<PAGE>
[CELESTICA LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2000
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 CONTAINED IN THE
COMPANY'S FORM 6-K/A FILING FOR FEBRUARY 2000.
CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS BELIEVES, ANTICIPATES,
ESTIMATES, EXPECTS, AND WORDS OF SIMILAR IMPORT, CONSTITUTE FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. CELESTICA'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, WHICH ARE DETAILED IN CELESTICA'S
ANNUAL REPORT ON FORM 20-F.
GENERAL
Celestica is a leading provider of electronics manufacturing services
to OEMs worldwide and is the third-largest EMS provider in the world with 1999
revenue of $5.3 billion. Celestica provides a wide variety of products and
services to its customers, including the high-volume manufacture of complex PCAs
and the full system assembly of final products. In addition, the Company is a
leading-edge provider of design, repair and engineering services, supply chain
management, memory and power products.
At October 18, 2000, Celestica operated 33 facilities in eleven
countries. During 1998, Celestica operated 18 facilities across North America
and Europe. The acquisition of IMS in December 1998 provided the Company with an
immediate and major presence in Asia, increasing the number of facilities to 23.
Seven facilities were added in 1999 through five acquisitions and two greenfield
establishments. In 2000, five facilities have been added through three
acquisitions and two smaller facilities were consolidated.
In 1998 and 1999, Celestica completed three equity offerings, including
its initial public offering, issuing a total of 81.9 million subordinate voting
shares for net proceeds (after tax) of $1.1 billion. The net proceeds from the
initial public offering were used to prepay a significant portion of Celestica's
debt. The net proceeds of the follow-on offerings were used to fund organic and
acquisition-related growth. In March 2000, Celestica issued 16.6 million
subordinate voting shares for net proceeds (after tax) of $740 million which
provided Celestica with additional flexibility to support its growth strategy.
In August 2000, Celestica completed an offering of 20-year Liquid Yield Option
Notes or LYONs, raising net proceeds (after tax) of $850 million. The LYONs are
recorded as an equity instrument pursuant to Canadian GAAP. See "Convertible
Debt". The Company's net debt to capitalization ratio decreased from 57% at July
1998 to negative 32% at September 30, 2000.
In December 1999, the Company completed a two-for-one stock split of
the subordinate voting and multiple voting shares by way of a stock dividend.
All historical share and per share information has been restated to reflect the
effects of this stock split on a retroactive basis.
Celestica prepares its financial statements in accordance with
accounting principles which are generally accepted in Canada with a
reconciliation to accounting principles generally accepted in the United States,
as disclosed in Note 24 to the 1999 Consolidated Financial Statements.
ACQUISITIONS
A significant portion of Celestica's growth has been generated by the
strengthening of its customer relationships and increases in the breadth of its
service offerings through facility and business acquisitions completed since the
beginning of 1997.
During 1997 and 1998, Celestica completed 12 acquisitions and
established one greenfield operation. In 1999, Celestica completed five
acquisitions and established two greenfield operations. In 2000, Celestica has
completed three acquisitions.
<PAGE>
In April 1999, Celestica acquired certain assets of Gossen-Metrawatt
GmbH's ("Gossen-Metrawatt") manufacturing operation in the Czech Republic, which
provided Celestica with a strategic presence in a low-cost geography in Central
Europe. In connection with the acquisition, Celestica entered into a long-term
supply and cooperation agreement with Gossen-Metrawatt. In September 1999,
Celestica acquired VXI Electronics, Inc. in Milwaukie, Oregon, which enhanced
the Company's power systems product and service operations in North America and
expanded its customer base. In October 1999, Celestica acquired certain assets
related to Hewlett-Packard's Healthcare Solutions Group's printed circuit board
assembly operations in Andover, Massachusetts. This acquisition enhanced the
Company's presence in the Northeast region of the United States and provided
further product diversification into the medical equipment market segment. In
December 1999, Celestica acquired EPS Wireless, Inc. in Dallas, Texas. Also in
December 1999, Celestica acquired certain assets of Fujitsu-ICL's repair
business in Dallas, Texas. These acquisitions enhanced the Company's repair
capabilities in North America and diversified its relationships with its
customers. The aggregate purchase price paid by the Company for acquisitions in
1999 was $65.1 million.
In June 1999, Celestica established greenfield operations in Brazil and
Malaysia.
In February and May, 2000, the Company acquired certain assets from the
Enterprise Systems Group and Microelectronics Division of IBM in Rochester,
Minnesota and Vimercate and Santa Palomba, Italy, respectively, for a total
purchase price of $471.6 million. The purchase price, including capital assets,
working capital and intangible assets, was financed with cash on hand. In
connection with the acquisition, the Company signed two three-year strategic
supply agreements with IBM to provide a complete range of electronics
manufacturing services. Annualized revenue from these agreements is expected to
be approximately $1.5 billion. The agreements provided for the employment by
Celestica of approximately 1,800 employees. The Rochester, Minnesota operation
provides printed circuit board assembly and test services. The Vimercate
operation provides printed circuit board assembly services and the Santa Palomba
operation provides system assembly services. The Company expects that the
acquisition of these operations will be accretive to adjusted net earnings in
2000.
In June 2000, Celestica acquired NDB Industrial Ltda., NEC
Corporation's wholly-owned manufacturing subsidiary in Brazil, for $126.8
million. The Company signed a five-year supply agreement to manufacture NEC
communications network equipment for the Brazilian market, with estimated
revenue of approximately $1.2 billion over the five-year term of the agreement.
The operations employ approximately 680 employees. This acquisition enhanced the
Company's presence in South America and provided Celestica a leadership position
with communications and Internet infrastructure customers.
In August 2000, the Company acquired Bull Electronics Inc., the North
American contract manufacturing operation of Groupe Bull, of France. The
operations, which are located in Lowell, Massachusetts, have enhanced the
Company's service offerings in the New England area. The Company will be moving
its printed circuit board assembly operation from Andover into this Lowell
facility, resulting in lower infrastructure costs.
Celestica's 20 acquisitions completed through October 18, 2000 and the
three greenfield operations had purchase prices, or initial investment costs, in
the case of greenfield operations, ranging from $2.5 million to $471.6 million,
totaling $1,186.2 million. Celestica continues to examine numerous acquisition
opportunities in order to:
- create strategic relationships with new customers and diversify
end-product programs with existing customers;
- expand its capacity in selected geographic regions to take
advantage of existing infrastructure or low cost manufacturing;
- diversify its customer base to serve a wide variety of
end-markets with increasing emphasis on the communications
sector;
- broaden its product and service offerings; and
- optimize its global positioning.
-2-
<PAGE>
Consistent with its past practices and as a normal course of business,
Celestica is engaged in ongoing discussions with respect to several possible
acquisitions of widely varying sizes, including small single facility
acquisitions, significant multiple facilities acquisitions and corporate
acquisitions. Celestica has identified several possible acquisitions that would
enhance its global operations, increase its penetration in the computer and
communication industries and establish strategic relationships with new
customers. Celestica is currently involved in discussions at an advanced stage
concerning certain of these opportunities. The possible purchase prices of the
opportunities under discussion range considerably and may be satisfied by cash,
subordinate voting shares, or a combination thereof. There can be no assurance
that any of these discussions will result in a definitive purchase agreement
and, if they do, what the terms or timing of any agreement would be. Celestica
expects to continue its current discussions and actively pursue other
acquisition opportunities.
RESULTS OF OPERATIONS
Celestica's revenue and margins can vary from period to period as a
result of the relative mix of the value-add of products and services, the level
of business volumes, seasonality of demand, component supply availability,
manufacturing effectiveness and efficiency, price competition and the timing of
acquisitions and related integration costs. There is no certainty that the
historical pace of Celestica's acquisitions will continue in the future.
Celestica's contracts with its key customers generally provide a
framework for its overall relationship with the customer. Actual production
volumes are based on purchase orders for the delivery of products. These orders
typically do not commit to firm production schedules for more than 30 to 90 days
in advance. Celestica minimizes risk relative to its inventory by usually
ordering materials and components only to the extent necessary to satisfy
existing customer orders. Celestica is largely protected from the risk of
inventory cost fluctuations as these costs are generally passed through to
customers.
Celestica's annual and quarterly operating results are primarily
affected by the level and timing of customer orders, fluctuations in materials
costs and the mix of materials and labour and manufacturing overhead costs. The
level and timing of a customer's orders will vary due to the customer's attempt
to balance its inventory, changes in its manufacturing strategy and variation in
demand for its products. Celestica's annual and quarterly operating results are
also affected by capacity utilization and other factors, including price
competition, experience in manufacturing a particular product, the degree of
automation used in the assembly process, the efficiencies achieved by Celestica
in managing inventories and capital assets, the timing of expenditures in
anticipation of increased sales, the timing of acquisitions and related
integration costs, customer product delivery requirements and shortages of
components or labour. Historically, Celestica has experienced some seasonal
variation in revenue, with revenue typically being highest in the fourth quarter
and lowest in the first quarter.
The table below sets forth certain operating data expressed as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 2000 1999 2000
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 92.7 92.9 92.9 93.0
----- ----- ----- -----
Gross profit................................ 7.3 7.1 7.1 7.0
Selling, general and administrative expenses 3.8 3.3 3.8 3.4
Amortization of intangible assets........... 1.0 1.0 1.1 1.0
Integration costs related to acquisitions... 0.2 0.2 0.2 0.2
----- ----- ----- -----
Operating income............................ 2.3 2.6 2.0 2.4
Interest expense (income), net.............. 0.2 (0.2) 0.2 (0.2)
----- ------ ----- ------
Earnings before income taxes................ 2.1 2.8 1.8 2.6
Income taxes................................ 0.7 0.7 0.6 0.7
----- ----- ----- -----
Net earnings................................ 1.4% 2.1% 1.2% 1.9%
===== ===== ===== =====
</TABLE>
-3-
<PAGE>
As a result of the significant number of acquisitions made by Celestica
over the past four years, management of Celestica uses adjusted net earnings as
a measure of operating performance on an enterprise-wide basis. Adjusted net
earnings exclude the effects of acquisition-related charges (most significantly,
amortization of intangible assets and integration costs related to acquisitions)
and the related income tax effect of these adjustments. Adjusted net earnings is
not a measure of performance under Canadian GAAP or U.S. GAAP. Adjusted net
earnings should not be considered in isolation or as a substitute for net
earnings prepared in accordance with Canadian GAAP or U.S. GAAP or as a measure
of operating performance or profitability. The following table reconciles net
earnings to adjusted net earnings:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999 2000
--------- --------- --------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Net earnings ............................... $ 19.5 $ 55.7 $ 42.2 $ 123.2
Amortization of intangible assets........... 14.1 25.6 41.6 60.1
Integration costs related to acquisitions... 1.3 4.8 5.3 10.4
Income tax effect of above.................. (2.3) (2.2) (7.1) (6.5)
-------- -------- -------- --------
Adjusted net earnings....................... $ 32.6 $ 83.9 $ 82.0 $ 187.2
======= ======= =====================
As a percentage of revenue 2.4% 3.2% 2.2% 3.0%
======== ======== ======== ========
</TABLE>
REVENUE
Revenue increased $1,243.2 million, or 91.6%, to $2,600.1 million for
the three months ended September 30, 2000 from $1,356.9 million for the same
period of 1999. Revenue for the nine months ended September 30, 2000 increased
$2,615.8 million, or 70.9%, to $6,304.3 million from $3,688.5 million for the
same period of 1999. Sequentially, revenue increased $508.2 million, or 24.3%,
for the three months ended September 30, 2000 compared to revenue of $2,091.9
million for the three months ended June 30, 2000. This increase resulted from
growth achieved both organically and through strategic acquisitions. This growth
was driven by customers in the communications and server industries. Organic
revenue growth for the three months ended September 30, 2000 was 51.8% and
represented approximately 56.5% of the total year-over-year quarterly growth.
The Company defines organic revenue as revenue which excludes business from
operations acquired in the preceding 12 months. The organic growth resulted from
growth in existing business and new program wins with existing and new customers
across all geographic segments.
Revenue from Celestica's North American operations grew $715.4 million,
or 76.9%, to $1,646.1 million for the three months ended September 30, 2000 from
$930.7 million for the same period of 1999 and increased $1,696.4 million, or
67.1%, to $4,223.9 million for the nine months ended September 30, 2000 from
$2,527.5 million for the same period of 1999. Revenue from European operations
grew $502.0 million, or 191.4%, to $764.3 million for the three months ended
September 30, 2000 from $262.3 million for the same period of 1999, and
increased $884.0 million, or 117.4%, to $1,637.1 million for the nine months
ended September 30, 2000 from $753.1 million for the same period of 1999. The
Italian facilities generated over $300.0 million of revenue in the third
quarter, representing its first full quarter of revenue contribution. Revenue
from Asian operations increased $102.0 million, or 55.7%, to $285.0 million for
the three months ended September 30, 2000 from $183.0 million for the same
period of 1999, and increased $253.1 million, or 52.7%, to $733.1 million for
the nine months ended September 30, 2000 from $480.0 million for the same period
of 1999. Inter-segment revenue for the three and nine months ended September 30,
2000 was $95.3 million and $289.8 million, respectively, compared to $19.0
million and $72.2 million for the same period of 1999.
Revenue from customers in the communications industry for the three and
nine months ended September 30, 2000 increased to 32% and 31% of revenue,
respectively, compared to 24% and 24% of revenue for the same period of 1999.
This increase is consistent with the Company's strategy to increase the portion
of its revenue from customers in the communications industry. Revenue from
customers in the server-related business for the three and nine months ended
September 30, 2000 increased to 33% and 30% of revenue, respectively, compared
to 27% and 27% of revenue for the same period of 1999. The Company expects a
further increase in server-related business for 2000 as a result of the
Rochester, Minnesota acquisition in February and the Italian acquisition in May
2000.
-4-
<PAGE>
The following customers represented more than 10% of total revenue for
each of the indicated periods:
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 2000 1999 2000
----- ------ ----- ------
<S> <C> <C> <C> <C>
Hewlett-Packard..... X X X
Sun Microsystems.... X X X X
Cisco Systems....... X X
IBM................. X X
</TABLE>
Celestica's top five customers represented in the aggregate 69.5% and
68.3% of total revenue for the three months ended September 30, 2000 and
September 30, 1999, respectively. Celestica's top five customers represented in
the aggregate 69.4% of total revenue for the nine months ended September 30,
2000 compared to 68.4% for the same period in 1999. The Company is dependent
upon continued revenue from its top five customers. There can be no guarantee
that revenue from these or any other customers will not increase or decrease as
a percentage of consolidated revenue either individually or as a group. Any
material decrease in revenue from these or other customers could have a material
adverse effect on the Company's results of operations. The Company expects a
significant increase in revenue from IBM in 2000 as a result of the acquisition
of the Rochester, Minnesota and Italian operations.
GROSS PROFIT
Gross profit increased $84.9 million, or 86.1%, for the three months
ended September 30, 2000 to $183.5 million from $98.6 million for the same
period of 1999. Gross margin decreased to 7.1% for the three months ended
September 30, 2000 from 7.3% for the same period of 1999. Gross profit increased
$177.7 million, or 67.8%, for the nine months ended September 30, 2000 to $439.9
million from $262.2 million for the same period of 1999. Gross margin decreased
to 7.0% for the nine months ended September 30, 2000 from 7.1% for the same
period of 1999. Year-over-year gross margin has decreased as a result of a
change in product mix, start-up costs for new programs, particularly in Mexico,
and lower margins for the Rochester, Minnesota operations. Sequentially, the
gross margin increased to 7.1% for the three months ended September 30, 2000
compared to 7.0% for the three months ended June 30, 2000.
For the foreseeable future, the Company's gross margin is expected to
depend primarily on product mix, production efficiencies, utilization of
manufacturing capacity, start-up activity, new product introductions, and
pricing within the electronics industry. Over time, gross margins at individual
sites and for the Company as a whole are expected to fluctuate. Changes in
product mix, additional costs associated with new product introductions and
price erosion within the electronics industry could adversely affect the
Company's gross margin. Also, the availability of raw materials, which are
subject to lead time and other constraints, could possibly limit the Company's
revenue growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG & A") increased $33.5
million, or 64.9%, for the three months ended September 30, 2000 to $85.1
million (3.3% of revenue) from $51.6 million (3.8% of revenue) for the same
period of 1999. SG & A expenses increased $75.7 million, or 53.7%, for the nine
months ended September 30, 2000 to $216.6 million (3.4% of revenue) from $140.9
million (3.8% of revenue) for the same period of 1999. The increase in expense
was a result of increased staffing levels and higher selling, marketing and
administrative costs to support sales growth, as well as the impact of expenses
incurred by operations acquired during the last quarter of 1999 and in 2000. SG
& A expenses increased $11.6 million, or 15.8%, for the three months ended
September 30, 2000 to $85.1 million (3.3% of revenue) from $73.5 million (3.5%
of revenue) for the three months ended June 30, 2000. SG & A expenses have
increased at a slower rate than the revenue increases from period to period as a
result of continued cost reduction programs and the impact of lower levels of SG
& A expenses related to the Rochester, Minnesota and Italian operations.
Research and development ("R&D") costs of $5.1 million (0.2% of
revenue) were incurred for the three months ended September 30, 2000 compared to
$4.6 million (0.3% of revenue) for the same period of 1999. R&D costs for the
nine months ended September 30, 2000 were $14.3 million (0.2% of revenue)
compared to $13.8 million (0.4% of revenue) for the same period of 1999.
-5-
<PAGE>
INTANGIBLE ASSETS AND AMORTIZATION
Amortization of intangible assets increased $11.5 million, or 81.6%,
for the three months ended September 30, 2000 to $25.6 million from $14.1
million for the same period of 1999. Amortization of intangible assets increased
$18.5 million, or 44.5%, for the nine months ended September 30, 2000 to $60.1
million from $41.6 million for the same period of 1999. This increase is
attributable to the intangible assets arising from the 1999 and 2000
acquisitions. The excess of the purchase price paid over the fair value of
tangible assets acquired in the five acquisitions completed in 1999 and the
three acquisitions completed in 2000 totaled $331.4 million and has been
allocated to goodwill and other intangible assets. The IBM acquisition generated
approximately $200 million of intangible assets, primarily intellectual
property.
At September 30, 2000, intangible assets represented 10.8% of
Celestica's total assets compared to 14.8% at June 30, 2000 and 11.5% at March
31, 2000.
INTEGRATION COSTS RELATED TO ACQUISITIONS
Integration costs related to acquisitions represent one-time costs
incurred within 12 months of the acquisition date, such as the costs of
implementing compatible information technology systems in newly acquired
operations, establishing new processes related to marketing and distribution
processes to accommodate new customers and salaries of personnel directly
involved with integration activities. Integration costs related to greenfield
operations represent costs incurred within three months of commencing
operations. All of the integration costs incurred related to either newly
acquired facilities or the start-up of greenfield sites, and not to the
Company's existing operations.
Integration costs increased $3.5 million to $4.8 million for the three
months ended September 30, 2000 from $1.3 million for the same period of 1999.
Integration costs increased $5.1 million to $10.4 million for the nine months
ended September 30, 2000 from $5.3 million for the same period of 1999. The
integration costs incurred in 2000 relate primarily to the IBM acquisition.
Integration costs vary from period to period due to the timing of
acquisitions, the establishment of greenfield operations and related integration
activities. Celestica expects to incur additional integration costs in 2000 as
it completes the integration of (i) operations acquired in 1999, (ii) the
Rochester, Minnesota operation acquired in February 2000, (iii) the Italian
operations acquired in May 2000, (iv) the Brazilian operation acquired in June
2000, and (v) the Lowell, Massachusetts operation acquired in August 2000.
Celestica will incur future additional integration costs as the Company
continues to make acquisitions and establish greenfield operations as part of
its growth strategy.
INTEREST EXPENSE (INCOME), NET
Interest income, net of interest expense, for the three and nine months
ended September 30, 2000 amounted to $5.2 million and $13.3 million,
respectively. For the three and nine months ended September 30, 1999, the
Company incurred net interest expense of $3.0 million and $8.5 million,
respectively. Cash balances were higher in the first nine months of 2000
compared to the first nine months of 1999 due to the timing and size of the
equity and debt offerings. In 2000, the Company earned interest income on its
cash balance which more than offset the interest expense incurred on the
Company's Senior Subordinated Notes. In 1999, the Company earned less interest
income to offset against the higher interest expense.
INCOME TAXES
Income tax expense for the three months ended September 30, 2000 was
$17.5 million, reflecting an effective tax rate for the period of 24%. This
income tax expense compares to $9.1 million, or an effective tax rate of 32%,
for the same period of 1999. Commencing in the second half of 1999, the
Company's effective tax rate decreased from 39% to 32%. In the second quarter of
2000, the effective tax rate decreased further to 24%. Celestica believes this
tax rate is sustainable for the foreseeable future. The decrease in the
Company's effective tax rates is attributable to the earning of additional
income in lower tax jurisdictions within Europe and Asia. These lower tax rates
include special tax holidays or similar tax incentives that Celestica has
negotiated with the respective tax authorities.
-6-
<PAGE>
Income tax expense for the nine months ended September 30, 2000 was
$42.9 million resulting in a nine-month effective tax rate of 26%. This is
compared to an income tax expense of $23.7 million for the same period of 1999,
and an effective tax rate for that period of 36%.
Celestica has recognized a net deferred tax asset at September 30, 2000
of $75.1 million, which relates to the recognition of net operating losses and
future income tax deductions available to reduce future years' income for income
tax purposes. Celestica's current projections demonstrate that it will generate
sufficient taxable income (in excess of $250 million) in the future to realize
the benefit of these deferred income tax assets in the carry-forward periods,
not exceeding 15 years.
-7-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information of Celestica for the eight quarters ended September 30, 2000.
Historically, Celestica has experienced some seasonal variation in revenue, with
revenue typically being highest in the fourth quarter and lowest in the first
quarter. This variation may be offset in part by organic growth and
acquisitions. This information has been derived from the quarterly consolidated
financial statements of Celestica which are unaudited but which, in the opinion
of management, have been prepared on the same basis as the Company's annual
Consolidated Financial Statements contained in the Company's form 6-K/A filing
made in February 2000 and include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
results for such periods. This information should be read in conjunction with
the annual Consolidated Financial Statements. The operating results for any
previous quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER DECEMBER MARCH 31, JUNE 30, SEPTEMBER
------------ --------- -------- --------- -------- --------- -------- ---------
1998 1999 1999 30, 1999 31, 1999 2000 2000 30, 2000
---- ---- ---- -------- -------- ---- ---- --------
QUARTER ENDED(1)
----------------
(U.S.$ millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................. $ 925.3 $1,081.8 $1,249.7 $1,356.9 $1,608.8 $ 1,612.3 $2,091.9 $ 2,600.1
Cost of sales............ 856.1 1,006.6 1,161.3 1,258.3 1,488.5 1,501.7 1,946.1 2,416.6
------- -------- -------- -------- -------- ------- -------- ---------
Gross profit............. 69.2 75.2 88.4 98.6 120.3 110.6 145.8 183.5
% of revenue......... 7.5% 7.0% 7.1% 7.3% 7.5% 6.9% 7.0% 7.1%
Selling, general and
administrative expenses 36.6 42.2 47.1 51.6 61.3 58.0 73.5 85.1
% of revenue......... 4.0% 3.9% 3.8% 3.8% 3.8% 3.6% 3.5% 3.3%
Amortization of intangible
assets................. 10.8 13.8 13.7 14.1 14.0 15.3 19.2 25.6
Integration costs relating
to Acquisitions........ 2.5 0.4 3.6 1.3 4.3 0.7 4.9 4.8
Other charges............ 11.9(2) - - - - - - -
------- -------- -------- -------- -------- ------- -------- ---------
Operating income......... 7.4 18.8 24.0 31.6 40.7 36.6 48.2 68.0
Interest expense (income) 3.2 3.2 2.3 3.0 2.2 (1.8) (6.3) (5.2)
------- -------- -------- -------- -------- ------- -------- ---------
Earnings before tax...... 4.2 15.6 21.7 28.6 38.5 38.4 54.5 73.2
Income taxes ............ 8.0 6.1 8.5 9.1 12.3 12.3 13.1 17.5
------- -------- -------- -------- -------- ------- -------- ---------
Net earnings (loss)...... $ (3.8) $ 9.5 $ 13.2 $ 19.5 $ 26.2 $ 26.1 $ 41.4 $ 55.7
------- -------- -------- -------- -------- ------- -------- ---------
------- -------- -------- -------- -------- ------- -------- ---------
Basic earnings (loss) per
share................... $ (0.03) $ 0.06 $ 0.08 $ 0.12 $ 0.15 $ 0.14 $ 0.20 $ 0.26
------- -------- -------- -------- -------- ------- -------- ---------
------- -------- -------- -------- -------- ------- -------- ---------
Adjusted net earnings.... $ 18.7 $ 21.9 $ 27.5 $ 32.6 $ 41.0 $ 39.5 $ 63.7 $ 83.9
------- -------- -------- -------- -------- ------- -------- ---------
------- -------- -------- -------- -------- ------- -------- ---------
</TABLE>
------
(1) For 1999 and 2000, includes the results of operations of (a)
International Manufacturing Services, Inc. ("IMS", renamed Celestica
Asia) acquired December 30, 1998, (b) the manufacturing operation of
Gossen-Metrawatt GmbH in the Czech Republic acquired in April 1999, (c)
greenfield operations established in Brazil and Malaysia in June 1999,
(d) VXI Electronics, Inc. acquired in September 1999, (e) the assets
acquired from Hewlett-Packard's Healthcare Group in October 1999, (f)
EPS Wireless, Inc. acquired in December 1999 and (g) certain assets and
repair operations acquired from Fujitsu-ICL Systems Inc. in December
1999; and for 2000, includes the results of operations of (h) certain
assets in Rochester, Minnesota and Italy acquired from IBM in February
and May, 2000, respectively, (i) NDB Industrial Ltda. acquired in June
2000 and (j) Bull Electronics Inc. acquired in August 2000.
(2) Represents a $6.8 million write-off of goodwill and $5.1 million of
other charges arising from the merger with IMS.
-8-
<PAGE>
CONVERTIBLE DEBT
In August 2000, Celestica issued LYONs with a principal amount at
maturity of $1,813.6 million, payable August 1, 2020. The Company received gross
proceeds of $862.9 million and incurred $19.4 million in underwriting
commissions, before tax of $6.9 million. No interest is payable on the LYONs;
the issue price of the LYONs represents a yield to maturity of 3.75%. The LYONs
are subordinated in right of payment to all existing and future senior
indebtedness of the Company.
The LYONs are convertible at any time at the option of the holder,
unless previously redeemed or repurchased, into 5.6748 subordinate voting shares
for each $1,000 principal amount at maturity. Holders may require the Company to
repurchase all or a portion of their LYONs on August 2, 2005, August 1, 2010 and
August 1, 2015 and the Company may redeem the LYONs at any time on or after
August 1, 2005 (and, under certain circumstances, before that date). The Company
is required to offer to repurchase the LYONs if there is a change in control or
a delisting event. Generally, the redemption or repurchase price is equal to the
accreted value of the LYONs. The Company may elect to pay the principal amount
at maturity of the LYONs or the repurchase price that is payable in certain
circumstances, in cash or subordinate voting shares or any combination thereof.
Upon the occurrence of certain tax events, the Company may elect to pay
interest on the LYONs in lieu of accruing the original issue discount.
The proceeds from the LYONs issue will be used for capital
expenditures, working capital and general corporate purposes, including future
acquisitions.
The Company has recorded the LYONs as an equity instrument pursuant to
Canadian GAAP. In accordance with Canadian GAAP, the LYONs are bifurcated into a
principal equity component (representing the present value of the notes) and an
option component (representing the value of the conversion features of the
notes). The principal equity component is accreted over the 20-year term through
periodic charges to retained earnings. Under U.S. GAAP, the LYONs would be
classified as long-term debt and, accordingly, the accrued yield on the LYONs
during any period (at 3.75% per year) would be classified as interest expense
for that period.
The accretion of the convertible debt is deducted from net earnings for
the period to determine earnings available to shareholders for the calculation
of basic earnings per share for Canadian GAAP.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, Celestica used cash of
$238.4 million from operating activities, principally to support higher working
capital requirements relating to revenue growth, which was offset by cash
generated from operations. Investing activities for the nine months included
capital expenditures of $163.9 million and $622.7 million for acquisitions. The
acquisitions included IBM's operations in Rochester, Minnesota and Italy, NEC's
operations in Brazil and Groupe Bull's operations in Lowell, Massachusetts for a
total purchase price of $622.7 million. In March 2000, Celestica completed an
equity offering and issued 16.6 million subordinate voting shares, for gross
proceeds of $757.4 million less expenses and underwriting commissions of $26.8
million. In August 2000, Celestica completed its offering of 20-year LYONs,
raising gross proceeds of $862.9 million less underwriting commissions of $19.4
million.
For the nine months ended September 30, 1999, Celestica's operating
activities utilized $32.7 million in cash. Investing activities for the nine
months ended September 30, 1999 included capital expenditures of $155.2 million
and $13.9 million for acquisitions. In March 1999, Celestica issued 18.4 million
subordinate voting shares in an equity offering for gross proceeds of $263.6
million less expenses and underwriting commissions of $12.7 million.
CAPITAL RESOURCES
Celestica has two $250 million global, unsecured, revolving credit
facilities totaling $500 million, each provided by a syndicate of lenders. The
credit facilities permit Celestica and certain designated subsidiaries to borrow
funds directly for general corporate purposes (including acquisitions) at
floating rates. The credit facilities are available until April 2003 and July
2003, respectively. Under the credit facilities: Celestica is required to
-9-
<PAGE>
maintain certain financial ratios; its ability and that of certain of its
subsidiaries to grant security interests, dispose of assets, change the nature
of its business or enter into business combinations, is restricted; and a change
in control is an event of default. No borrowings were outstanding under the
revolving credit facilities at October 18, 2000.
The only other financial covenant in effect is a debt incurrence
covenant contained in Celestica's Senior Subordinated Notes due 2006. This
covenant is based on Celestica's fixed charge coverage ratio, as defined in the
indenture governing the Senior Subordinated Notes.
Celestica was in compliance with all debt covenants as at October 18,
2000.
Earlier in the year, Celestica's public credit ratings were upgraded by
both Standard & Poor's and by Moody's Investors Service. Standard and Poor's
senior corporate credit rating for Celestica is BB+ with a stable outlook.
Moody's senior implied rating for Celestica is Ba1, also with a stable outlook.
Celestica believes that cash flow from operating activities, together
with cash on hand and borrowings available under its global, unsecured,
revolving credit facilities, will be sufficient to fund currently anticipated
working capital, planned capital spending and debt service requirements for the
next 12 months. The Company expects capital spending for 2000 to be
approximately $200 million to $250 million, including any capital expenditures
required for the IBM operations. Capital expenditures totaled $163.9 million in
the first nine months of 2000 and $43.0 million was committed at September 30,
2000. In addition, Celestica regularly reviews acquisition opportunities, and
may therefore require additional debt or equity financing.
Celestica prices the majority of its products in U.S. dollars, and the
majority of its material costs are also denominated in U.S. dollars. However, a
significant portion of its non-material costs (including payroll, facilities
costs and costs of locally sourced supplies and inventory) are primarily
denominated in Canadian dollars, British pounds sterling, European euros and
Mexican pesos. As a result, Celestica may experience transaction and translation
gains or losses because of currency fluctuations. At September 30, 2000,
Celestica had forward foreign exchange contracts covering various currencies in
an aggregate notional amount of US$535 million with expiry dates up to January
2002. The fair value of these contracts at September 30, 2000 was an unrealized
loss of US$8.3 million. Celestica's current hedging activity is designed to
reduce the variability of its foreign currency costs and involves entering into
contracts to sell U.S. dollars to purchase Canadian dollars, British pounds
sterling, Mexican pesos and Euros at future dates. In general, these contracts
extend for periods of less than 18 months. Celestica may, from time to time,
enter into additional hedging transactions to minimize its exposure to foreign
currency and interest rate risks. There can be no assurance that such hedging
transactions, if entered into, will be successful.
BACKLOG
Although Celestica obtains firm purchase orders from its customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. Celestica does not believe that the backlog of
expected product sales covered by firm purchase orders is a meaningful measure
of future sales since orders may be rescheduled or cancelled.
RECENT ACCOUNTING DEVELOPMENTS
In December 1999, the SEC issued Staff Accounting Bulletins (SAB) 101,
101A and 101B in June 2000, "Revenue Recognition", which provided guidelines in
applying generally accepted accounting principles to revenue recognition in
financial statements and must be implemented as of the fourth quarter of 2000.
The Company believes that its revenue recognition practices are consistent with
these guidelines.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. SFAS No. 137 delays the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The Company will be required to
implement SFAS No. 133 for its fiscal year ended December 31, 2001. The Company
has not assessed the impact of the adoption of SFAS No. 133 on its financial
position, results of operations or cash flows.
-10-
