Celestica Announces Second Quarter 2016 Financial Results

4. SOLAR INVESTMENTS

In March 2015, we entered into a supply agreement with an Asia-based solar cell supplier (Solar Supplier), that includes a commitment by us to provide cash advances of up to $31.0 to help secure our solar cell supply. The advances were used by the Solar Supplier to help finance the expansion of its manufacturing operations into Malaysia. This supply agreement has an initial term of three and a half years, and is subject to automatic renewal for successive one-year terms unless either party provides a notice of intent not to renew. All such cash advances are scheduled to be repaid by this supplier through quarterly repayment installments, which commenced in the fourth quarter of 2015 and are to continue through the end of 2017. As of June 30, 2016, we have advanced a total of $29.5 under this agreement. We received cash repayments of $2.0 from the supplier in the second quarter of 2016 (first half of 2016 -- $5.0). As of June 30, 2016, $21.5 remains recoverable from this supplier, which we have recorded as other current assets of $17.0 and other non-current assets of $4.5 on our consolidated balance sheet. We received an additional cash repayment of $2.0 from this supplier in July 2016.

In April 2015, we entered into a five-year agreement, pursuant to which we leased $19.3 of manufacturing equipment to be used in our solar operations in Asia. Our quarterly lease payments commenced in January 2016, pursuant to which we made a scheduled repayment of $1.1 in the second quarter of 2016 (first half of 2016 -- $2.4). As of June 30, 2016, our related lease obligations totaled $17.3, consisting of short-term obligations of $4.1 and long-term obligations of $13.2. This lease qualifies as a finance lease under IFRS. See note 7.

5. ACCOUNTS RECEIVABLE

We have an accounts receivable sales agreement to sell up to $250.0 at any one time in accounts receivable on an uncommitted basis (subject to pre-determined limits by customer) to two third-party banks. Each of these banks had a Standard and Poor's long-term rating of BBB+ or above and a short-term rating of A-2 or above at June 30, 2016. The term of this agreement has been annually extended in recent years for additional one-year periods (and is currently extendable to November 2017 under specified circumstances), but may be terminated earlier as provided in the agreement. At June 30, 2016, $60.0 of accounts receivable were sold under this facility (December 31, 2015 -- $50.0) and de-recognized from our accounts receivable balance. The accounts receivable sold are removed from our consolidated balance sheet and the proceeds are reflected as cash provided by operating activities in our consolidated statement of cash flows. Upon sale, we assign the rights to the accounts receivable to the banks. We continue to collect cash from our customers and remit the cash to the banks when collected. We pay interest and fees which we record in finance costs in our consolidated statement of operations.

6. INVENTORIES

We record our inventory provisions and valuation recoveries in cost of sales. We record inventory provisions to reflect write-downs in the value of our inventory to net realizable value, and valuation recoveries primarily to reflect realized gains on the disposition of inventory previously written down to net realizable value. We recorded net inventory recoveries of $0.4 for the second quarter of 2016 and net inventory provisions of $0.2 for the first half of 2016 (second quarter and first half of 2015 -- net inventory provisions of $2.5 and $4.2, respectively). We regularly review our estimates and assumptions used to value our inventory through analysis of historical performance. During the second quarter of 2016, our net inventory recoveries of $0.4 were comprised of a $2.5 provision reversal to reflect improved recovery of certain inventory, offset in part by new provisions of $2.1 for aged inventory.

7. CREDIT FACILITIES AND LONG-TERM DEBT

In order to fund a portion of our share repurchases under the $350.0 substantial issuer bid (the SIB) completed in June 2015, we amended our $300.0 revolving credit facility in May 2015 to add a non-revolving term loan component (Term Loan) in the amount of $250.0 (in addition to the previous revolving credit limit of $300.0), and to extend the maturity of the entire facility from October 2018 to May 2020. We funded the SIB using the proceeds of the Term Loan, $25.0 drawn on the revolving portion of the credit facility (Revolving Facility), and $75.0 of available cash on hand. We also borrowed an additional $40.0 under the Revolving Facility in the first quarter of 2016 to fund the repurchase of shares and to pre-fund a program share repurchase (PSR) under our current normal course issuer bid (the 2016 NCIB), which PSR was completed in May 2016. During the second quarter of 2016, we made a scheduled quarterly principal repayment of $6.25 (first half of 2016 -- $12.5) under the Term Loan, and a repayment of $10.0 under the Revolving Facility. At June 30, 2016, $280.0 was outstanding under the credit facility, comprised of $55.0 under the Revolving Facility and $225.0 under the Term Loan (December 31, 2015 -- $262.5 outstanding, comprised of $25.0 under the Revolving Facility and $237.5 under the Term Loan).

The Revolving Facility has an accordion feature that allows us to increase the $300.0 limit by an additional $150.0 on an uncommitted basis upon satisfaction of certain terms and conditions. The Revolving Facility also includes a $25.0 swing line, subject to the overall revolving credit limit, that provides for short-term borrowings up to a maximum of seven days. The Revolving Facility permits us and certain designated subsidiaries to borrow funds for general corporate purposes, including acquisitions. Borrowings under the Revolving Facility bear interest for the period of the draw at various base rates selected by us consisting of LIBOR, Prime, Base Rate Canada, and Base Rate (each as defined in the amended credit agreement), plus a margin. The margin for borrowings under the Revolving Facility ranges from 0.6% to 1.4% (except in the case of the LIBOR base rate, in which case, the margin ranges from 1.6% to 2.4%), based on a specified financial ratio based on indebtedness. The Term Loan bears interest at LIBOR plus a margin ranging from 2.0% to 3.0% based on the same financial ratio.

We are required to comply with certain restrictive covenants under the credit facility, including those relating to the incurrence of senior ranking indebtedness, the sale of assets, a change of control, and certain financial covenants related to indebtedness and interest coverage. Certain of our assets are pledged as security for borrowings under this facility. If an event of default occurs and is continuing, the administrative agent may declare all advances on the facility to be immediately due and payable and may cancel the lenders' commitments to make further advances thereunder.

The following table sets forth our borrowings under the Revolving Facility, Term Loan, and finance lease obligations as of the period-ends indicated:

                                                                            
                                                  December 31     June 30   
                                                     2015          2016     
                                                 ------------- -------------
Borrowings under the Revolving Facility           $      25.0    $            55.0  
Term  Loan                                                                                              237.5                  225.0  
                                                                                                  -------------  -------------
Total  borrowings  under  credit  facility                                    262.5                  280.0  
Less:  unamortized  debt  issuance  costs                                        (1.8)                  (1.5)
Finance  lease  obligations  (note  4)                                              19.0                    17.3  
                                                                                                  -------------  -------------
                                                                                                    $          279.7      $          295.8  
                                                                                                  =============  =============
Comprised  of:                                                                                                                              
Current  portion  of  borrowings  under  credit                                                                    
  facility  and  finance  lease  obligations                      $            29.1      $            84.1  
Long-term  portion  of  borrowings  under  credit                                                                
  facility  and  finance  lease  obligations                                  250.6                  211.7  
                                                                                                  -------------  -------------
                                                                                                    $          279.7      $          295.8  
                                                                                                  =============  =============
                                                                                                                                                        
 

We incurred debt issuance costs of $2.1 in 2015 in connection with the amendment of the credit facility, which we recorded as an offset against the proceeds from the Term Loan. Such costs are deferred and amortized over the term of the Term Loan using the effective interest rate method.

The $55.0 outstanding under the Revolving Facility is due upon maturity of the facility in May 2020. We are permitted to repay amounts prior to maturity. We currently intend to repay this $55.0 within the next twelve months. Prepayments are also required under certain circumstances.

The Term Loan requires quarterly principal repayments until its maturity. At June 30, 2016, the remaining mandatory principal repayments of the Term Loan were as follows:

 
                                                                                                                                                        
Years  ending  December  31                                                                                      Amount      
----------------------------------------------------------------------------
2016                                                                                                                          $            12.5
2017                                                                                                                                        25.0
2018                                                                                                                                        25.0
2019                                                                                                                                        25.0
2020  (to  maturity  in  May  2020)                                                                                  137.5
                                                                                                                                ------------
                                                                                                                                  $          225.0
                                                                                                                                ============
                                                                                                                                                        
 

We are permitted to make voluntary prepayments of the Term Loan, subject to certain terms and conditions. Prepayments on the Term Loan are also required under certain circumstances. Repaid amounts on the Term Loan may not be re-borrowed.

At June 30, 2016, we were in compliance with all restrictive and financial covenants under the credit facility. Commitment fees paid in the second quarter and first half of 2016 were $0.3 and $0.6, respectively (second quarter and first half of 2015 -- $0.3 and $0.6, respectively). At June 30, 2016, we had $29.1 (December 31, 2015 -- $27.2) outstanding in letters of credit under this facility.

We also have a total of $70.0 of uncommitted bank overdraft facilities available for intraday and overnight operating requirements. There were no amounts outstanding under these overdraft facilities at June 30, 2016 or December 31, 2015.

The amounts we borrow and repay under these facilities can vary significantly from month-to-month depending upon our working capital and other cash requirements.

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