
(note 4)............................... 0.6 0.3
------------- -------------
1,725.9 1,488.0
Long-term debt (note 4)................... 750.2 746.7
Accrued pension and post-employment
benefits................................. 54.9 66.8
Deferred income taxes..................... 47.5 68.3
Other long-term liabilities............... 13.2 15.5
------------- -------------
2,591.7 2,385.3
Shareholders' equity (note 11):
Capital stock........................... 3,576.6 3,585.0
Warrants................................ 8.4 3.1
Contributed surplus..................... 179.3 187.9
Deficit................................. (1,696.2) (1,704.6)
Accumulated other comprehensive
income................................. 26.5 52.6
------------- -------------
2,094.6 2,124.0
------------- -------------
$ 4,686.3 $ 4,509.3
------------- -------------
------------- -------------
Guarantees and contingencies (note 12)
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2006 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars, except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
----------- ----------- ----------- -----------
Revenue............... $ 2,392.4 $ 2,080.6 $ 6,549.9 $ 5,859.9
Cost of sales......... 2,258.2 1,959.4 6,185.2 5,569.5
----------- ----------- ----------- -----------
Gross profit.......... 134.2 121.2 364.7 290.4
Selling, general and
administrative
expenses............. 71.0 74.1 221.4 219.5
Amortization of
intangible assets.... 6.8 5.1 20.5 16.2
Integration costs
related to
acquisitions......... 0.2 - 0.9 0.1
Other charges
(note 5)............. 81.5 2.2 151.9 8.4
Interest on
long-term debt....... 17.2 14.6 49.7 49.8
Interest expense
(income), net 0.1 (4.6) (3.3) (8.1)
----------- ----------- ----------- -----------
Earnings (loss) before
income taxes......... (42.6) 29.8 (76.4) 4.5
Income tax expense
(recovery):
Current............. 0.4 (21.2) 12.0 (9.0)
Deferred............ (0.9) (0.5) 1.4 15.5
----------- ----------- ----------- -----------
(0.5) (21.7) 13.4 6.5
----------- ----------- ----------- -----------
Net earnings (loss)
for the period....... $ (42.1) $ 51.5 $ (89.8) $ (2.0)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss)
per share............ $ (0.19) $ 0.22 $ (0.40) $ (0.01)
Diluted earnings (loss)
per share............ $ (0.19) $ 0.22 $ (0.40) $ (0.01)
Shares used in
computing per
share amounts:
Basic
(in millions)....... 227.2 229.1 227.0 228.8
Diluted
(in millions)...... 227.2 229.1 227.0 228.8
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2006 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions of U.S. dollars)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
----------- ----------- ----------- -----------
Net earnings (loss)
for the period....... $ (42.1) $ 51.5 $ (89.8) $ (2.0)
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation gain
(loss)............ (1.0) 6.2 5.2 5.1
Net gain on
derivatives
designated as
cash flow
hedges............ - 12.0 - 28.3
Net gain on
derivatives
designated as
cash flow hedges
reclassified to
operations........ - (4.4) - (6.8)
----------- ----------- ----------- -----------
Comprehensive
income
(loss).............. $ (43.1) $ 65.3 $ (84.6) $ 24.6
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2006 annual consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
----------- ----------- ----------- -----------
Cash provided by (used in):
Operations:
Net earnings (loss)
for the period....... $ (42.1) $ 51.5 $ (89.8) $ (2.0)
Items not affecting
cash:
Depreciation and
amortization....... 33.6 35.2 98.1 97.1
Deferred income
taxes.............. (0.9) (0.5) 1.4 15.5
Non-cash charge for
option issuances... 1.2 1.3 4.3 4.3
Restructuring charges 40.8 3.1 40.8 (1.0)
Other charges....... - (0.5) 33.2 (1.1)
Other................. 4.4 7.5 12.0 21.2
Changes in non-cash
working capital items:
Accounts receivable (44.6) (23.7) (110.4) 9.6
Inventories......... (105.9) 28.0 (287.1) 271.0
Prepaid and other
assets............. (10.4) (23.3) (4.2) (9.0)
Income taxes
recoverable........ 53.4 (5.6) 68.4 (6.7)
Accounts payable and
accrued liabilities 157.4 168.0 240.5 (205.4)
Income taxes
payable............ 1.2 (23.2) (15.7) (21.2)
----------- ----------- ----------- -----------
Non-cash working
capital changes.... 51.1 120.2 (108.5) 38.3
----------- ----------- ----------- -----------
Cash provided by
(used in)
operations........... 88.1 217.8 (8.5) 172.3
----------- ----------- ----------- -----------
Investing:
Acquisitions, net of
cash acquired
(note 3)........... - - (19.1) -
Purchase of capital
assets............. (37.4) (12.7) (161.9) (48.7)
Proceeds, net of cash
divested from sale
of operations or
assets............. (20.2) 0.7 (1.7) 24.0
Other............... 0.1 (0.2) 0.7 (0.1)
----------- ----------- ----------- -----------
Cash used in investing
activities........... (57.5) (12.2) (182.0) (24.8)
----------- ----------- ----------- -----------
Financing:
Financing costs..... - - - (0.9)
Repayment of
long-term debt..... (0.1) (0.2) (0.5) (0.5)
Issuance of share
capital............ 0.2 0.1 1.8 3.5
Other............... - 0.6 (1.0) (0.2)
----------- ----------- ----------- -----------
Cash provided by
financing activities 0.1 0.5 0.3 1.9
----------- ----------- ----------- -----------
Increase (decrease)
in cash.............. 30.7 206.1 (190.2) 149.4
Cash, beginning of
period............... 748.1 747.0 969.0 803.7
----------- ----------- ----------- -----------
Cash, end of period... $ 778.8 $ 953.1 $ 778.8 $ 953.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash is comprised of cash and short-term investments.
Supplemental cash flow information (note 9)
See accompanying notes to consolidated financial statements.
These unaudited interim consolidated financial statements
should be read in conjunction with the
2006 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 2006 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 2006 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
September 30, 2007 and the results of operations and cash flows for the
three and nine months ended September 30, 2006 and 2007. These unaudited
interim consolidated financial statements are based upon accounting
principles consistent with those used and described in the 2006 annual
consolidated financial statements, except for the following:
Change in accounting policies:
(a) Financial instruments:
Effective January 1, 2007, we adopted the new standards issued by the
CICA on financial instruments, hedges and comprehensive income. Section
1530, "Comprehensive income," Section 3855, "Financial instruments -
recognition and measurement," Section 3861, "Financial instruments -
disclosure and presentation," and Section 3865, "Hedges," were effective
for our first quarter of 2007. We were not required to restate prior
results.
On January 1, 2007, we made the following transitional adjustments to our
consolidated balance sheet to adopt the new standards:
Increase (decrease)
-------------------
Prepaid and other assets............................ $ 5.5
Other assets........................................ (10.3)
Accrued liabilities................................. 5.8
Long-term debt - embedded option and debt
obligation......................................... 1.9
Long-term debt - unamortized debt issue costs....... (11.5)
Other long-term liabilities......................... 8.1
Long-term deferred income taxes liability........... (2.2)
Opening deficit..................................... 6.4
Accumulated other comprehensive loss - cash flow
hedges............................................. 0.5
The details of the transitional adjustments are noted below.
The impact of the new standards on our operations for 2007 is as follows:
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
Decrease in interest expense on
long-term debt.................. $ 2.1 $ 0.7
The new standards require all financial assets and liabilities to be
carried at fair value in our consolidated balance sheet, except for loans
and receivables, held-to-maturity investments and non-trading financial
liabilities, which are carried at their amortized cost. We do not
currently have any financial assets designated as available-for-sale.
All derivatives, including embedded derivatives that must be separately
accounted for, are measured at fair value in our consolidated balance
sheet. The types of hedging relationships that qualify for hedge
accounting have not changed under the new standards. We will continue to
designate our hedges as either cash flow hedges or fair value hedges. In
a cash flow hedge, changes in the fair value of the hedging derivative,
to the extent effective, are recorded in other comprehensive income/loss
(OCI) until the asset or liability being hedged is recognized in
operations. Any hedge ineffectiveness is recognized in operations
immediately. For hedges that are discontinued before the end of the
original hedge term, the unrealized hedge gain/loss in OCI is amortized
to operations over the remaining term of the original hedge. If the
hedged item ceases to exist before the end of the original hedge term,
the unrealized hedge gain/loss in OCI is recognized in operations
immediately. In a fair value hedge, changes in the fair value of the
hedging derivative are offset in operations by the changes in the fair
value relating to the hedged risk of the asset, liability or cash flows
being hedged.
Derivatives may be embedded in financial instruments (the "host
instrument"). Under the new standards, embedded derivatives are treated
as separate derivatives when their economic characteristics and risks are
not closely related to those of the host instrument, the terms of the
embedded derivative are similar to those of a stand-alone derivative, and
the combined contract is not held for trading or designated at fair
value. These embedded derivatives are measured at fair value with
subsequent changes recognized in operations. We have elected
January 1, 2003 as our transition date for identifying contracts with
embedded derivatives. Currently we have prepayment options that are
embedded in our Senior Subordinated Notes which meet the criteria for
bifurcation. The impact of the prepayment options on our consolidated
financial statements is described under the transitional adjustments
below and in note 4(d).
The new standards require that we present a new "consolidated statement
of comprehensive income/loss" as part of our consolidated financial
statements. Comprehensive income/loss is comprised of net income/loss,
changes in the fair value of derivative instruments designated as cash
flow hedges and the net unrealized foreign currency translation gain/loss
arising from self-sustaining foreign operations, which was previously
classified as a separate component of shareholders' equity. Subsequent
releases from OCI to operations is dependent on when the hedged items
designated under cash flow hedges are recognized in operations, or upon
de-recognition of the net investment in a self-sustaining foreign
operation.
In determining the fair value of our financial instruments, we used a
variety of methods and assumptions that are based on market conditions
and risks existing on each reporting date. Broker quotes and standard
market conventions and techniques, such as discounted cash flow analysis
and option pricing models, are used to determine the fair value of our
financial instruments, including derivatives and hedged debt obligations.
All methods of fair value measurement result in a general approximation
of value and such value may never actually be realized.
The transitional impact of recording our derivatives as at
January 1, 2007 at fair value on our consolidated financial statements is
as follows:
(i) Cash flow hedges:
As at January 1, 2007, we recorded derivative assets of $5.8 and
derivative liabilities of $6.0 at fair value on our consolidated
balance sheet in relation to our cash flow hedges, with a
corresponding balance of $0.2 recorded in the opening accumulated
other comprehensive loss. In addition, we reclassified $0.3 of
net deferred foreign exchange losses to opening accumulated other
comprehensive loss. The ineffective portion of cash flow hedges
as of December 31, 2006 was insignificant and, therefore, did not
impact the opening deficit.
(ii) Fair value hedges:
In connection with the issuance of our $500.0 Senior Subordinated
Notes (2011 Notes) in June 2004, we entered into agreements to
swap the fixed interest rate for a variable interest rate. We
have designated the swap agreements as fair value hedges. As at
January 1, 2007, we recorded a derivative liability of $7.9 (net
of an interest accrual of $2.0) for the swap agreements in other
long-term liabilities. A corresponding fair value adjustment was
not recorded against the 2011 Notes since the prior hedge
relationship was not considered a qualified type under
Section 3865 after bifurcation of the embedded prepayment option
in accordance with Section 3855. We decreased the deferred income
tax liability by $2.6 and recorded a loss of $5.3 to opening
deficit. A new hedge relationship was redesignated on
January 1, 2007 which qualified for fair value hedge accounting in
accordance with Section 3865.
(iii) Embedded derivatives:
The prepayment options embedded in our Senior Subordinated Notes
qualify as embedded derivatives which must be bifurcated for
reporting in accordance with the new standards. As at
January 1, 2007, we bifurcated the fair value of the embedded
derivative asset of $9.3 from the Notes. As a result of recording
this asset, the amortized cost of long-term debt increased. We
also recorded a cumulative adjustment of $1.9 against the opening
deficit. Any subsequent change in the fair value of the embedded
derivatives will be recorded in operations.
(iv) Effective interest method:
We incurred underwriting commissions and expenses relating to our
Senior Subordinated Notes offerings. Previously, these costs were
deferred in other assets and amortized on a straight-line basis
over the term of the debt. The new standards require us to
reclassify these costs as a reduction of the cost of the debt and
to use the effective interest rate method to amortize the costs to
operations. As at January 1, 2007, we reclassified $10.3 of
unamortized costs from other assets to long-term debt and recorded
an adjustment to reflect the balance had we used the effective
interest rate method since inception. This resulted in a $1.2
increase in the unamortized costs, a decrease of $0.8 in opening
deficit and an increase of $0.4 in deferred income tax liability.
(b) Accounting changes:
In January 2007, we adopted CICA Handbook Section 1506, "Accounting
changes," which requires that voluntary changes in accounting policy are
made only if the changes result in financial statements that provide more
reliable and more relevant information. It also requires prior period
errors to be corrected retrospectively. The adoption of this standard did
not impact our consolidated financial statements.
Recently issued accounting pronouncements:
(i) Inventories:
In June 2007, the CICA issued Section 3031, "Inventories," which requires
inventory to be measured at the lower of cost and net realizable value.
The standard provides guidance on the types of costs that can be
capitalized and requires the reversal of previous inventory write-downs
if economic circumstances have changed to support higher inventory
values. The standard is effective for 2008. Commencing in the first
quarter of 2008, we are required to disclose the amount of inventory
recognized in cost of sales each quarter, as well as any inventory
write-down or reversals each quarter. We are currently evaluating the
impact of adopting this standard on our consolidated financial
statements.
(ii) Financial instruments and capital disclosure:
In December 2006, the CICA issued 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 CICA also issued Section 1535, "Capital Disclosures,"
which provides guidance for disclosing information about an entity's
capital and how it manages its capital. These standards are effective for
2008. We are currently evaluating the impact of adopting these standards
on our consolidated financial statements.
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. 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 2007 activity through the MSL restructuring liability are
as follows:
Lease and
other
contractual
obligations
------------
December 31, 2006.......................................... $ 1.5
Cash payments.............................................. (0.2)
------------
March 31, 2007............................................. 1.3
Cash payments.............................................. (0.2)
------------
June 30, 2007.............................................. 1.1
Cash payments.............................................. (0.3)
------------
September 30, 2007......................................... $ 0.8
------------
------------
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. Our plastics business was located primarily in Asia. During the
second quarter of 2006, we reported a loss on sale of $33.2 which we
recorded as other charges. 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 liquidity.
4. Long-term debt:
December 31 September 30
2006 2007
----------- -------------
Secured, revolving credit facility due
2009(a)....................................... $ - $ -
Senior Subordinated Notes due 2011(b).......... 500.0 500.0
Senior Subordinated Notes due 2013(c).......... 250.0 250.0
Embedded prepayment option at fair
value(d)..................................... - (5.4)
Basis adjustments on debt obligation(d)...... - 6.7
Unamortized debt issue costs(b)(c)........... - (10.1)
Fair value adjustment of 2011 Notes
attributable to interest rate risks(d)...... - 5.5
-------- --------
750.0 746.7
Capital lease obligations...................... 0.8 0.3
-------- --------
750.8 747.0
Less current portion........................... 0.6 0.3
-------- --------
$ 750.2 $ 746.7
-------- --------
-------- --------
(a) In April 2007, we renegotiated the terms of our revolving credit
facility and reduced the amount available from $600.0 to $300.0. We
also extended the maturity from June 2007 to April 2009. Under the
terms of the extension, we have pledged certain assets, including the
shares of certain North American subsidiaries, as security.
The facility includes a $25.0 swing-line facility that provides for
short-term borrowings up to a maximum of seven days. 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 were no borrowings outstanding under this
facility. Commitment fees for the third quarter of 2007 were $0.4
($1.9 - first nine months of 2007).
The facility has restrictive covenants relating to debt incurrence
and sale of assets and also contains financial covenants that require
us to maintain certain financial ratios. We were in compliance with
all covenants at September 30, 2007. Based on the required financial
ratios at September 30, 2007, we have approximately $220 of available
debt incurrence.
We also have uncommitted bank overdraft facilities available for
operating requirements which total $49.5 at September 30, 2007. 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 using
the effective interest rate method. 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 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 8.4% for the third quarter and first nine months of
2007 (8.5% - third quarter of 2006; 8.1% - first nine months of
2006).
(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 using
the effective interest rate method. 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.
(d) The prepayment options in the Notes qualify as embedded derivatives
which must be bifurcated for reporting under the new standards. As of
September 30, 2007, the fair value of the embedded derivative asset
is $5.4 and is recorded with long-term debt. The decrease in the fair
value of $0.2 for the first nine months of 2007 is recorded in
interest expense on long-term debt. As a result of bifurcating the
prepayment option from the Notes, a basis adjustment is added to the
amortized cost of the long-term debt. This basis adjustment is
amortized over the term of the debt using the effective interest rate
method. This, combined with the change in the fair value of the debt
obligation attributable to movement in the benchmark interest rates,
resulted in a loss of $4.7 for the first nine months of 2007, which
increases interest expense on long-term debt.
5. Other charges:
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
-------- -------- -------- --------
2001 to 2004
restructuring(a)............ $ 0.9 $ 0.6 $ 2.0 $ 1.1
2005 to 2007
restructuring(b)............ 81.5 2.1 117.6 12.1
-------- -------- -------- --------
Total restructuring.......... 82.4 2.7 119.6 13.2
Loss on sale of operations
(note 3).................... - - 33.2 -
Other(c).................... (0.9) (0.5) (0.9) (4.8)
-------- -------- -------- --------
Total other charges $ 81.5 $ 2.2 $ 151.9 $ 8.4
-------- -------- -------- --------
-------- -------- -------- --------
(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 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 2007 activity are as follows:
Lease
and
other Facility
Employee contr- exit
termi- actual costs Total
nation obliga- and accrued Non-cash 2007
costs tions other liability charge charge
--------- --------- --------- --------- --------- ---------
December 31,
2006....... $ 0.4 $ 29.3 $ 1.0 $ 30.7 $328.7 $ -
Cash
payments... (0.2) (2.7) - (2.9) - -
Adjustments. (0.2) 0.8 (1.0) (0.4) - (0.4)
------- ------- ------- ------- ------- -------
March 31,
2007....... - 27.4 - 27.4 328.7 (0.4)
Cash
payments... - (1.9) - (1.9) - -
Adjustments. - 0.9 - 0.9 - 0.9
------- ------- ------- ------- ------- -------
June 30,
2007....... - 26.4 - 26.4 328.7 0.5
Cash
payments... - (1.9) - (1.9) - -
Adjustments. - 0.6 - 0.6 - 0.6
------- ------- ------- ------- ------- -------
September
30, 2007... $ - $ 25.1 $ - $ 25.1 $328.7 $ 1.1
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
(b) 2005 to 2007 restructuring:
In January 2005, we announced plans to further improve capacity
utilization and accelerate margin improvements. These restructuring
actions included facility closures and a reduction in workforce,
primarily targeting our higher-cost geographies where end-market demand
had not recovered to the levels required to achieve sustainable
profitability. We expected to complete these restructuring actions by the
end of 2006. However, in light of our operating results in 2006 and in
the course of preparing our 2007 plan in the fourth quarter of 2006, we
identified additional restructuring actions to improve our profitability.
These restructuring actions include additional downsizing of workforces
to reflect the volume reductions at certain facilities and reducing
overhead costs. We now expect to complete most of these restructuring
actions by the end of the first half of 2008.
As of September 30, 2007, we have recorded termination costs related to
approximately 7,200 employees, primarily operations and plant employees.
Approximately 7,000 of these employees have been terminated as of
September 30, 2007 with the balance of the terminations to occur by the
end of the first half of 2008. Approximately 65% of employee terminations
are in the Americas and 35% in Europe.
Details of the 2007 activity are as follows:
Lease
and
other Facility
Employee contr- exit
termi- actual costs Total
nation obliga- and accrued Non-cash 2007
costs tions other liability charge charge
--------- --------- --------- --------- --------- ---------
December 31,.
2006........ $52.5 $12.1 $ 0.5 $65.1 $53.6 $ -
Cash
payments.... (28.3) (2.3) (1.7) (32.3) - -
Provisions... 6.1 0.7 1.6 8.4 - 8.4
------ ------ ------ ------ ------ ------
March 31,
2007........ 30.3 10.5 0.4 41.2 53.6 8.4
Cash
payments.... (14.4) (0.8) (0.8) (16.0) - -
Provisions... 4.8 0.1 0.8 5.7 (4.1) 1.6
------ ------ ------ ------ ------ ------
June 30,
2007........ 20.7 9.8 0.4 30.9 49.5 10.0
Cash
payments.... (10.3) (0.5) (0.5) (11.3) - -
Provisions... (1.9) 0.5 0.4 (1.0) 3.1 2.1
------ ------ ------ ------ ------ ------
September 30,
2007........ $ 8.5 $ 9.8 $ 0.3 $18.6 $52.6 $12.1
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Cash outlays are and will be funded from cash on hand. The restructuring
liability is recorded in accrued liabilities.
In September 2006, we sold one of our production facilities in Europe to
a third party as part of our restructuring program. 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 liquidity. The final post-closing cash was received
in the first quarter of 2007. In the first quarter of 2007, we also
repaid $4.0 to the purchaser which we were previously holding in escrow.
Restructuring summary:
We recorded restructuring charges of $13.2 in the first nine months of
2007. We expect to incur restructuring charges of approximately $25 to
complete our previously announced restructuring actions. These charges
will be recorded during the fourth quarter of 2007 and in the first half
of 2008.
As of September 30, 2007, we have approximately $20 in assets that are
available-for-sale, primarily land and buildings as a result of the
restructuring actions we implemented. We have programs underway to sell
these assets.
(c) In 2004, we recorded a write-down in other charges to reduce the net
realizable value of certain assets for one customer which ceased
operations in 2005. The 2007 amounts are primarily due to additional
recoveries realized.
6. Pension and non-pension post-employment benefit plans:
We have recorded the following pension expense:
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
----- ----- ----- -----
Pension plans.................. $ 7.6 $ 4.8 $25.4 $15.1
Other benefit plans............ 2.0 1.7 6.5 5.1
----- ----- ----- -----
Total expense.................. $ 9.6 $ 6.5 $31.9 $20.2
----- ----- ----- -----
----- ----- ----- -----
7. Stock-based compensation and other stock-based payments:
We have granted stock options and performance 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 Nine months ended
September 30 September 30
2006 2007 2006 2007
----- ----- ----- -----
Risk-free rate.. 4.7% - 4.9% 4.1% - 4.4% 4.5% - 5.0% 4.1% - 4.8%
Dividend yield.. 0.0% 0.0% 0.0% 0.0%
Volatility
factor of the
expected market
price of our
shares......... 35% 35% - 47% 35% - 65% 35% - 52%
Expected option
life (in years) 3.5 4.0 - 5.5 3.5 - 5.5 4.0 - 5.5
Weighted average
fair value of
options granted $2.97 $2.81 $5.58 $2.57
Compensation expense for the three and nine months ended September 30,
2007 was $1.3 and $4.3, respectively (three and nine months ended
September 30, 2006 was $1.2 and $4.3, 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 Nine months ended
September 30 September 30
2006 2007 2006 2007
------- ------- ------- -------
Net earnings (loss)
as reported......... $(42.1) $ 51.5 $(89.8) $ (2.0)
Deduct: Stock-based
compensation (fair
value).............. (1.2) - (3.9) -
------- ------- ------- -------
Pro forma net
earnings (loss)..... $(43.3) $ 51.5 $(93.7) $ (2.0)
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per
share:
Basic - as reported $(0.19) $ 0.22 $(0.40) $(0.01)
Basic - pro forma.. $(0.19) $ 0.22 $(0.41) $(0.01)
Diluted - as
reported.......... $(0.19) $ 0.22 $(0.40) $(0.01)
Diluted - pro forma $(0.19) $ 0.22 $(0.41) $(0.01)
All of the 2002 option grants were fully vested by the end of 2006 and,
therefore, do not impact our 2007 pro forma disclosure.
Our stock plans are described in note 9 to the 2006 annual consolidated
financial statements.
8. Segment and geographic 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, geographic areas 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.
In 2006, we had three reportable operating segments: Asia, Americas and
Europe. Beginning in the first quarter of 2007, we realigned our
organizational structure to more effectively manage our operations. We
evaluate financial information for purposes of making decisions and
assessing financial performance based on the types of services we offer.
Our operating segments include electronics manufacturing and global
services, which we combined for reporting purposes because our global
services segment does not meet the qualitative threshold for separate
segment disclosure. 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 Nine months ended
September 30 September 30
2006 2007 2006 2007
------- ------- ------- ------
Enterprise
communications...... 26% 26% 28% 29%
Telecommunications... 19% 16% 19% 14%
Servers.............. 15% 18% 16% 19%
Consumer............. 21% 24% 17% 20%
Storage.............. 10% 10% 10% 11%
Industrial,
aerospace and
defense............. 9% 6% 10% 7%
(ii) The number of customers that individually exceeded 10% of total
revenue for the indicated periods are as follows:
Three months ended Nine months ended
September 30 September 30
2006 2007 2006 2007
------- ------- ------- ------
Number of customers.. - 1 1 2
9. Supplemental cash flow information:
Three months ended Nine months ended
September 30 September 30
Paid (recovered)
during the period: 2006 2007 2006 2007
------- ------- ------- ------
Taxes................ $(52.2) $ 6.8 $(41.2) $ 18.7
Interest (a)......... $ 32.6 $ 33.7 $ 66.3 $ 74.3
(a) 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.
10. Derivative financial instruments:
We enter into foreign currency contracts to hedge foreign currency risks
relating to cash flow. At September 30, 2007, we had forward exchange
contracts covering various currencies in an aggregate notional amount of
$434.9. All derivative financial instruments are recorded at fair value
on our consolidated balance sheet. The fair value of these contracts at
September 30, 2007 was a net unrealized gain of $21.1. As of September
30, 2007, $21.5 of derivative assets are recorded in prepaid and other
assets, $0.4 of derivative assets are recorded in other assets and
$0.8 of derivative liabilities are recorded in accrued liabilities
relating to our hedges against foreign currency risks.
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 September 30, 2007
was an unrealized loss of $2.3 which is recorded in other long-term
liabilities (December 31, 2006 - unrealized loss of $7.9). The change in
the fair value of the swap agreements of $5.6 for the first nine months
of 2007 is recorded in interest expense on long-term debt.
11. Shareholders' equity:
Contri-
Capital buted
stock Warrants surplus Deficit
---------- ---------- ---------- ----------
Balance - December 31,
2006.................... $ 3,576.6 $ 8.4 $ 179.3 $(1,696.2)
Change in accounting
policy (note 2)......... - - - (6.4)
Shares issued............ 8.4 - - -
Warrants cancelled....... - (5.3) 5.3 -
Stock-based costs........ - - 2.9 -
Other.................... - - 0.4 -
Net loss for the first
nine months of 2007..... - - - (2.0)
---------- ---------- ---------- ----------
Balance - September 30,
2007.................... $ 3,585.0 $ 3.1 $ 187.9 $(1,704.6)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Contri-
Capital buted
stock Warrants surplus Deficit
---------- ---------- ---------- ----------
Balance - December 31,
2005.................... $ 3,562.3 $ 8.4 $ 169.9 $(1,545.6)
Shares issued............ 7.2 - - -
Stock-based costs........ - - 9.1 -
Other.................... - - 0.5 -
Net loss for the first
nine months of 2006..... - - - (89.8)
---------- ---------- ---------- ----------
Balance - September 30,
2006.................... $ 3,569.5 $ 8.4 $ 179.5 $(1,635.4)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Three months Nine months
ended ended
Accumulated other comprehensive income, September 30 September 30
net of tax: 2007 2007
------------ ------------
Opening balance of foreign currency
translation account................... $ 25.4 $ -
Transitional adjustment - January 1,
2007.................................. - 26.5
Foreign currency translation gain...... 6.2 5.1
------------ ------------
Closing balance........................ $ 31.6 $ 31.6
Opening balance of unrealized net gain
on cash flow hedges................... $ 13.4 $ -
Transitional adjustment - January 1,
2007.................................. - (0.5)
Net gain on cash flow hedges(1)........ 12.0 28.3
Net gain on cash flow hedges
reclassified to operations(2)......... (4.4) (6.8)
------------ ------------
Closing balance(3)..................... $ 21.0 $ 21.0
------------ ------------
Accumulated other comprehensive
income................................ $ 52.6 $ 52.6
------------ ------------
------------ ------------
(1) Net of income tax benefit of Nil and $0.1, respectively, for the
three and nine months ended September 30, 2007.
(2) Net of income tax expense of $0.1 for the three and nine months ended
September 30, 2007.
(3) No income tax expense as of September 30, 2007.
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 September 30, 2007, these contingent liabilities amounted
to $74.0 (December 31, 2006 - $84.9).
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.
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 litigations were commenced against us,
our former Chief Executive Officer and our former Chief Financial
Officer, in the United States District Court of the Southern District of
New York by individuals who claim they were purchasers of our stock, on
behalf of themselves and other 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 adverse information with
respect to demand and inventory in our Mexican operations and our
information technology and communications divisions. A parallel class
proceeding has recently been issued against us, our former Chief
Executive Officer and our former Chief Financial Officer in the Ontario
Superior Court of Justice, although the claim has not yet been served
against us and neither leave nor certification of the action has been
granted by the 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 the expense of defending these
cases, as well as potential judgments or settlement costs.
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 tax audits in the United States, taxing authorities
asserted that our United States subsidiaries owed significant amounts of
tax, interest and penalties arising from inter-company transactions. A
significant portion of these asserted deficiencies were resolved in our
favour in the fourth quarter of 2006. As a result, we recorded a
reduction to our current income tax liabilities in 2006. In the third
quarter of 2007, we resolved the remaining deficiencies in our favour
which resulted in a reduction to current income tax liabilities for the
quarter. The tax audit resolution also resulted in a small reduction in
the amount of our U.S. tax loss carryforwards.
%SEDAR: 00010284E