Quarter Two 2018 CEVA Logistics AG - www.cevalogistics.com
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CEVA Logistics AG Quarter Two 2018 www.cevalogistics.com
CEVA Logistics AG Quarter Two, 2018 Interim Financial Statements Table of Contents Unaudited Condensed Consolidated Three Months Income Statement ....................................................................................... 2 Unaudited Condensed Consolidated Six Months Income Statement ............................................................................................ 3 Unaudited Condensed Consolidated Statement of Comprehensive Income ................................................................................. 4 Unaudited Condensed Consolidated Balance Sheet ...................................................................................................................... 5 Unaudited Condensed Consolidated Statement of Cash Flows ..................................................................................................... 6 Unaudited Condensed Consolidated Statement of Changes in Equity .......................................................................................... 7 Notes to the Unaudited Condensed Consolidated Interim Financial Statements ......................................................................... 8 Cautionary statement: This document contains forward looking statements which are subject to risk factors associated with, amongst others, the economic and business circumstances occurring from time to time in the countries and markets in which the Group (as defined below) operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables, which could cause actual results to differ materially from those currently anticipated. 1
Unaudited Condensed Consolidated Three Months Income Statement THREE MONTHS ENDED 30 JUNE THREE MONTHS ENDED 30 JUNE² $ millions Note 2018 2017 Before Specific Before Specific specific items items and specific items items and and SBC SBC1 Total and SBC SBC1 Total Revenue 6 1,848 - 1,848 1,721 - 1,721 Work contracted out (923) - (923) (858) - (858) Personnel expenses (570) (12) (582) (520) (9) (529) Other operating expenses (289) (18) (307) (284) 6 (278) Operating expenses excluding depreciation, amortization and impairment (1,782) (30) (1,812) (1,662) (3) (1,665) EBITDA 6 66 (30) 36 59 (3) 56 Depreciation (14) - (14) (13) - (13) Amortization and impairment (17) - (17) (14) - (14) Operating income 35 (30) 5 32 (3) 29 Finance income 2 - 2 2 - 2 Finance expense (53) (23) (76) (57) (12) (69) Foreign exchange gain/(loss) 28 - 28 (13) - (13) Net finance income / (expense) (23) (23) (46) (68) (12) (80) Net result from joint ventures 4 - 4 5 - 5 Profit/(Loss) before income taxes 16 (53) (37) (31) (15) (46) Income tax income/(expense) 8 (11) 3 (8) 1 - 1 Profit/(Loss) for the period 5 (50) (45) (30) (15) (45) Attributable to: Non-controlling interests - - Equity holders of the Company (45) (45) Earnings per share (in US$) 10 Basic & Diluted (1.15) (3.91) Basic - adjusted 0.13 (2.61) Diluted - adjusted 0.13 (2.61) ¹ Refer to Note 7 for details on specific items and non-cash share based compensation costs (SBC) 2 Accounting for a capital reorganization relating to the legal merger of CEVA Logistics AG and CEVA Holdings LLC has been applied The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 2
Unaudited Condensed Consolidated Six Months Income Statement SIX MONTHS ENDED 30 JUNE SIX MONTHS ENDED 30 JUNE² $ millions Note 2018 2017 Before Specific Before Specific specific items items and specific items items and and SBC SBC1 Total and SBC SBC1 Total Revenue 6 3,638 - 3,638 3,317 - 3,317 Work contracted out (1,798) - (1,798) (1,627) - (1,627) Personnel expenses (1,119) (16) (1,135) (1,020) (16) (1,036) Other operating expenses (602) (21) (623) (566) 2 (564) Operating expenses excluding depreciation, amortization and impairment (3,519) (37) (3,556) (3,213) (14) (3,227) EBITDA 6 119 (37) 82 104 (14) 90 Depreciation (33) - (33) (25) - (25) Amortization and impairment (34) - (34) (28) - (28) Operating income 52 (37) 15 51 (14) 37 Finance income 3 - 3 3 - 3 Finance expense (112) (23) (135) (104) (12) (116) Foreign exchange gain/(loss) 10 - 10 (20) - (20) Net finance income / (expense) (99) (23) (122) (121) (12) (133) Net result from joint ventures 9 - 9 9 - 9 Profit/(Loss) before income taxes (38) (60) (98) (61) (26) (87) Income tax income/(expense) 8 (17) 3 (14) (15) - (15) Profit/(Loss) for the period (55) (57) (112) (76) (26) (102) Attributable to: Non-controlling interests - - Equity holders of the Company (112) (102) Earnings per share (in US$) 10 Basic & Diluted (4.42) (8.87) Basic & Diluted - adjusted (2.17) (6.61) ¹ Refer to Note 7 for details on specific items and non-cash share based compensation costs (SBC) 2 Accounting for a capital reorganization relating to the legal merger of CEVA Logistics AG and CEVA Holdings LLC has been applied The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 3
Unaudited Condensed Consolidated Statement of Comprehensive Income THREE MONTHS ENDED 30 JUNE THREE MONTHS ENDED 30 JUNE $ millions 2018 2017 Specific Specific Before specific items and Before specific items and items and SBC SBC1 Total items and SBC SBC1 Total Profit/(Loss) for the period 5 (50) (45) (30) (15) (45) Items that will not be reclassified to Profit and Loss: Remeasurements of retirement benefit obligations - - - - - - Items that may be reclassified subsequently to Profit and Loss: Tax effects of items in OCI - - - - - - Currency translation adjustment (55) - (55) (2) - (2) Total comprehensive income/(loss) for the period, net of income tax (50) (50) (100) (32) (15) (47) Attributable to: Non-controlling interests - - Equity holders of the Company (100) (47) Total comprehensive profit/(loss) for the period (100) (47) SIX MONTHS ENDED 30 JUNE SIX MONTHS ENDED 30 JUNE $ millions 2018 2017 Specific Specific Before specific items and Before specific items and items and SBC SBC1 Total items and SBC SBC1 Total Profit/(Loss) for the period (55) (57) (112) (76) (26) (102) Items that will not be reclassified to Profit and Loss: Remeasurements of retirement benefit obligations - - - - - - Items that may be reclassified subsequently to Profit and Loss: Tax effects of items in OCI - - - - - - Currency translation adjustment (16) - (16) 30 - 30 Total comprehensive income/(loss) for the period, net of income tax (71) (57) (128) (46) (26) (72) Attributable to: Non-controlling interests - - Equity holders of the Company (128) (72) Total comprehensive profit/(loss) for the period (128) (72) ¹ Refer to note 7 for details on specific items and non-cash share based compensation costs (SBC) The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 4
Unaudited Condensed Consolidated Balance Sheet AS AT 30 JUNE AS AT 31 DECEMBER¹ $ millions Note 2018 2017 ASSETS Non-current assets Intangible assets 1,409 1,448 Property, plant and equipment 167 169 Investments in joint ventures 13 104 98 Deferred income tax assets 110 108 Prepayments 45 44 Other non-current assets 113 106 Total non-current assets 1,948 1,973 Current assets Inventory 20 18 Trade and other receivables 1,113 1,053 Prepayments 85 65 Contract assets 3 142 - Accrued income - 131 Income tax receivable 12 12 Cash and cash equivalents 327 295 Assets held for sale 12 4 - Total current assets 1,703 1,574 TOTAL ASSETS 3,651 3,547 EQUITY Capital and reserves attributable to equity holders Share capital 9 4 1 Share premium 783 - Convertible securities 378 - Other reserves 2,312 2,319 Accumulated deficit (3,110) (2,997) Attributable to equity holders of the Company 367 (677) Non-controlling interests 3 3 Total Group equity 370 (674) LIABILITIES Non-current liabilities Borrowings 11 1,422 2,197 Deferred income tax liabilities 9 8 Retirement benefit obligations 107 111 Provisions 130 125 Other non-current liabilities 56 60 Total non-current liabilities 1,724 2,501 Current liabilities Borrowings 11 37 187 Provisions 64 68 Trade and other payables 1,398 1,449 Contract liabilities 3 40 - Income tax payable 18 16 Total current liabilities 1,557 1,720 TOTAL EQUITY AND LIABILITIES 3,651 3,547 ¹ Accounting for a capital reorganization relating to the legal merger of CEVA Logistics AG and CEVA Holdings LLC has been applied The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 5
Unaudited Condensed Consolidated Statement of Cash Flows THREE MONTHS THREE MONTHS SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 ENDED 30 JUNE ENDED 30 JUNE JUNE JUNE $ millions Note 2018 2017 2018 2017 Profit/(Loss) before income taxes (37) (46) (98) (87) Adjustments for: Depreciation, amortization and impairment 31 27 67 53 Finance income (2) (2) (3) (3) Foreign exchange (gains) and losses (28) 13 (10) 20 Finance expense 76 69 135 116 Share of profit from equity accounted joint venture (4) (5) (9) (9) Share based compensation costs 6 2 9 5 Changes in provisions: Retirement benefit obligations - - (2) (1) Long-term Provisions - (3) 7 (4) Changes in working capital: Inventory (5) - (4) (2) Trade and other receivables (15) (52) (32) (29) Prepayments and accrued income / contract assets 55 (16) (49) (29) Trade and other payables including contract liabilities (32) 90 (34) (10) Changes in non-current prepayments (3) (3) (3) (3) Changes in non-current assets and liabilities (6) (2) (5) (5) Cash generated (used for) / from operations 36 72 (31) 12 Interest cost paid (53) (40) (87) (71) Other financing cost paid (28) (7) (33) (15) Net income taxes paid (7) (6) (13) (17) Net cash (used for) / from operating activities (52) 19 (164) (91) Capital expenditure (32) (26) (53) (51) Proceeds from sale of property, plant and equipment 1 2 1 3 Interest received - 3 3 5 Net cash (used for) / from investing activities (31) (21) (49) (43) Issuance of shares 1 - 1 - IPO proceeds (gross) 1,198 - 1,198 - IPO transaction costs (16) - (16) - Repayment of borrowings 11 (988) (82) (1,017) (98) Proceeds from non-current borrowings 11 5 (5) 64 19 Proceeds from current borrowings 11 8 87 14 112 Net cash (used for) / from financing activities 208 - 244 33 Change in cash and cash equivalents 125 (2) 31 (101) Cash and cash equivalents at beginning of period 203 239 295 333 Foreign exchange impact on cash and cash equivalents (1) (3) 1 2 Cash and cash equivalents at end of period 327 234 327 234 The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 6
Unaudited Condensed Consolidated Statement of Changes in Equity Attributable to equity Non- Share Convertible Other Accumulated holders of the controlling Total Group $ millions Share capital Premium Securities reserves deficit Company interest equity Balance as at 1 January 2017¹ 1 - - 2,258 (2,800) (541) 3 (538) Currency translation adjustment - - - 30 - 30 - 30 Share based compensation reserve - - - 5 - 5 - 5 Loss attributable to equity holders for the period - - - - (102) (102) - (102) Balance at 30 June 2017 1 - - 2,293 (2,902) (608) 3 (605) Restated as at 1 January 2018 2 1 - - 2,319 (2,998) (678) 3 (675) IPO proceeds 3 817 378 - - 1,198 - 1,198 IPO transaction costs - (34) - - - (34) - (34) Currency translation adjustment - - - (16) - (16) - (16) Share based compensation reserve - - - 9 - 9 - 9 Loss attributable to equity holders for the period - - - - (112) (112) - (112) Balance at 30 June 2018 4 783 378 2,312 (3,110) 367 3 370 1 Accounting for a capital reorganization relating to the legal merger of CEVA Logistics AG and CEVA Holdings LLC has been applied. Refer to Note 2 for details of the capital reorganization accounting treatment 2 Refer to Note 3 for details on the restatement due to IFRS adjustments The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 7
Notes to the Unaudited Condensed Consolidated Interim Financial Statements 1. General Information CEVA Logistics AG (the “Company”) was established as a holding company on 21 February 2018 in Switzerland. The address of its registered office is Grabenstrasse 25, 6340 Baar, Switzerland. The founder of the Company was CEVA Holdings LLC. On 3 May 2018 CEVA Holdings LLC legally merged with CEVA Logistics AG, with CEVA Logistics AG being the surviving entity that then listed on the SIX Swiss Exchange. CEVA Logistics AG and its subsidiaries (collectively, the “Group” or “CEVA”) design, implement and operate complete end-to-end Freight Management and Contract Logistics solutions for multinational and small and medium sized companies on a local, regional and global level. CEVA Logistics AG is the immediate parent of CEVA Group Plc, a company incorporated on 9 August 2006 in England and Wales as a UK public company with limited liability. On 4 May 2018, CEVA Logistics AG completed an IPO on the SIX Swiss Exchange with gross proceeds of CHF 821 million (US$ 820 million), which successfully closed on 8 May 2018. At the same time, CEVA Logistics AG sold mandatory convertible securities to CMA CGM S.A. (“CMA CGM”) in the amount of CHF 379 million (US$ 378 million), which will be converted to shares of CEVA Logistics AG upon the receipt of regulatory approvals obtained on 9 July 2018, and the satisfaction of certain other conditions. These unaudited condensed consolidated interim financial statements were approved and authorized for issue by the Board of Directors of CEVA Logistics AG on 27 July 2018. 2. Basis of Preparation The unaudited condensed consolidated interim financial information for the three and six months ended 30 June 2018 has been prepared on a going concern basis and in accordance with IAS 34, ‘Interim financial reporting’. The unaudited condensed consolidated interim financial information should be read in conjunction with the annual financial statements of CEVA Holdings LLC (predecessor entity to CEVA Logistics AG following legal merger) for the year ended 31 December 2017, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with IFRIC interpretations. As from the merger the preparation of the consolidated interim financial report is in conformity with IFRS as issued by the International Accounting Standards Board (IASB) and comply with Swiss law. We have not identified any material differences between EU-IFRS and IFRS as issued by the IASB. In order to effect the merger of CEVA Holdings LLC with the Company, the series A1 and A2 preference shares of CEVA Holdings LLC were first converted into common shares of CEVA Holdings LLC. This resulted in 1.15 million CEVA Holdings LLC common shares. The holders of these common shares were then entitled to receive 10 common shares of CEVA Logistics AG for each CEVA Holdings LLC common share held after conversion of the A1 and A2 preference shares. This resulted in 11.5 million shares of CEVA Logistics AG being issued on merger and prior to IPO. Under the principles of capital reorganization accounting, the Company has reported the whole prior period results and statement of comprehensive income of CEVA Holdings LLC and its subsidiaries rather than including them only from the capital reorganization date but has reflected the new equity structure of CEVA Logistics AG from 1 January 2017 in doing so. This gives rise to a difference on consolidation, called the capital reorganization reserve, which is included within other reserves as shown in the table below: Preferred stock, Attributable Common stock to equity Non- and Additional Other Accumulated holders of the controlling Total Group $ millions paid in capital Share Capital reserves deficit Company interest equity CEVA Holdings LLC - Balance as of 1 January 2017 1,443 - 816 (2,800) (541) 3 (538) Merger (1,443) 1 1,442 - - - - CEVA Logisitcs AG - Balance as of 1 January 2017 - 1 2,258 (2,800) (541) 3 (538) For the current reporting and comparatives, the financial statements of the individual Group entities were combined on a line-by-line basis by adding together comparable items of assets, liabilities, equity and income and expenses. Balances, transactions and unrealized gains or losses on transactions between the combined and consolidated entities, including their subsidiaries, were eliminated in full. 3. Accounting Policies The accounting policies applied are consistent with those applied in the consolidated financial statements of CEVA Holdings LLC (predecessor entity to CEVA Logistics AG following legal merger) as at and for the year ended 31 December 2017, and as described in those consolidated financial statements which can be found at www.cevalogistics.com, except as described above. New and amended standards adopted by the Group The Group has applied the following standards and amendments for the first time for the financial year beginning on 1 January 2018: IFRS 2, “Share Based Payments” – Clarifies the accounting for cash-settled share-based payment transactions that include a performance condition, the classification of share-based payment transactions with net settlement features, and the accounting for modifications of share-based payment transactions from cash-settled to equity-settled. This standard does not have any material impact on the financial statements. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 8
IFRS 9, “Financial Instruments” – Addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010, and further amended in July 2014. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. IFRS 9 also introduces a single impairment model and removes the need for a triggering event to be necessary for recognition of impairment losses. The Group concluded that the classification and measurement basis for its financial assets and liabilities will be largely unchanged by adoption of IFRS 9. The main impact of adopting IFRS 9 arose from the implementation of the expected loss model regarding trade debtors. The calculated impact at 1 January 2018 under the “simplified approach” is US$3 million. No material impact on profit for future periods is expected. IFRS 15, “Revenue from Contracts with Customers”. This new standard on revenue recognition supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The new standard establishes uniform requirements regarding the nature, amount, timing, and time period of revenue recognition. Revenue is recognized when a customer obtains control of a good or a service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard provides a principles-based five-step model that must be applied to all categories of contracts with customers. The Group carried out a review of existing contractual arrangements as part of this process. We concluded that IFRS 15 does not have a material impact on the Contract Logistics Business. Regarding the Freight Management business, the timing of revenue recognition from certain types of contracts did change because according to IFRS 15 revenue is recognised overtime instead of at a point in time. As a result, accrued income and trade and other payables balances are affected by US$13 million and US$11 million. This led to an increase of US$2 million in retained earnings. No material impact on profit for future periods is expected. IFRS 15 requires contract assets and liabilities to be presented separately. The Group has presented US$142 million as contract assets and US$40 million as contract liabilities as of 30 June 2018 on separate balance sheet lines (US$3 million non-current contract assets is included in the non-current prepayments as of 30 June 2018). In prior periods, the amounts were presented as accrued income or included within trade and other payables respectively. IFRIC 22, “Foreign Currency Transactions and Advance Consideration”- This interpretation addresses foreign currency transactions: the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. The new interpretation requires application for annual periods beginning on or after 1 January 2018. No material impact is expected. Restated opening balance sheet 1 January 2018 IFRS 9 and IFRS 15 are adopted by using the modified retrospective method without restating comparatives. The following tables show the adjustments recognized for each individual line item regarding the changes as described above. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided. The adjustments are explained in more detail by above. AS AT 31 DECEMBER 2017 IFRS 9 adjustment IFRS 15 adjustment AS AT 1 JANUARY 2018 $ millions ASSETS Trade and other receivables 1,053 (3) - 1,050 Accrued income 131 - 13 144 Total current assets 1,574 (3) 13 1,584 TOTAL ASSETS 3,547 (3) 13 3,557 EQUITY Capital and reserves attributable to equity holders Share capital 1 - - 1 Other reserves 2,319 - - 2,319 Accumulated deficit (2,997) (3) 2 (2,998) Attributable to equity holders of the Company (677) (3) 2 (678) Total Group equity (674) (3) 2 (675) LIABILITIES Trade and other payables 1,449 - 11 1,460 Total current liabilities 1,720 - 11 1,731 TOTAL EQUITY AND LIABILITIES 3,547 (3) 13 3,557 New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2019, and have not been applied in preparing these unaudited condensed consolidated interim financial statements: IFRS 16, “Leases” – The new standard addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 9
from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees such as CEVA. The standard replaces IAS 17 “Leases”, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019. The Group is currently working on implementing a new system that will help track all its leases so as to produce a full impact assessment of IFRS 16: a significant impact is expected that will increase reported EBITDA, as current operating lease charges will be replaced by additional depreciation and finance charges. On the balance sheet, both assets and liabilities will increase significantly from 1 January 2019. The Group does not intend to retrospectively adopt this standard; IFRIC 23, "Uncertainty over income tax treatments" - This interpretation clarifies the accounting for uncertainties in income taxes, and to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. No material impact is currently expected. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. 4. Critical Accounting Estimates and Judgments The preparation of financial statements in accordance with generally accepted accounting principles under IFRS requires the Group to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the financial statements. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, rarely equal the related actual results. Actual results may differ significantly from these estimates, the effect of which is recognized in the period in which the facts that give rise to the revision, become known. In preparing these unaudited condensed consolidated interim financial statements, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty, were the same (being impairment of goodwill, income taxes, retirement benefits, provisions for onerous contracts, provisions and contingent liabilities) as those that applied to the consolidated financial statements of CEVA Holdings LLC (predecessor entity to CEVA Logistics AG following legal merger) as at, and for, the year ended 31 December 2017. 5. Financial Risk Management The Group’s operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial position, results of operations and cash flows. The Group’s risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at, and for, the year ended 31 December 2017. The Group operates internationally and generates foreign currency exchange risks arising from future commercial transactions, recognized assets and liabilities, investments and divestments in foreign currencies other than the US dollar, the Group’s reporting currency. The main exchange rates are shown below: 2018 2017 June closing Three Month Average Six Month Average June closing Three Month Average Six Month Average British pound 0.7572 0.7351 0.7273 0.7678 0.7818 0.7935 Euro 0.8559 0.8387 0.8267 0.8754 0.9097 0.9243 Chinese yuan 6.6171 6.3787 6.3708 6.7793 6.8603 6.8767 As a result of our global operations, our business, results of operations and financial condition may be materially adversely affected by fluctuations in currency exchange rates. For example, we are subject to currency risks because our revenues may be generated in different currencies from the currencies in which our related costs are incurred, and because our cash flow may be generated in currencies that do not match our debt service obligations. In addition, our reporting currency is the U.S. dollar, and therefore our reporting results are subject to translational risks relating to currency exchange rate fluctuations. Given the volatility of exchange rates, our failure to effectively hedge or otherwise manage such currency risks effectively may materially adversely affect our financial condition and results of operations. 6. Segment Information The Group’s operating and reporting segments are its Freight Management and Contract Logistics businesses which are the main focus of the Group’s chief operating decision maker (“CODM”), the Executive Board of the Group (the “Executive Board”). This is the primary way in which the CODM is provided with financial information. The Group’s internal organization and management structure is also aligned to the two businesses. All reporting to the CODM analyses performance by Freight Management and Contract Logistics business activity, and resources are allocated on this basis. Disclosure has been included in the segment note to reflect these operating segments. As additional information the Group has also provided geographical information on its results. The Executive Board considers the operations from a business perspective. In addition, information from a geographical perspective has also been presented, which reflects the cluster basis on which the Company administers the operations of its business. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 10
Operating segments Freight Management, which includes the provision of international air, ocean, ground, customs brokerage, deferred air and pickup and delivery, and other value-added services; and Contract Logistics, which includes the provision of inbound logistics, manufacturing support, outbound/distribution logistics and aftermarket logistics. Additional geographical information The Group is operating on a worldwide basis in the following geographical areas: Americas – comprising North America; Central America; and South America clusters; Asia Pacific – comprising South East Asia; Mekong; India sub-continent; Australia and New Zealand; Greater China; and North Asia clusters; Europe – comprising UK, Ireland and Nordics; Benelux; France; Germany; Central and Eastern Europe; Italy; Iberia; and BAMECA (includes the Balkans, the Middle East and Africa) clusters. The Executive Board assesses the performance of the operating segments (including joint ventures) based on EBITDA before specific items and SBC. Interest income and expenditure are not included in the result for each operating segment that is reviewed by the Executive Board. The information provided to the Executive Board is measured in a manner consistent with that in the financial statements. Operating segments The segment results for the three months ended 30 June 2018 and 30 June 2017 are as follows: THREE MONTHS ENDED 30 JUNE $ millions 2018 Freight Contract Management Logistics Total Total segment revenue 853 996 1,849 Inter-segment revenue - (1) (1) Revenue from external customers 853 995 1,848 EBITDA before specific items and SBC 27 39 66 Specific items and SBC (30) EBITDA 36 Depreciation, amortization and impairment (31) Operating income 5 Net finance income / (expense) (46) Net result from joint ventures 4 Profit/(Loss) before income taxes (37) EBITDA before specific items and SBC, as a % of revenue 3.2% 3.9% 3.6% THREE MONTHS ENDED 30 JUNE $ millions 2017 Freight Contract Management Logistics Total Total segment revenue 789 933 1,722 Inter-segment revenue - (1) (1) Revenue from external customers 789 932 1,721 EBITDA before specific items and SBC 20 39 59 Specific items and SBC (3) EBITDA 56 Depreciation, amortization and impairment (27) Operating income 29 Net finance income / (expense) (80) Net result from joint ventures 5 Profit/(Loss) before income taxes (46) EBITDA before specific items and SBC, as a % of revenue 2.5% 4.2% 3.4% CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 11
The segment results for the six months ended 30 June 2018 and 30 June 2017 are as follows: SIX MONTHS ENDED 30 JUNE $ millions 2018 Freight Contract Management Logistics Total Total segment revenue 1,656 1,983 3,639 Inter-segment revenue - (1) (1) Revenue from external customers 1,656 1,982 3,638 EBITDA before specific items and SBC 42 77 119 Specific items and SBC (37) EBITDA 82 Depreciation, amortization and impairment (67) Operating income 15 Net finance income / (expense) (122) Net result from joint ventures 9 Profit/(Loss) before income taxes (98) EBITDA before specific items and SBC, as a % of revenue 2.5% 3.9% 3.3% SIX MONTHS ENDED 30 JUNE $ millions 2017 Freight Contract Management Logistics Total Total segment revenue 1,491 1,828 3,319 Inter-segment revenue - (2) (2) Revenue from external customers 1,491 1,826 3,317 EBITDA before specific items and SBC 30 74 104 Specific items and SBC (14) EBITDA 90 Depreciation, amortization and impairment (53) Operating income 37 Net finance income / (expense) (133) Net result from joint ventures 9 Profit/(Loss) before income taxes (87) EBITDA before specific items and SBC, as a % of revenue 2.0% 4.1% 3.1% Geographical information The geographical results for the three months ended 30 June 2018 and 30 June 2017 are as follows: THREE MONTHS ENDED 30 JUNE $ millions 2018 Americas Asia Pacific Europe Total Total segment revenue 616 467 765 1,848 Inter-segment revenue (1) - 1 - Revenue from external customers 615 467 766 1,848 EBITDA before specific items and SBC 12 29 25 66 Specific items and SBC (30) EBITDA 36 Depreciation, amortization and impairment (31) Operating income 5 Net finance income / (expense) (46) Net result from joint ventures 4 Profit/(Loss) before income taxes (37) CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 12
THREE MONTHS ENDED 30 JUNE $ millions 2017 Americas Asia Pacific Europe Total Total segment revenue 581 449 693 1,723 Inter-segment revenue (1) - (1) (2) Revenue from external customers 580 449 692 1,721 EBITDA before specific items and SBC 17 16 26 59 Specific items and SBC (3) EBITDA 56 Depreciation, amortization and impairment (27) Operating income 29 Net finance income / (expense) (80) Net result from joint ventures 5 Profit/(Loss) before income taxes (46) The geographical results for the six months ended 30 June 2018 and 30 June 2017 are as follows: SIX MONTHS ENDED 30 JUNE $ millions 2018 Americas Asia Pacific Europe Total Total segment revenue 1,201 912 1,526 3,639 Inter-segment revenue (1) - - (1) Revenue from external customers 1,200 912 1,526 3,638 EBITDA before specific items and SBC 22 50 47 119 Specific items and SBC (37) EBITDA 82 Depreciation, amortization and impairment (67) Operating income 15 Net finance income / (expense) (122) Net result from joint ventures 9 Profit/(Loss) before income taxes (98) SIX MONTHS ENDED 30 JUNE $ millions 2017 Americas Asia Pacific Europe Total Total segment revenue 1,132 848 1,339 3,319 Inter-segment revenue (1) - (1) (2) Revenue from external customers 1,131 848 1,338 3,317 EBITDA before specific items and SBC 21 34 49 104 Specific items and SBC (14) EBITDA 90 Depreciation, amortization and impairment (53) Operating income 37 Net finance income / (expense) (133) Net result from joint ventures 9 Profit/(Loss) before income taxes (87) 7. Specific Items and SBC THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 30 JUNE 30 JUNE JUNE JUNE $ millions 2018 2017 2018 2017 Personnel expenses 12 9 16 16 Other operating expenses 18 (6) 21 (2) Items affecting EBITDA 30 3 37 14 Finance expenses 23 12 23 12 Total (income)/expense before income taxes 53 15 60 26 Tax expense (3) - (3) - Total (income)/expense 50 15 57 26 CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 13
The following table provides a detailed split on the specific items and SBC: THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 30 JUNE 30 JUNE JUNE JUNE $ millions 2018 2017 2018 2017 Restructuring and transformation 5 9 7 15 Litigation and legacy tax (1) (9) (1) (7) Other - 1 - 1 Subtotal specific items excluding IPO 4 1 6 9 IPO related operating costs 18 - 20 - Share based compensation (non-cash) 8 2 11 5 Items affecting EBITDA 30 3 37 14 Finance expenses 23 12 23 12 Total (income)/expense before income taxes 53 15 60 26 Tax expense (3) - (3) - Total (income)/expense 50 15 57 26 Restructuring and transformation For the three months ended 30 June 2018 restructuring and transformation costs arose predominantly in the Italian and North American clusters as part of the ongoing cost reduction initiatives. For 2017, severance costs and provisions were incurred, mainly in the North American, Benelux, Italian, German and UKIN clusters. Litigation and legacy tax Litigation and legacy tax includes settlement payments received in the North America cluster, offset by costs relating to the CIL litigation and independent contractors litigation in California. For 2017, the Group received a settlement payment related to an anti-trust claim. IPO related operating costs IPO related operating costs includes certain legal, accountancy and other professional fees incurred for external advice in relation to the IPO. Share based compensation Non-cash share based compensation costs are recognized in a similar manner as specific items. These relate to the issuance of shares in CEVA Holdings LLC (predecessor entity to CEVA Logistics AG following legal merger) and grant of equity awards to certain members of management under the CEVA Holdings LLC 2013 Long-Term Incentive Plan in July 2016. Additionally, a one-time grant was awarded to certain members of management as a result of the IPO in April 2018. These costs are included within personnel expenses. Finance expenses Finance expenses include the accelerated write-off of capitalized debt issuance costs (US$8 million), as well as breakage fees (US$13 million) relating to the debt that has been repaid and cancelled, and other finance costs relating to refinancing transactions pre IPO. 8. Income Tax For the first six months ended 30 June 2018 the effective tax rate is (14.3)% (first six months ended 30 June 2017: (17.2)%) and is based on an entity by entity calculation of forecasted effective tax rates for the full year. The difference between the expected tax rate (the Group’s overall expected tax rate is calculated as the weighted average tax rate based on earnings before tax of each subsidiary and can change on a yearly basis) and the effective tax rate is mainly due to uncertainty regarding the future utilization of losses or temporary differences, for which no deferred tax asset has been recognized. 9. Share Capital Number of common shares Nominal value 1 January 2018¹ - Issued share capital during the year 41,361,537 CHF 0.10 30 June 2018 41,361,537 CHF 0.10 Authorised and issued share capital as per 30 June 2018 41,361,537 CHF 0.10 ¹ On 3 May 2018 CEVA Logistics merged with CEVA Holdings LLC and was the surviving parent Company of the Group. As a result of this capital reorganization the share capital of CEVA Logistics AG has been reflected in the consolidated balance sheet as though the Company had always been the parent of the Group. See Note 2 for further details. On 21 February 2018, the Company was incorporated with 1,000,000 fully paid in registered shares with a nominal value of CHF 0.10 per share issued at par value. On 10 April 2018, the Company issued 10,505,000 fully paid in registered shares with a nominal value of CHF 0.10 per share issued at par value. The Company legally merged with CEVA Holdings LLC on 3 May 2018 with CEVA Logistics AG being the surviving entity. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 14
On 8 May 2018, the Company successfully completed an IPO on the SIX Swiss Exchange and issued 29,856,537 new registered shares with a nominal value of CHF 0.10 each for CHF 27.50 per share. At the same time, CMA CGM made a strategic investment of CHF 379 million in convertible securities issued by CEVA in a concurrent private placement. These securities, which have the same rights as shares, will convert to 13,779,826 registered shares once certain regulatory approvals have been obtained or are mandatorily convertible into common shares (see Note 18 “Events after Balance Sheet Date”). The proceeds from the IPO were primarily used to repay debt as disclosed in Note 11. Each share has one vote. All shares have equal voting rights, and no preferential rights or similar entitlements exist. 10. Earnings per share Basic earnings per share is calculated by dividing the profit (loss) for the period attributable to shareholders of the Company by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding during the period for the diluting effect of our share based compensation plans. The calculation (both basic and diluted EPS) as at 30 June 2018 includes the CMA CGM convertible security that is redeemable in shares as this instrument is mandatorily convertible regardless of whether regulatory approval for CMA’s investment is given. Adjusted earnings per share represents the basic / dilutive earnings per share excluding specific items and share based compensation expenses. Profit for the period THREE MONTHS ENDED THREE MONTHS ENDED 30 JUNE 30 JUNE $ millions 2018 2017 Profit/(Loss) before tax (37) (46) Income tax (8) 1 Profit/(Loss) for the period (45) (45) Profit/(Loss) for the period attributable to noncontrolling interests - - Profit/(Loss) for the period attributable to shareholders of the Company (45) (45) SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 JUNE JUNE $ millions 2018 2017 Profit/(Loss) before tax (98) (87) Income tax (14) (15) Profit/(Loss) for the period (112) (102) Profit/(Loss) for the period attributable to noncontrolling interests - - Profit/(Loss) for the period attributable to shareholders of the Company (112) (102) Weighted average number of shares THREE MONTHS ENDED THREE MONTHS ENDED 30 JUNE 30 JUNE Number of shares 2018 1 2017 2 Issued shares at April 1 11,505,000 11,505,000 Effect of issued shares during the period 18,909,140 - Convertible securities to CMA CGM Group 8,727,224 - Shares for basic earnings per share for the period 39,141,364 11,505,000 Effect of dilutive shares Share options 712,395 - Shares for diluted earnings per share for the period 39,853,759 11,505,000 1 538,900 potentially dilutive share options have been excluded from the computation of the diluted average number of shares outstanding as they would have an anti-dilutive effect 2325,750 potentially dilutive share options have been excluded from the computation of the diluted average number of shares outstanding as they would have an anti-dilutive effect CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 15
SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 JUNE JUNE Number of shares 2018 1 2017 2 Issued shares at January 1 11,505,000 11,505,000 Effect of issued shares during the period 9,454,570 - Convertible securities to CMA CGM Group 4,363,612 - Shares for basic and diluted earnings per share for the period 25,323,182 11,505,000 1 538,900 potentially dilutive share options have been excluded from the computation of the diluted average number of shares outstanding as they would have an anti-dilutive effect 2325,750 potentially dilutive share options have been excluded from the computation of the diluted average number of shares outstanding as they would have an anti-dilutive effect Earnings and adjusted earnings per share THREE MONTHS THREE MONTHS ENDED 30 JUNE ENDED 30 JUNE In $ 2018 2017 Basic & Diluted (1.15) (3.91) Basic - adjusted 0.13 (2.61) Diluted - adjusted 0.13 (2.61) SIX MONTHS SIX MONTHS ENDED 30 JUNE ENDED 30 JUNE In $ 2018 2017 Basic & Diluted (4.42) (8.87) Basic & Diluted - adjusted (2.17) (6.61) Adjusted earnings THREE MONTHS ENDED THREE MONTHS ENDED 30 JUNE 30 JUNE $ millions 2018 2017 Profit/(Loss) for the period (45) (45) Specific items 53 15 Adjusted Income tax (3) - Non-controlling interest - - Adjusted profit/(loss) attributable to shareholders of the Company 5 (30) SIX MONTHS ENDED 30 SIX MONTHS ENDED 30 JUNE JUNE $ millions 2018 2017 Profit/(Loss) for the period (112) (102) Specific items 60 26 Adjusted Income tax (3) - Non-controlling interest - - Adjusted profit/(loss) attributable to shareholders of the Company (55) (76) CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 16
11. Borrowings As at 30 June 2018 and 31 December 2017, the carrying amounts and fair value of borrowings were as follows: 30 JUNE 31 DECEMBER $ millions 2018 2017 Carrying value Level 1 fair Level 2 fair Total fair Carrying value Level 1 fair Level 2 fair Total fair value value value value value value Non-current Bank borrowings 973 - 990 990 1,165 - 1,138 1,138 Loan notes 423 443 - 443 1,008 995 - 995 Finance leases 26 - 26 26 24 - 24 24 Total non-current borrowings 1,422 443 1,016 1,459 2,197 995 1,162 2,157 Current Bank overdrafts 21 - 21 21 131 - 131 131 Loan Notes - - - - 39 39 - 39 Bank borrowings 11 - 11 11 13 - 13 13 Finance leases 5 - 5 5 4 - 4 4 Total current borrowings 37 - 37 37 187 39 148 187 Total borrowings 1,459 443 1,053 1,496 2,384 1,034 1,310 2,344 Unamortized debt issuance costs 25 38 Total principal debt 1,484 2,422 The fair value of the loan notes has been presented using the available market price (Level 1) at the balance sheet date. The bank borrowings' fair value has been presented using a valuation technique based on prices of recent over-the-counter transactions for these borrowings (Level 2). The average floating interest rate for the six months ended 30 June 2018 was 3.9% (six months ended 30 June 2017: 3.6%) and 7.0% (three months ended 30 June 2017: 6.1%) for Euro and for US dollar denominated loans respectively. As at 30 June 2018 the weighted average period to maturity was 2.3 years. April 2017 Exchange offer and March 2018 Tack-on bond On 7 April 2017, CEVA successfully completed an exchange offer for the 4% First Lien Senior Secured Notes due 2018, where US$351 million of the notes were exchanged for CEVA’s new 9.00% First Lien Senior Secured Notes due 2020 (the “New 9% Notes”). After the exchange approximately US$39 million principal amount of 4% First Lien Senior Secured Notes were outstanding. In addition, CEVA entered into agreements with certain holders to exchange US$16 million of 12.75% Senior Notes for New 9% Notes. After the exchange approximately US$26.5 million principal amount 12.75% Senior Notes were outstanding. The New 9% Notes will pay 6% cash and 3% PIK (payment-in-kind) interest per annum. On 19 March 2018, CEVA successfully completed its offering of US$50 million, in aggregate principal amount of the New 9% Notes, in a private offering. The new notes were issued as additional notes under an indenture, dated as of 7 April 2017. Proceeds from the issuance of the tack-on bond were used to repay the outstanding US$39 million aggregate principal amount of its 4.0% Senior Notes on 1 May 2018 and the balance was used for general corporate purposes. May 2018 IPO On 8 May 2018, CEVA Logistics AG successfully completed an initial public offering (IPO) on the SIX Swiss Exchange. The Company received aggregate gross proceeds of CHF 1.2 billion (equivalent to US$1.2 billion) from the IPO and the private placement of the CMA CGM convertible securities. Since the closing of the IPO, the Company has used the net proceeds from the IPO to repay debt as follows: i. To repay US$184 million of drawings under the Existing Term Loans outstanding, on 14 May 2018; ii. To redeem in full the US$300 million principal amount of 7.0% First Lien Notes and US$325 million principal amount of 9.0% 1.5 Lien Notes on 24 May 2018; iii. To redeem in full the US$26 million principal amount of the 12.75% Senior Notes on 13 June 2018. European Securitization due 2020 On 24 March 2016, the Company closed a €170 million (US$191 million) Pan-European Asset Backed Securitization (“the European Securitization Facility”). The European Securitization Facility is a four year commitment (two year initially) from two banks and is based on securitization of receivables from six European countries. As of 30 June 2018, the outstanding drawn amount under the facility was €150 million (US$175 million). Australian Receivables Facility due 2020 On 22 May 2016, certain of the Company’s Australian subsidiaries of the Group renewed and extended CEVA’s A$40 million receivables purchase facility. The renewal, among other things, extended the maturity of the facility to 30 April 2020 and amended certain economic terms including facility margin. Additional amendments were made in 2017 which increased the facility limit to A$50 million. As of 30 June 2018, the outstanding drawn amount under the facility was A$41 million (US$30 million). CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 17
US ABL facility due 2020 On 19 November 2010, certain US subsidiaries of the Group (“the Originators”) and a new subsidiary, CEVA US Receivables, LLC (the “Unrestricted Subsidiary”), entered into agreements establishing an Asset Backed Loan (ABL) Facility with an initial commitment amount of US$200 million (the “ABL Facility”). On 30 November 2010, the committed amount of the ABL Facility was increased to US$250 million. The ABL Facility was scheduled to mature on 31 December 2018, but was amended in November 2017 and now matures on 1 August 2020. The commitment amount for the facility has been reduced to US$225 million. As at 30 June 2018, the outstanding drawn amount of the ABL Facility was US$198 million. Covenants At the end of the quarter, if the outstanding amount under our US$250 million revolving credit facility exceeds 30% of the total facility, our senior secured credit facilities require us to maintain a maximum ratio of secured first lien net debt to covenant EBITDA of 5.35 to 1.0, calculated for the trailing four quarters (as determined under our senior secured credit facility agreement). As at 30 June 2018 there was no debt outstanding under this facility. The Group is in compliance with the covenants set forth in the documents governing its existing borrowings and believes that it has sufficient liquidity to service its operating activities and continued growth ambitions for the foreseeable future. The Company has launched its refinancing during the third quarter (see Note 18 “Events after Balance Sheet Date”). 12. Asset held for sale The asset held for sale of US$4 million is related to the sale of a warehouse in the Benelux cluster. The asset classified as held for sale is presented below: AS AT 30 JUNE AS AT 30 JUNE $ millions 2018 2017 Assets held for sale Property, plant and equipment 4 - Total non-current assets 4 - TOTAL ASSETS 4 - 13. Joint ventures The Group has an investment totaling US$104 million as at 30 June 2018 (31 December 2017: US$98 million), being a 50% interest in ANJI- CEVA Logistics Co. Ltd (“Anji-CEVA”) with its registered address at No. 258 Miquan Road, Anting Town, Jiading District, Shanghai City, P.R. of China. Anji-CEVA principally engages in contract logistics activities, including warehousing, distribution, transportation, domestic freight, technical consulting and training. For the three months ended 30 June 2018, CEVA’s share in Anji-CEVA’s net result was US$4 million (three months ended 30 June 2017: US$4 million). For the six months ended 30 June 2018, CEVA’s share was US$9 million (six months ended 30 June 2017: US$9 million). The consolidated balance sheet of Anji-CEVA as at 30 June 2018, 31 December 2017 and 30 June 2017 is as follows: AS AT 30 JUNE AS AT 31 DECEMBER AS AT 30 JUNE $ millions 2018 2017 2017 Current Cash and cash equivalents 166 144 166 Other current assets 676 410 432 Total current assets 842 554 598 Financial liablities (11) (7) (3) Other current liabilities (787) (532) (580) Total current liabilities (798) (539) (583) Non-current Assets 168 170 150 Total non-current assets 168 170 150 Other liabilities (3) - - Total non-current liabilities (3) - - NET ASSETS 209 185 165 CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 18
The consolidated income statement of Anji-CEVA for the three and six months ended 30 June 2018 and 2017 is as follows: THREE MONTHS ENDED 30 JUNE SIX MONTHS ENDED 30 JUNE $ millions 2018 2017 2018 2017 Revenue 387 293 733 538 Operating expenses excluding depreciation, amortization and impairment (365) (272) (686) (498) EBITDA 22 21 47 40 Depreciation,amortization and impairment (7) (6) (14) (10) Operating income 15 15 33 30 Net finance income/(expense) (including foreign exchange movements) 1 - 1 - Profit/(Loss) before income taxes 16 15 34 30 Income tax (expense) / Income (6) (4) (11) (8) Profit/(Loss) for the period 10 11 23 22 Attributable to: Non-controlling interests 3 2 6 4 Equity holders of the Company 7 9 18 18 The reconciliation from the net asset value to the carrying value of the joint ventures for the period ending 30 June 2018 and 2017 is as follows: $ millions 2018 2017 Opening net assets - 1 January 185 149 Allocated to non-controlling interest (41) (35) Adjusted opening net assets - 1 January 144 114 Profit for the period 23 22 Non-controlling interest (6) (4) Foreign exchange impact (6) - Closing net assets - 30 June 155 132 Interest in joint ventures at 50% 78 66 Goodwill in joint ventures 26 25 Carrying value 30 June 104 91 The Company had no contingent liabilities towards the joint venture as at 30 June 2018 (31 December 2017: nil). There are no significant restrictions on the ability of joint ventures to transfer funds to the Company in the form of cash dividends, or to repay loans or advances made by the Company. As part of the agreement in 2017 to renew the Anji-CEVA joint venture agreement it was agreed in principle that the joint venture parties, CEVA and Anji Automotive Logistics Company Limited (Anji Logistics) (a subsidiary of Shanghai Automotive Industry Sales Corporation, or SAIC), will be entitled to certain annual adjustment payments prior to or subsequent to the net profits distribution depending on certain contributions made by the parties to the joint venture. During the quarter a formal agreement to this effect was entered into under which JV pays a fee that is based on the difference between the ratio in joint venture revenue stemming from the SAIC-group versus non-SAIC- group companies. This will be an operating expense and affect EBITDA; the economic consequences for CEVA are the same as if the adjustment had been done subsequent to net profit distribution. For 2018 the JV will pay an annual adjustment payment to Anji-Logistics, however, as the share of non-SAIC group revenues is expected to increase, the impact on CEVA is expected to reduce accordingly. As a result of a strategic review that may occur in 2021 depending on the level of non-SAIC revenue achieved in 2020, the parties may amend the joint venture agreement, including the profit sharing provisions, purpose of the joint venture and business transfers, or the parties may sell a portion of their interests in the joint venture or the Anji-CEVA joint venture in its entirety. The agreement will have no impact on the dividend CEVA will receive in 2018. 14. Commitments Operating lease commitments The Group leases various offices and warehouses under non-cancellable operating lease agreements. The lease terms are generally between one and six years and the majority of lease agreements are renewable at the end of the lease period at market rates. The Group also leases various motor vehicles, office and computer equipment under operating lease agreements. During the three months ended 30 June 2018, US$88 million was recognized as an expense in the income statement in respect of operating lease rentals (three months ended 30 June 2017: US$83 million). For the six months ended 30 June 2018, US$178 million was recognized as an expense (six months ended 30 June 2017: US$164 million). CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 19
The future aggregate minimum lease payments under non-cancellable operating leases are as follows: AS AT 30 JUNE AS AT 31 DECEMBER $ millions 2018 2017 Less than 1 year 332 340 1-5 years 656 688 Thereafter 146 180 Total 1,134 1,208 Of which guaranteed by third party / customers 78 129 Of the future lease payments, US$747 million (31 December 2017: US$759 million) relates to commitments in relation to multi-user/shared facilities, while the remainder of US$387 million (31 December 2017: US$449 million) is dedicated to specific customers/facilities. Guarantees In the normal course of our business, we provide bank guarantees or letters of credit to various customs authorities, landlords, suppliers and insurance underwriters. The principal sources of the bank guarantees or letters of credit are CEVA's US$230 million synthetic letter of credit facility (US$275 million previously) or the US$250 million revolving credit facility. As at 30 June 2018, US$206 million (30 June 2017: US$269 million) of letters of credit and guarantees were issued, but undrawn, under the synthetic letter of credit facility of US$230 million. At the same date, no letters of credit were issued under the US$250 million revolving credit facility (30 June 2017: US$0 million). The committed Senior Secured Facilities are secured by substantially all of the assets of CEVA Group Plc and the assets of its restricted subsidiaries excluding certain trade accounts receivables that are transferred to special purpose entities formed in connection with the US ABL Facility, the European Securitization Facility and the Australian Receivables Facility. The amount of the Euro denominated facilities has been converted to US dollar for the above presentation based upon the 30 June 2018 closing rate of 1.1683. As at 30 June 2018, the Group has issued guarantees on behalf of its subsidiaries in the ordinary course of business in connection with lease agreements, customs duty deferment and local credit lines amounting to US$267 million (30 June 2017: US$327 million), of which US$206 million (2017: US$269 million) was issued but undrawn under CEVA’s synthetic letter of credit facility. The obligations under the guarantees issued by banks and other financial institutions have been secured by CEVA and certain of its subsidiaries. 15. Contingencies Litigation and Legal Proceedings The Company is involved in several legal proceedings relating to the normal conduct of CEVA’s business. While the outcome of these legal proceedings is uncertain, the Company believes that it has provided for all probable and estimable liabilities arising from the normal course of business, and CEVA therefore does not expect any un-provisioned liability arising from any of these legal proceedings to have a material impact on CEVA’s results of operations, liquidity, capital resources or financial position. Independent Contractor-Related Proceedings The classification of drivers as independent contractors, which CEVA believes to be a common practice in its industry in the U.S., is challenged from time to time by federal and state governmental and regulatory authorities, including tax authorities, as well as by individual drivers who seek to have drivers reclassified as employees. We have previously been subject to claims relating to the classification of independent contractor owner-operators. In 2009, the California Employment Development Department (“EDD”), based on a worker classification audit, determined that certain individuals should be reclassified as employees for purposes of state unemployment tax, employment training tax, disability insurance contributions, and personal income tax, and the EDD issued a tax assessment. CEVA has petitioned the EDD to review its assessment, with a potential for abating a majority of the assessed taxes. While CEVA cannot provide assurances with respect to the outcome of this matter and it is possible that CEVA could incur a material loss, CEVA intends to vigorously defend itself. In connection with this, the Company has accounted for a provision in its accounts. CIL Related Proceedings CIL Limited (formerly CEVA Investments Limited), the former parent of CEVA Group Plc, is involved in a consensually filed liquidation proceeding in the Cayman Islands and an involuntary Chapter 7 proceeding in the Bankruptcy Court for the Southern District of New York. The Trustee in the Chapter 7 proceeding filed a claim against CIL Limited’s former directors, CEVA Group Plc, and affiliated entities relating mostly to CEVA’s recapitalization in 2013. In 2015 the defendants filed motions to dismiss certain of the claims asserted by the Trustee, and in January 2018, the Bankruptcy Court issued an order granting in part and denying in part the defendants’ motions. The Trustee subsequently filed an amended complaint on 9 July 2018. Prior to this, the defendants filed motions for summary judgment which are currently being briefed. The Company cannot provide assurances regarding the outcome of this matter and it is possible that if the Trustee were to prevail on his claims, the Company could incur a material loss in connection with this matter, including the payment of substantial damages and/or the unwinding of the recapitalization in 2013. However, the Company believes the claims are without merit and intends to vigorously defend itself. CEVA Logistics AG – Quarter Two 2018 Interim Financial Statements 20
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