(All amounts in U.S. dollars. Per share information based on diluted
shares outstanding unless noted otherwise.)
Third Quarter Summary
---------------------
- Revenue of $2,031 million, up 8% sequentially, and compared to
$2,081 million for the same period last year
- GAAP earnings of $0.14 per share compared to $0.22 per share last
year
- Adjusted net earnings of $0.24 per share compared to $0.13 per share
last year driven primarily by improved operating earnings and a lower
adjusted tax rate
- Operating margin of 3.2% compared to 2.3% last year
- Gross margin of 7.4% compared to 5.8% last year
- Inventory turnover of 9.1 turns compared to 8.3 turns last year
- Return on invested capital including intangibles of 13.9% compared to
9.1% last year
- Third quarter free cash flow of $57 million, cash balance of
$1.26 billion
- Fourth quarter revenue guidance of $1.75 billion - $2.0 billion,
adjusted net earnings per share of $0.16 - $0.24
TORONTO, Oct. 23 /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 third quarter ended September 30, 2008.
Revenue was $2,031 million compared to $2,081 million in the third quarter of 2007. Net earnings on a GAAP basis for the third quarter were $32.1 million or $0.14 per share, compared to GAAP net earnings of $51.5 million or $0.22 per share for the same period last year. The year-over-year decline in GAAP EPS was primarily impacted by lower tax recoveries and higher restructuring charges, offset partially by improved operating earnings.
Adjusted net earnings for the quarter were $54.3 million or $0.24 per share, compared to adjusted net earnings of $29.3 million or $0.13 per share for the same period last year. The term adjusted net earnings is defined as net earnings before other charges, amortization of intangible assets, integration costs related to acquisitions, option expense, option exchange costs 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 results compare with the company's guidance for the third quarter, announced on July 24, 2008, of revenue of $1.9 billion to $2.1 billion and adjusted net earnings per share of $0.17 to $0.23.
For the nine months ended September 30, 2008, revenue was $5,743 million compared to $5,860 million for the same period in 2007. Net earnings on a GAAP basis were $101.7 million or $0.44 per share compared to GAAP net loss of ($2.0) million or ($0.01) per share for the same period last year. Adjusted net earnings for the nine months ended September 30, 2008 were $128.6 million or $0.56 per share compared to adjusted net earnings of $25.1 million or $0.11 per share for the same period in 2007.
"Celestica delivered strong results in the third quarter driven predominately by our operating improvements in Mexico and Europe," said Craig Muhlhauser, President and Chief Executive Officer, Celestica. "In the third quarter, we continued delivering strong working capital performance and generated free cash flow for the sixth consecutive quarter. We ended the quarter with a healthy $1.26 billion cash balance and a strong balance sheet.
"While we expect end markets to be impacted by the current uncertain environment, Celestica is well positioned with its customers, who recognize the benefit of having partnered with a supply chain leader with global capabilities and significant financial strength."
Outlook ------- For the fourth quarter ending December 31, 2008, the company anticipates revenue to be in the range of $1.75 billion to $2.0 billion, and adjusted net earnings per share to range from $0.16 to $0.24. Third Quarter Webcast --------------------- Management will host its quarterly results conference call today at 4:30 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, restructuring costs and the write-down of goodwill and long-lived assets), acquisition-related charges (amortization of intangible assets and integration costs related to acquisitions), option expense and option exchange costs, 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 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 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 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 credit crisis; 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 third quarter ended September 30, 2008 and revenue and adjusted net earnings guidance for the fourth quarter ending December 31, 2008. Revenue and earnings guidance is reviewed by the company's board of directors. Our revenue and earnings guidance is based on various assumptions by management, 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 GAAP Adjust- Adjusted GAAP Adjust- Adjusted
September 30 ments ments
-------- ------ -------- -------- -------- --------
Revenue $2,080.6 $ - $2,080.6 $2,030.8 $ - $2,030.8
Cost of sales(1) 1,959.4 (1.0) 1,958.4 1,880.8 (0.5) 1,880.3
-------- ------ -------- -------- -------- --------
Gross profit 121.2 1.0 122.2 150.0 0.5 150.5
SG&A(1) 74.1 (0.3) 73.8 85.9 (0.6) 85.3
Amortization of
intangible
assets 5.1 (5.1) - 3.4 (3.4) -
Other charges 2.2 (2.2) - 16.4 (16.4) -
-------- ------ -------- -------- -------- --------
Operating earnings
- EBIAT 39.8 8.6 48.4 44.3 20.9 65.2
Interest expense,
net 10.0 - 10.0 9.8 - 9.8
-------- ------ -------- -------- -------- --------
Net earnings
before tax 29.8 8.6 38.4 34.5 20.9 55.4
Income tax expense
(recovery) (21.7) 30.8 9.1 2.4 (1.3) 1.1
-------- ------ -------- -------- -------- --------
Net earnings
(loss) $ 51.5 $(22.2) $ 29.3 $ 32.1 $ 22.2 $ 54.3
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
W.A. No. of
shares
(in millions)
- diluted 229.1 229.1 230.3 230.3
Earnings per
share
- diluted $ 0.22 $ 0.13 $ 0.14 $ 0.24
2007 2008
--------------------------- ----------------------------
Nine months
ended GAAP Adjust- Adjusted GAAP Adjust- Adjusted
September 30 ments ments
-------- ------ -------- -------- -------- --------
Revenue $5,859.9 $ - $5,859.9 $5,742.8 $ - $5,742.8
Cost of sales(1) 5,569.5 (2.9) 5,566.6 5,352.3 (2.3) 5,350.0
-------- ------ -------- -------- -------- --------
Gross profit 290.4 2.9 293.3 390.5 2.3 392.8
SG&A(1) 219.5 (1.4) 218.1 223.8 (2.7) 221.1
Amortization of
intangible
assets 16.2 (16.2) - 11.8 (11.8) -
Integration costs
relating to
acquisitions 0.1 (0.1) - - - -
Other charges 8.4 (8.4) - 23.3 (23.3) -
-------- ------ -------- -------- -------- --------
Operating earnings
- EBIAT 46.2 29.0 75.2 131.6 40.1 171.7
Interest expense,
net 41.7 - 41.7 28.8 - 28.8
-------- ------ -------- -------- -------- --------
Net earnings
before tax 4.5 29.0 33.5 102.8 40.1 142.9
Income tax expense 6.5 1.9 8.4 1.1 13.2 14.3
-------- ------ -------- -------- -------- --------
Net earnings
(loss) $ (2.0) $ 27.1 $ 25.1 $ 101.7 $ 26.9 $ 128.6
-------- ------ -------- -------- -------- --------
-------- ------ -------- -------- -------- --------
W.A. No. of shares
(in millions)
- diluted 228.8 229.0 230.0 230.0
Earnings (loss)
per share
- diluted $ (0.01) $ 0.11 $ 0.44 $ 0.56
(1) Non - cash option expense included in cost of sales and SG&A is added
back for adjusted net earnings
GUIDANCE SUMMARY
3Q 08 Guidance 3Q 08 Actual 4Q 08 Guidance(2)
-------------- ------------ -----------------
Revenue $1.9B - $2.1B $2.0B $1.75B - $2.0B
Adjusted net EPS $0.17 - $0.23 $0.24 $0.16 - $0.24
(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
2007 2008
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents.................... $ 1,116.7 $ 1,258.2
Accounts receivable.......................... 941.2 1,040.1
Inventories.................................. 791.9 843.3
Prepaid and other assets..................... 126.2 83.7
Income taxes recoverable..................... 19.8 34.4
Deferred income taxes........................ 3.8 4.5
------------ ------------
2,999.6 3,264.2
Property, plant and equipment.................. 466.0 462.9
Goodwill from business combinations............ 850.5 850.5
Intangible assets.............................. 35.2 23.4
Other long-term assets......................... 119.2 114.0
------------ ------------
$ 4,470.5 $ 4,715.0
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................ $ 1,029.8 $ 1,169.0
Accrued liabilities......................... 402.6 415.7
Income taxes payable........................ 14.0 20.3
Deferred income taxes....................... - 0.1
Current portion of long-term debt (note 3).. 0.2 1.2
------------ ------------
1,446.6 1,606.3
Long-term debt (note 3) 758.3 760.3
Accrued pension and post-employment benefits.. 70.4 72.1
Deferred income taxes......................... 63.3 55.7
Other long-term liabilities................... 13.7 12.2
------------ ------------
2,352.3 2,506.6
Shareholders' equity (note 10):
Capital stock............................... 3,585.2 3,588.5
Warrants.................................... 3.1 -
Contributed surplus......................... 190.3 206.3
Deficit..................................... (1,716.3) (1,614.6)
Accumulated other comprehensive income...... 55.9 28.2
------------ ------------
2,118.2 2,208.4
------------ ------------
$ 4,470.5 $ 4,715.0
------------ ------------
------------ ------------
Guarantees and contingencies (note 11)
See accompanying notes to 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)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2007 2008 2007 2008
----------- ----------- ----------- -----------
Revenue............... $ 2,080.6 $ 2,030.8 $ 5,859.9 $ 5,742.8
Cost of sales......... 1,959.4 1,880.8 5,569.5 5,352.3
----------- ----------- ----------- -----------
Gross profit.......... 121.2 150.0 290.4 390.5
Selling, general and
administrative
expenses............. 74.1 85.9 219.5 223.8
Amortization of
intangible assets.... 5.1 3.4 16.2 11.8
Integration costs
related to
acquisitions......... - - 0.1 -
Other charges
(note 4)............. 2.2 16.4 8.4 23.3
Interest on long-term
debt................. 14.6 14.1 49.8 42.3
Interest income,
net of interest
expense.............. (4.6) (4.3) (8.1) (13.5)
----------- ----------- ----------- -----------
Earnings before
income taxes......... 29.8 34.5 4.5 102.8
Income tax expense
(recovery):
Current............. (21.2) 6.4 (9.0) 5.1
Deferred............ (0.5) (4.0) 15.5 (4.0)
----------- ----------- ----------- -----------
(21.7) 2.4 6.5 1.1
----------- ----------- ----------- -----------
Net earnings (loss)
for the period....... $ 51.5 $ 32.1 $ (2.0) $ 101.7
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss)
per share............ $ 0.22 $ 0.14 $ (0.01) $ 0.44
Diluted earnings
(loss) per share..... $ 0.22 $ 0.14 $ (0.01) $ 0.44
Shares used in
computing per share
amounts:
Basic (in millions) 229.1 229.4 228.8 229.2
Diluted (in millions) 229.1 230.3 228.8 230.0
See accompanying notes to 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
(in millions of U.S. dollars)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2007 2008 2007 2008
----------- ----------- ----------- -----------
Net earnings (loss)
for the period....... $ 51.5 $ 32.1 $ (2.0) $ 101.7
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation gain
(loss)............. 6.2 (3.3) 5.1 2.8
Net gain (loss) on
derivatives
designated as cash
flow hedges........ 12.0 (11.4) 28.3 (9.0)
Net gain on
derivatives
designated as cash
flow hedges
reclassified to
operations......... (4.4) (2.5) (6.8) (21.5)
----------- ----------- ----------- -----------
Comprehensive income.. $ 65.3 $ 14.9 $ 24.6 $ 74.0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to 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)
(unaudited)
Three months ended Nine months ended
September 30 September 30
2007 2008 2007 2008
----------- ----------- ----------- -----------
Cash provided by (used
in):
Operations:
Net earnings (loss)
for the period....... $ 51.5 $ 32.1 $ (2.0) $ 101.7
Items not affecting
cash:
Depreciation and
amortization....... 35.2 27.2 97.1 81.5
Deferred income
taxes.............. (0.5) (4.0) 15.5 (4.0)
Non-cash charge for
option issuances... 1.3 1.1 4.3 5.0
Restructuring
charges............ 3.1 0.2 (1.0) 0.5
Other charges....... (0.5) - (1.1) -
Other................. 7.5 7.5 21.2 19.5
Changes in non-cash
working capital
items:
Accounts
receivable......... (23.7) (146.8) 9.6 (98.9)
Inventories......... 28.0 (31.3) 271.0 (51.4)
Prepaid and other
assets............. (23.3) 9.8 (9.0) 25.0
Income taxes
recoverable........ (5.6) (1.5) (6.7) (14.6)
Accounts payable
and accrued
liabilities........ 168.0 191.2 (205.4) 132.8
Income taxes
payable............ (23.2) 2.3 (21.2) 6.3
----------- ----------- ----------- -----------
Non-cash working
capital changes.... 120.2 23.7 38.3 (0.8)
----------- ----------- ----------- -----------
Cash provided by
operations........... 217.8 87.8 172.3 203.4
----------- ----------- ----------- -----------
Investing:
Purchase of
property, plant
and equipment...... (12.7) (30.8) (48.7) (63.2)
Proceeds from sale
of assets.......... 0.7 0.4 24.0 4.2
Other............... (0.2) (0.1) (0.1) (0.1)
----------- ----------- ----------- -----------
Cash used in
investing
activities........... (12.2) (30.5) (24.8) (59.1)
----------- ----------- ----------- -----------
Financing:
Financing costs..... - - (0.9) -
Repayment of
long-term debt..... (0.2) - (0.5) (0.2)
Issuance of share
capital............ 0.1 0.2 3.5 2.1
Other............... 0.6 (2.3) (0.2) (4.7)
----------- ----------- ----------- -----------
Cash provided by (used
in) financing
activities........... 0.5 (2.1) 1.9 (2.8)
----------- ----------- ----------- -----------
Increase in cash...... 206.1 55.2 149.4 141.5
Cash, beginning of
period............... 747.0 1,203.0 803.7 1,116.7
----------- ----------- ----------- -----------
Cash, end of
period............... $ 953.1 $ 1,258.2 $ 953.1 $ 1,258.2
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental cash flow information (note 8)
See accompanying notes to 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
September 30, 2008 and the results of operations and cash flows for the
three and nine months ended September 30, 2007 and 2008. 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 third quarter of 2008, we recorded a net inventory provision
of $3.9 (first nine months of 2008 - $11.5) to write-down the value of
our inventory to net realizable value. This net inventory provision is
included in cost of sales. There were no significant reversals of
previously recorded inventory write-downs during the quarter.
(ii) Financial instruments:
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
assets
- financial liabilities held- - financial liabilities
for-trading 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 8. Most 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 $500.0 Senior Subordinated Notes due 2011 are
recorded at fair value and are designated as fair value hedges. See note
9. 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,
which are recorded in long-term debt, are classified as financial
liabilities. See note 3. The carrying values of our Senior Subordinated
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
12.
Effective January 1, 2007, we adopted the CICA standards 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". 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.
The impact of these standards on our operations is as follows:
Three months ended Nine months ended
September 30 September 30
2007 2008 2007 2008
----------- ----------- ----------- -----------
Increase (decrease)
in interest expense
on long-term debt.... $ (2.1) $ 0.9 $ (0.7) $ 0.2
(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 13. The adoption of this standard did
not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements:
Goodwill and intangible assets:
In February 2008, the CICA issued Handbook Section 3064, "Goodwill and
intangible assets," which replaces the existing standards. This revised
standard establishes guidance for the recognition, measurement and
disclosure of goodwill and intangible assets, including internally
generated intangible assets. This standard is effective for 2009. We are
currently evaluating the impact of adopting this standard on our
consolidated financial statements.
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.
3. Long-term debt:
December 31 September 30
2007 2008
----------- -----------
Secured, revolving credit facility due
2009(a)....................................... $ - $ -
Senior Subordinated Notes due 2011 (2011
Notes)(b)(c).................................. 500.0 500.0
Senior Subordinated Notes due 2013 (2013
Notes)(b)..................................... 250.0 250.0
Embedded prepayment option at fair
value(d).................................... (6.5) (5.8)
Basis adjustments on debt obligation(d)...... 6.5 5.7
Unamortized debt issue costs................. (9.6) (8.0)
Fair value adjustment of 2011 Notes
attributable to interest rate risks(d)...... 17.9 18.4
----------- -----------
758.3 760.3
Capital lease obligations...................... 0.2 1.2
----------- -----------
758.5 761.5
Less current portion........................... 0.2 1.2
----------- -----------
$ 758.3 $ 760.3
----------- -----------
----------- -----------
(a) We have a revolving credit facility for $300.0 which matures in April
2009. There were no borrowings outstanding under this facility at
September 30, 2008. Commitment fees for the third quarter of 2008
were $0.5 ($1.4 - first nine months of 2008). 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, 2008. Based on the required financial ratios at
September 30, 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 $49.5 at September 30, 2008. There
were no borrowings outstanding under these facilities at
September 30, 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 are unsecured and are subordinated in right
of payment to all our senior debt. The 2011 and 2013 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 September 30, 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 5.8%
and 6.4%, respectively, for the third quarter and first nine months
of 2008 (8.4% - third quarter and first nine months of 2007). The
fair value of the interest rate swap agreements is disclosed in note
9(ii).
(d) The prepayment options in the 2011 and 2013 Notes qualify as embedded
derivatives which must be bifurcated for reporting under the
financial instruments standards. As of September 30, 2008, the fair
value of the embedded derivative asset is $5.8 and is recorded
against long-term debt. The decrease in the fair value of the
embedded derivative asset of $0.7 for the first nine months of 2008
is recorded as an increase in 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 $0.8 for the first nine months of 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 $0.5 for the first
nine months of 2008, which increased interest expense on long-term
debt.
4. Other charges:
Three months ended Nine months ended
September 30 September 30
2007 2008 2007 2008
----------- ----------- ----------- -----------
2001 to 2004
restructuring(a)..... $ 0.6 $ 0.5 $ 1.1 $ 1.4
2005 to 2009
restructuring(b)..... 2.1 16.3 12.1 22.3
----------- ----------- ----------- -----------
Total restructuring... 2.7 16.8 13.2 23.7
Other(c).............. (0.5) (0.4) (4.8) (0.4)
----------- ----------- ----------- -----------
$ 2.2 $ 16.4 $ 8.4 $ 23.3
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(a) 2001 to 2004 restructuring:
In 2001, we announced a restructuring plan as a result of the weak
end-markets in the enterprise 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. The
restructuring liability is recorded in accrued liabilities.
Details of the lease and other contractual obligations accrual are as
follows:
Total
accrued 2008
liability charge
----------- -----------
December 31, 2007.............................. $ 26.8 $ -
Cash payments.................................. (1.7) -
Adjustments.................................... 0.3 0.3
----------- -----------
March 31, 2008................................. 25.4 0.3
Cash payments.................................. (1.8) -
Adjustments.................................... 0.6 0.6
----------- -----------
June 30, 2008.................................. 24.2 0.9
Cash payments.................................. (1.9) -
Adjustments.................................... 0.5 0.5
----------- -----------
September 30, 2008............................. $ 22.8 $ 1.4
----------- -----------
----------- -----------
(b) 2005 to 2009 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. In the fourth quarter of 2006, we identified additional
restructuring actions. These restructuring actions included additional
downsizing of the workforce to reflect the volume reductions at certain
facilities and to reduce overhead costs, which we expected to complete in
2007.
In the fourth quarter of 2007, we identified additional restructuring
actions to drive further operational improvements throughout our
manufacturing network. These restructuring actions will reduce our
workforce and will include the closure of certain facilities. We plan to
consolidate the programs from the facilities we close into our other
facilities. As we complete these restructuring actions, our overall
utilization and operating efficiency should improve, allowing us to
service our customers through more cost-effective facilities. As we
finalize the detailed plans of these restructuring actions, we will
recognize the related charges. We estimate the additional restructuring
charges will be in the range of $50 to $75 which will be recorded
throughout 2008 and 2009. We expect to complete these actions during the
second half of 2009.
As of September 30, 2008, we have recorded termination costs, incurred
since 2005, relating to approximately 9,000 employees, primarily
operations and plant employees. Approximately 8,800 of these employees
have been terminated as of September 30, 2008. Approximately 60% of the
employee terminations have been in the Americas, 30% in Europe and 10% in
Asia. Our lease and other contractual obligations will be paid out over
the remaining lease terms through 2010. The 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
nation oblig- and liab- Non-cash 2008
costs ations other ility charge charge
-------- -------- -------- -------- -------- --------
December 31, 2007.. $ 9.0 $ 9.7 $ 0.6 $ 19.3 $ 58.7 $ -
Cash payments...... (7.1) (1.1) (0.8) (9.0) - -
Provisions......... 2.4 - 0.4 2.8 0.2 3.0
-------- -------- -------- -------- -------- --------
March 31, 2008..... 4.3 8.6 0.2 13.1 58.9 3.0
Cash payments...... (2.8) (1.0) (0.3) (4.1) - -
Provisions......... 3.2 (0.7) 0.4 2.9 0.1 3.0
-------- -------- -------- -------- -------- --------
June 30, 2008...... 4.7 6.9 0.3 11.9 59.0 6.0
Cash payments...... (9.3) (1.0) (0.1) (10.4) - -
Provisions......... 15.7 0.3 0.1 16.1 0.2 16.3
-------- -------- -------- -------- -------- --------
September 30,
2008.............. $ 11.1 $ 6.2 $ 0.3 $ 17.6 $ 59.2 $ 22.3
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
As of September 30, 2008, we have approximately $23 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.
(c) Other:
The amounts in 2007 and 2008 are primarily recoveries relating to certain
assets previously written off.
5. 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
2007 2008 2007 2008
----------- ----------- ----------- -----------
Pension plans......... $ 4.8 $ 4.5 $ 15.1 $ 14.1
Other benefit plans... 1.7 1.6 5.1 5.4
----------- ----------- ----------- -----------
Total expense......... $ 6.5 $ 6.1 $ 20.2 $ 19.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
6. 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 Nine months ended
September 30 September 30
2007 2008 2007 2008
---------- ----------- ---------- ----------
Risk-free rate.......... 4.1%-4.4% 2.8%-3.3% 4.1%-4.8% 2.3%-3.3%
Dividend yield.......... 0.0% 0.0% 0.0% 0.0%
Volatility factor of
the expected market
price of our
shares................. 35%-47% 38%-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................ $2.81 $2.92 $2.57 $3.23
Compensation expense relating to the fair value of options granted for
the three and nine months ended September 30, 2008 was $1.1 and $5.0,
respectively (three and nine months ended September 30, 2007 was $1.3 and
$4.3, respectively).
Our stock-based compensation plans are described in note 9 to the 2007
annual consolidated financial statements.
7. 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 Nine months ended
September 30 September 30
2007 2008 2007 2008
---- ---- ---- ----
Consumer................ 24% 28% 20% 25%
Enterprise
communications......... 26% 25% 29% 26%
Servers................. 18% 15% 19% 16%
Telecommunications...... 16% 14% 14% 15%
Storage................. 10% 10% 11% 10%
Industrial, aerospace
and defense............ 6% 8% 7% 8%
(ii) For the third quarter and first nine months of 2008, no customer
represented more than 10% of total revenue (third quarter of 2007
-- one customer; first nine months of 2007 -- two customers).
8. Supplemental cash flow information:
Three months ended Nine months ended
September 30 September 30
Paid during the period: 2007 2008 2007 2008
---- ---- ---- ----
Interest (a).............. $ 33.7 $ 30.2 $ 74.3 $ 64.1
Taxes (b)................. $ 6.8 $ 6.2 $ 18.7 $ 14.1
(a) This includes interest paid on the 2011 and 2013 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 September 30
Cash is comprised of the following: 2007 2008
------------ -------------
Cash (i)....................... $ 328.7 $ 296.2
Short-term investments (i)..... 788.0 962.0
------------ -------------
$ 1,116.7 $ 1,258.2
------------ -------------
------------ -------------
(i) Our current portfolio consists of certificates of deposit and
certain money market funds which hold exclusively
U.S. government securities. The majority of our cash and
short-term investments are held with financial institutions
each of which has a Standard and Poor's rating of A-1 or above.
9. Derivative financial instruments:
(i) We enter into foreign currency contracts to hedge foreign currency
risks relating to cash flow. At September 30, 2008, we had forward
exchange contracts covering various currencies in an aggregate
notional amount of $482.1. All derivative financial instruments are
recorded at fair value on our consolidated balance sheet. The fair
value of these contracts at September 30, 2008 was a net unrealized
loss of $11.5 (December 31, 2007 - net unrealized gain of $20.0). As
of September 30, 2008, $3.2 of derivative assets are recorded in
prepaid and other assets and $14.7 of derivative liabilities are
recorded in accrued liabilities relating to our hedges against
foreign currency risks. The decrease in the fair value of these
forward exchange contracts for the first nine months of 2008 is due
primarily to unrealized losses from the fluctuations in foreign
exchange rates in the third quarter of 2008 and the settlement of
certain foreign currency forwards with significant gains during the
first half of 2008. During the third quarter of 2008, we incurred
unrealized losses as a result of fluctuations in foreign exchange
rates between the time the currency forward contracts were entered
into and the valuation date at quarter 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 September 30, 2008 was an unrealized gain of $8.9,
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 $0.2 for the first nine months of 2008 is recorded as
a reduction of interest expense on long-term debt.
Fair value hedge ineffectiveness arises when the change in the fair
values of our swap agreements, 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
$0.5 for the first nine months of 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.
10. 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))........ - - - (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)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Capital Contributed
stock Warrants surplus Deficit
----------- ----------- ----------- -----------
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............... - - 12.2 -
Other................ - - 0.7 -
Net earnings for
the first nine
months of 2008...... - - - 101.7
----------- ----------- ----------- -----------
Balance -
September 30, 2008.. $ 3,588.5 $ - $ 206.3 $ (1,614.6)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Nine months
Year ended ended
Accumulated other comprehensive December 31 September 30
income, 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 2.8
------------ ------------
Closing balance........................... 35.2 38.0
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 (9.0)
Net gain on cash flow hedges
reclassified to operations(2)............ (16.3) (21.5)
------------ ------------
Closing balance(3)........................ 20.7 (9.8)
------------ ------------
Accumulated other comprehensive income.... $ 55.9 $ 28.2
------------ ------------
------------ ------------
(1) Net of income tax benefit of $0.9 and $0.2, respectively, for the
three and nine months ended September 30, 2008 ($0.2 income tax
expense for 2007).
(2) Net of income tax benefit of $0.2 and $0.8, respectively, for the
three and nine months ended September 30, 2008 (no income tax for
2007).
(3) Net of income tax benefit of $0.8 as of September 30, 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 September 30, 2008 will be
reclassified to operations during the next 12 months.
11. 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 September 30, 2008, these contingent liabilities amounted
to $68.3 (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. 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 the
expense of defending these cases, as well as 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 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.
12. Financial instruments - financial risks:
We have exposures to the following financial risks arising from financial
instruments.
(a) Currency risk: See note 15(a) to the 2007 annual consolidated
financial statements. 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 September 30, 2008, are summarized in USD equivalents in the
following table. The local currency amounts have been converted to USD
equivalents using the spot rates as of September 30, 2008.
Chinese Canadian Brazilian
Euro renminbi dollar real
--------- --------- --------- ---------
Cash and cash equivalents...... $ 6.0 $ 37.9 $ 78.6 $ 3.0
Accounts receivable............ 1.0 38.9 0.1 34.3
Other financial assets(i)...... 477.2 5.2 7,447.1 30.3
Accounts payable and accrued
liabilities................... (5.8) (20.1) (61.2) (3.7)
Other financial
liabilities(i)................ (477.7) (2.1) (7,447.1) (15.3)
--------- --------- --------- ---------
Net financial assets $ 0.7 $ 59.8 $ 17.5 $ 48.6
--------- --------- --------- ---------
--------- --------- --------- ---------
(i) This includes foreign currency denominated inter-company loans.
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 as of September 30, 2008 has the
following impact:
Chinese Canadian Brazilian
Euro renminbi dollar real
--------- --------- --------- ---------
Increase
(decrease)
1% Strengthening
Net earnings................. $ - $ 0.6 $ 0.2 $ 0.5
Other comprehensive income... (0.1) - 1.8 -
1% Weakening
Net earnings................. - (0.6) (0.2) (0.5)
Other comprehensive income... 0.1 - (1.8) -
(b) Interest rate risk: See note 15(b) to the 2007 annual consolidated
financial statements. 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 $5.0 annually.
(c) Credit risk: See notes 2(e), 15(c) and 18 to the 2007 annual
consolidated financial statements. 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 a current Standard and Poor's rating of A+ or above.
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 credit risk. As of September 30, 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
$14.3 at September 30, 2008 (December 31, 2007 - $21.5).
(d) Liquidity risk: See note 15(d) to the 2007 annual consolidated
financial statements. 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. Our foreign
currency forward contracts generally extend for periods ranging from one
to 12 months. See note 15 to the 2007 annual consolidated financial
statements.
13. 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 available amount of debt that can be incurred under the
facility. We closely monitor our business performance to evaluate
compliance with our covenants. Our 2011 and 2013 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
first nine months of 2008. We have not distributed, nor do we currently
plan to distribute, any dividends to our shareholders.
Our strategy on capital risk management has not changed since year end.
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.
%SEDAR: 00010284E